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V Guard Industries Ltd
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Ladies and gentlemen, good day, and welcome to the V-Guard Industries Limited 1Q FY '24 Results Conference Call hosted by JM Financial Institutional Securities Limited. [Operator Instructions] Please note that this conference is being recorded.I now hand the conference over to Mr. Achal Lohade from JM Financial. Thank you, and over to you, sir.
Yes. Thank you, Niko. Good afternoon, everyone. On behalf of JM Financial Institutional Securities, I welcome you all to 1Q FY '24 earnings conference call of V-Guard Industries Limited.Today, we have with us Senior Management, represented by Mr. Mithun Chittilappilly, Managing Director; Mr. Ramachandran V, Director and CEO; and Mr. Sudarshan Kasturi, Senior Vice President and CFO.Without taking much time, I would like to hand over the floor to the management for their opening remarks. Post which, we will open the floor for Q&A. Thank you, and over to you, Mr. Mithun.
Yes. Thank you, Achal. A very warm welcome to everyone present on today's call. Thank you for joining us today to discuss the operating and financial performance of our company for the first quarter of financial year FY '24. I trust all of you have had a chance to refer to our investor presentation, which was shared yesterday.We reported consolidated net revenues of INR 1,215 crores in Q1 FY '24, higher by 19.3% on a Y-o-Y basis, including the revenue from Sunflame. The underlying growth is 13.1% excluding Sunflame. This strong top-line growth in Q1 has been broad-based across all the 3 segments.In Q1, the South market degrew by 9.9% Y-o-Y, while the non-South market grew by 16.7% Y-o-Y. Despite the North region being impacted by adverse weather conditions, growth in non-South markets has been strong. Our non-South revenues are approaching 50% contribution of the total sales, thereby strengthening the business.In our Electronics segment, comprising of stabilizers and inverters, we reported a revenue growth of 20% Y-o-Y. In the Consumer Durables segment, where we market fans, water heaters, kitchen appliances and air coolers, we registered a growth of 10.7%. We continue to make progress towards achieving scale in durable categories. In the Electrical segment, which remains our largest revenue contributor, comprising of wires, pumps, switchgears and modular switches, we registered a growth of 10% Y-o-Y in revenues over Q1 FY '23.Gross margins improved to 32.5% this quarter compared to 30% in Q1 last year. Essentially, there is an improvement of 120 basis points compared to 31.3% in the last quarter. The impact of softening commodity prices has started to reflect in the gross margin, with the gradual improvement over the last few quarters. We expect further improvement to reflect in the coming quarters as well.Consolidated EBITDA, excluding other income, was INR 105 crores in Q1, an increase of 27.7% on a Y-o-Y basis. Consolidated EBT at INR 86 crores grew by 19.9% Y-o-Y. This includes a fair value gain of INR 7 crores on the Gegadyne investment, which is a one-off item. Profit after tax for the quarter was INR 64.2 crores, an increase of 20% on a Y-o-Y basis. The strong financial performance reported in Q1 has been accompanied by a robust cash generation.As indicated a few quarters ago, we would revert to normative inventory levels as COVID-related supply disruptions diminished. Inventory levels have come down by about INR 120 crores compared to a year ago. During Q1, we have progressed well on the integration of [ Sula ]. Most of the back-end processes are now aligned with the mainstream. The go-to market approach continues in an optimal model for the present, and we are working on a growth strategy to derive from the combination of both the entities.In the case of Sunflame, business integration is underway at an accelerated pace. The management team is in place, enabling first-level alignment. We have prioritized integration of e-commerce, canteen stores department channels, teams, and initiated expansion in the Southern market, where Sunflame does not traditionally have a strong presence.The finance and IT integration for Sunflame has also started. We are working on renewing the portfolio, aligning the distribution channels, and undertake technology interventions wherever required in Sunflame. With these acquisitions being streamlined, inventories normalized and upward momentum in topline and margin, the business is well placed to execute on clients for the group. We look forward for the upcoming festive season and are hopeful to sustain the growth momentum during the quarters ahead.With that, I conclude my opening remarks. I would like to thank Achal Lohade and the team at JM Financial for hosting this call. I would like to request the moderator to open the floor for Q&A. Thank you.
[Operator Instructions] The first question is from the line of [ Shubham Agarwal ] from Axis Capital.
Thanks for the opportunity. Just on the first question on Sunflame, we noted that Q4 only had a part of the revenue. The whole Q4 revenue did not get consolidated. However, Q1 revenue has also been weaker for Sunflame. However, we were guiding for INR 400 crores or so, but it's weaker, so I just wanted to get a sense. Is it significantly lower or has there been -- is it lower than our expectations for Sunflame? And what should we expect for Sunflame going forward this year?
I think, as far as Sunflame is concerned, it is trending similar to other kitchen companies. I think there is some stress on kitchen revenues, and that's also reflected for Sunflame. I think, yes -- I think, we had hoped that Sunflame, the kitchen category would recover from Q1 this year, but it is still continuing to be weak, like you have seen with other kitchen companies who have announced it themselves.
I'm saying, is there any change in guidance given the weaker sentiment for kitchen appliances on Sunflame?
Yes, Sunflame, Q3 is the main quarter. In fact, Q3 is a very large quarter for a company like Sunflame, which has primarily its revenues coming from the non-South market, where Diwali is the main selling season. So we'll wait and see. Some of it, we are expecting it to recover. There are also some one-off issues in terms of, there were some issues with stockouts and there were some issues with CSD ordering system and all that. So some of those things are in streamline and we are expecting it to come back. So I think once we finish Q3, we can give a better picture. But, yes, kitchen companies across are reporting muted numbers. In fact, for most companies, either it's flat or negative growth.
Okay, sir. Moving on to the second one, just wanted to get a sense that the electrical margin seems a bit low on the lower side. Last year, we had inventory losses in last year same quarter in the first half. So why is the -- can you give some more color on why the electrical margins are so low right now this quarter?
Yes, Electrical segment is primarily, the margin impact has been primarily on account of A&P. We had a campaign for wires that started in Q1 of this year, so the A&P cost in this quarter is much higher than what it was the previous year. So that's the primary reason for the margin compression. The gross margins are almost comparable.
Okay. So overall, I see that only -- there was only 20 bps increase in the A&P spend on an overall company level. So, the higher allocation has gone towards electrical this year, is that the right way to understand and that's what's led to a lower margin? Can you quantify that how much should I add back to -- how much extra, something that gives you?
So, the way to look at A&P is, depending on the need, then depending upon our strategic priorities, we spend money on different categories of this year, because this year we decided to support wires and cables category in Q1 as a part of strengthening our presence in that segment across the country. Last year, there was no campaign for wires in the same quarter. So that's the reason.In terms of the exact value, we will come back to the...
It had an impact of about 1.8%.
About 1.8% for the quarter would be impact for electrical for the quarter, because of A&P.
Got it, sir. Sir, a very nice set of growth in Electronics that's been continuing even in this quarter. What is leading to this growth and how do you see this going forward in electronics?
For the past few years, both stabilizer and inverter sales has been impacted due to 1 reason or the other. I mean, we had multiple COVID waves during summer, due to which our categories were impacted. And this year, there was strong support of sales from Southern and Eastern markets, whereas North, like many other companies, we also faced a lot of headwinds because of -- there was not much of summer season in the Northern markets. So, I think this year is a good year. I think it looks -- this momentum should continue going forward, and Electronics should do well for the entire year as well.
Okay. So, any Electronics EBIT, how should we look at it, the margins going forward?
I think, like we had mentioned, there are some commodity prices that has come off from -- some of it has started to flow. I think we probably will see a little more, maybe a slightly more expansion in margins, but that's not only for Electronics, maybe in other categories, we are expecting some expansion in gross margins as the quarters go ahead.
Our next question is from the line of Venkatesh Balasubramaniam from Axis Capital.
Yes. Again, going back to what Shubham was asking you on Sunflame, now, this is the first full year of operations for Sunflame. So, what we are trying to understand is, is this like a INR 300 crores business, top line revenue business? Is it like a INR 350 crores? Is it a INR 400 crores or is it like a INR 450 crores? Some kind of ballpark indication for the current year would be very helpful to us in terms of modeling the business, what is the starting point for this business? Is it INR 300 crores? Is it INR 450 crores? Or is it like somewhere in between?
Yes. So I think, 1 way to understand this, Sunflame is an asset where we have been engaging with the promoters for sale for some time, at least for many years, even, at least a couple of years before COVID started. During COVID, what happened is, we had suspended the negotiations, and actually there was a small boom in kitchen appliances across categories. Companies grew very fast and so did Sunflame. But our original investment philosophy and whatever acquisition costs we had negotiated, we did not change it. So we ended up still buying Sunflame at a reasonable valuation. So, obviously what has happened now is, after that, there was an abnormal boom in the kitchen appliances business during COVID.And now, across companies, you will start to see, and some of them are already announced, and then you'll start to see in most cases, there is either a flattish kind of a number or some people have degrown, depending on what kind of product mix each company has. So, I think, again, Sunflame, we are looking at something like INR 330 crores to INR 350 crores of revenue in the current year.The good thing to note is that, margins are intact in Sunflame. In fact, we are expecting some margin improvements coming as the commodity prices are coming down. And we first want to fix the basics of the business. For example, the aftersale service for the entity, the quality of aftersales is not as great as what V-Guard customers are used to. So we are first fixing the basics and we are putting boots on the ground to ensure that Sunflame has better reach and sound. So, there are some levers that we have activated, and some of this may take time to show. But, yes, we are looking at between INR 300 crores to INR 350 crores of revenue in the current year. We are still hopeful because the decline in kitchen appliance sales started towards the H2 of last year. So to that extent, the basis are going to be low once we start entering post Diwali period.
Okay. And what about EBIT margins? Is it like a 9% to 10% kind of EBIT margin business? Is that a reasonable assumption?
So, Sunflame is between 11% to 12% EBIT margins. Sunflame's margins are higher than that of V-Guard's margins.
Okay, okay. Understood. Now, again, going back to that Electronics question which was asked, now, obviously, I mean, the quality and quantity of power, which is available from the grid, has improved significantly over the last 10 to 15 years. Now, while we are seeing a jump of 20% in FY '23, we're also seeing a jump of 20% growth -- Y-o-Y growth. Is this like normal growth or it is just that it is just a catch up? I mean, is this a category which can go at 10% going forward from next year onwards, or it again trends back to like 4%, 5% kind of level growth?
See, it's a heavily dependent category, both inverters and stabilizers are primarily sold in Q4 and Q1. So, what happens is, in a year, if there is not good summer, it affects the category growth for the entire year. And if you look at last 4, 5 years -- last four years at least, the CAGR has been extremely low for Electronics, practically not grown. So, yes, you can -- we do expect it to come back to its original CAGR of about 8% to 9%. And this year, we've made gross losses, and because last few years, there was no growth.
Okay, understood. Another thing, on the segmental numbers, if I see your segmental numbers, consolidated segmental numbers, there's an item called unallocable. Now that unallocable number usually is a negative number, it's around anywhere between INR 2 crores to INR 5 crores kind of a negative number. In this quarter, you have seen a positive number of around INR 2.6 crores. So why is that, that you have a positive number? Is this like a ForEx gain or is there something else at play here in the first quarter?
These are very small numbers, so they can move from a slight negative to slight positive depending on what items they are. Basically what is unallocated are some financial costs and financial income and some depreciation with non-factory. Sometimes if the finance cost is higher and income is lower, it can go into negative.
Okay, understood. One last one from my side, I mean, last year, obviously our margins were impacted. Overall consolidated margins were at around 7.8% kind of levels. What is kind of a reasonable level for EBITDA margins in the current year FY '24 and when can we get back to double-digits? Is it like, we can get back to double-digits in FY '25 or, and what can be achieved in the current year in terms of EBITDA margin?
So, we want basically the EBITDA margins to land somewhere between 9% to 9.5%. And I think, as of now, the trend of commodities, barring copper, almost all commodities are trending down. And even in the month of July, I think there has been some slight softening in certain commodities. So, I think the 9% to 9.5% is possible. I think we will start to see progressively happening over the quarter as we go ahead.
Our next question is from the line of Aniruddha Joshi from ICICI Securities.
Yes. Sir, thanks for the opportunity. So, 1 question, consumer durable margin continues to remain weaker. I understand there is an angle of depreciation of plant. So, if you can indicate what was the EBITDA margin in this quarter versus the previous quarter, or please also suggest how should we think about the EBIT margin improvement over the next 2 years. That is question 1.Secondly, what we understand, the trade margins of Sunflame, they're materially higher than that of V-Guard. So, how are you able to merge the 2 distribution networks? And what are the likely synergy benefits, whether we will continue with higher trade margins for Sunflame or we will cut them down to V-Guard level? It might be 1, 2-quarter impact on sales? That's it from my side.
First of all, about consumer durable, this is the segment where V-Guard has launched the maximum number of new products if you look at the last 7, 8 years. So, 2 large categories in this is fan and water heater. In the case of water heaters, the company is still sitting with a lot of high cost inventory from last year's season, which is not fully sold out, because the season was not as good as we expected. So we expect the high cost inventories to get sold out sometime by October of this financial year.So, I think, partly in Q3 and then in Q4, we should see CD margins going back. It used to be something like 4%, 5% EBIT margin, before we had these kind of commodity pricing -- huge inflation and commodity pricing and that's also being the category that has been mostly impacted.
And if you look at the last 2 quarters of the previous year, it wasn't negative [ during peak ]. At least it's now come to positive 0.3. There's still some more margin recovery to happen in water heaters and fans.
Yes. Regarding Sunflame, I'll ask Ram to answer, sir.
I think, as far as Sunflame is concerned, right, these 2 will run as independent go-to-market systems, right? So there is no plan to merge them. They presently are separate legal entities with independent teams which go to market independently. And at this stage, we have just landed the management team in the last quarter. I think, they've just been in the company for 2 to 2.5 months. And we will evolve going-forward strategy. But there is no plan to integrate Sunflame and V-Guard into existing system. That's going to remain independent, right?And presently, we are maintaining the Sunflame practices till we understand the Sunflame business and what drives it before we -- what I would say -- we move forward in terms of what we can do with the business.
Sure, sir. Understood. But if the -- unless and until overall both the brands come together as 1 single entity, how do we see the synergy benefits? Basically what are the synergy benefits that we are building in?
I think, fundamentally, there are some growth levers and there are some profit levers, right? As far as growth levers are concerned, the entire Southern market, they are absent. And that presents a good opportunity. I think e-commerce is again an area we have a strong business system, and [ Bihar is which ] Sunflame can leverage. I think these are 2 key areas. And the other critical area, fundamentally in terms of -- I think, over a period of time, sourcing or, what I would say, supply chain are some areas where we can get the better benefits like, sourcing is like whether it's raw material or packaging material. So these kind of opportunities are there and we are working on some of those kinds.
So if you ask us, our priority is going to be to integrate the back end. For example, customer service, sourcing, logistics, these are the things that we will integrate first. And probably the sales system will be the last because like you know, and you have said, Sunflame has got a very different GTM. There are some advantages and there are some disadvantages with that, but at the moment, we don't want to make any knee-jerk reaction, because there are -- it is a brand that has been there for almost 35, 40 years. So, it has some certain practices and it will take us some time to change those practices.
Our next question is from the line of Renu Baid from IIFL Securities.
Yes. My first question is, can you -- as an observation, can you have some input on the cables and wire segment performance in terms of the volume growth and what kind of capacity utilization are we working on currently in this segment?
So, our cables and wires is primarily house wiring cables. We don't make underground cables and cables that are going to infra and stuff like that. I think, our growth in cable, the house wiring cable segment was about -- around close to 13%. And I think that is value growth, and volume growth would have been -- it has this come back with the volume growth. Volume growth was about 13%, because there has not been much of a price difference.
Sure. And approximately what capacity utilization are our manufacturing facilities running today in this segment?
So we have spare capacity. I think, our capacity utilization is not more than 65% to 70% in terms of cables and wires. But we have to understand that the sales is volatile. Like for example, there is a practice of upstocking and destocking depending on how the copper price is going. So, certain months, it can go higher, but on average it is 65% to 70%.
Sure. Second, while we understand that there is no clear plan as of now for modular or Sunflame, this is a completely different portfolio. But how should we look at the deleveraging plan against finance, which was raised for funding the acquisition?
So, I think, deleveraging, we are already -- we have already paid down the working capital debt, which we have started to avail once we acquired Sunflame, that is something like INR 80 crores, INR 90 crores of working capital.
Yes, INR 100 crores, we have been retired already.
Yes, already INR 100 crores -- of the total INR 400-odd crores of debt, already INR 100 crores has been retired. And V-Guard is already sitting with a cash of close to INR 100-odd crores even after retiring the debt. I think, from April of 2024, V-Guard will start repaying the debt of -- which we have taken for Sunflame. I think, looking at the current cash flow generation of both the entities put together, they are both very healthy. So, I think, in about 18 to 24 months' time, we should be probably completing the repayment of most of the debt.
Sure. Secondly, sir, broadly if you look at the demand environment, what is your reading in terms of the consumption? Where do you see the pockets of consumption being far more weaker than expected and any timelines on recovery?
So like I said earlier, the kitchen part seems to be a bit stressed. We are hoping that it should be better. We started noticing stress on the kitchen business even last year after Diwali. I think that is also got to do with the fact that there was a huge increase in sales in the previous year prior to -- that's 2 years back.The other area where we are worried, there is some soreness we are seeing in the [indiscernible] also not grown as well as we had hoped, although cables and wires is doing better. So, we'll have to wait and see, it's been a mixed bag. But the good thing is, once we have a good start of the year for any summer-based products, we tend to at least do well in the following quarters, because there is very little inventory in the channels for a product like stabilizers or inverters. And last year and all, we were struggling with a huge channel inventory, and thereby our numbers were muted in the Q2, Q3 for these categories. So we see -- I think, overall it looks okay. I think, Onam will also give us some indication on how the consumer spend is going to be for this year.
And on the new production segment, because for the last couple of years, we have been trying to refocus on new segments categories where we can improve the profitability. But despite that, as you mentioned, even performance of some of the segments like switches and all have not been as expected, still a bit softer. So in your view, it is just that the overall demand environment is weak or somewhere the acceptance of V-Guard brand in some of these new categories have been softer than expected in the Southern markets. And aligned with this, what is the kind of penetration that you're looking for some of these new categories for non-South markets as well?
So, I think, the newer categories are growing. They're growing faster than market and faster than competition. There is a general softness in the market, and I think you would have seen this from the results that have come. And probably if you are able to separate the B2B outcomes from B2C outcomes, you might see a more broader -- you will have a more broader understanding of the extent of softening.I think, last quarter, we have been able to do stronger relatively, in spite of this slowdown. There are -- so I think, we will have to wait and see as we are entering the festive season, whether it's going to shift the mood. I think some of it has also had to do with heavy rains in certain parts of the country and stuff like that. But there is a larger slowdown in consumption.Now, in terms of, what I would say, the newer categories, entering into non-South, I think selectively depending on the category, we are moving them into non-South. And in fact, the non-South business has by and large been growing. This last quarter has been bad for North and, therefore, North has pulled down our non-South business for this last quarter, fundamentally because of weather. But otherwise, I think, we are on track. We are adding retail partners by category in most new categories, wherever we have taken them to non-South, but primarily, that is switches and switchgears. In the kitchen, we still remain in South. So, primarily the new categories are switches and switchgear-oriented, and these are growing in these markets.
Sure. And lastly, if I can ask...
Sorry. And [indiscernible] which is also growing here.
Okay. So, my last question is, if you look at the broader framework of the expansion across segment categories, diversification from South to non-South, which now has been over a decade in journey, from the current levels where we ended last year, in your view, how many more years it should take for you to double the revenue from the current level? Would it be like a 3-year journey, a 4-year-plus journey or how are you looking at the market from a slightly longer-term perspective?
So, I think, we have always said that, we will -- our goal is to hit 50% of revenues from non-South. And I think in some quarters, we are already hitting. And if you actually combine the Sunflame's business, it should even go to something like 50% to 53%. I think we have not set a target on, in how many years we have to do X number and all that. I think broadly if we get like about 60-odd-percent of revenues from non-South, that would say that we are reasonably mapped to the overall market sizes of both the [ rules ].
So, in our category, South is typically about 38% -- 37%, 38% of the market is South, and 60% to 63% is non-South. Presently, we are hovering between 48% to 50% non-South contribution, not including Sunflame. I think, we should be able to grow this by 2% every year, given the higher growth rate typically, non-South is enjoying over South. But I think the last, 2, 3, 4 percentages are going to be harder to come by because it will require more deeper penetration from a channel standpoint. And it will also require higher extraction, which will typically come with more maturity of the brands present in those markets. So I think we should be able to see 2% increase in non-South contribution every year over the next 4 to 5 years.
Our next question is from the line of Rahul Agarwal from InCred Capital.
Yes. Sir, 1 question on Electronics. I understood what you explained, but was the mix very different? Like what my understanding is, AC contributes about 70% to stabilizer sales mix. And my sense was 1Q was not a great sum for North, and non-South, let's say, for V-Guard. So, was the mix very different or you saw growth between stabilizers was pretty equal?
So, yes, AC stabilizers is the main driver for stabilizer business in Q1 especially. And the other 1 -- the other component for Electronics is inverters and batteries. Yes, North business was impacted. North, in fact, there was, I think, a degrowth for the stabilizer category. But our business in South and business in East grew very well. And some of this growth overshadowed degrowth in the Northern market. So that's why overall we have grown well. So I hope this answers. The Eastern, for example, West Bengal, Orissa and Bihar had extremely good summer season, so did Kerala and Tamil Nadu and parts of Andhra. So, all this kind of compensated for the degrowth in North.
Got it. Understand. Secondly, on gross margin, obviously good to see the recovery to 32.5%. Is there more to go here?
Some of the increases in gross margin has come due to the product mix also. So, there has been a better mix of products because stabilizer contribution has grown faster than the company average. Some of it is due to that. But even other than that, we are expecting some more improvement as the quarters go by. Like I said, we are still having some high cost inventory for certain categories that should go out by October. So, I think in the following orders also, we are hoping to see some improvement in gross margin.
So, stabilizer obviously won't sustain 20% growth in my understanding. So, obviously that will come down over the course of the year, and water heater might be better in second half. Net-net should be the same or you're saying net wise on a consol level the margin should go up?
No, I think, even from this level, I think gross margin should improve. Because see, for example, some large categories like water heaters and fans, we have still not got to the levels of gross margin which we should have, what was there before the commodities started shooting up. And there has been some good news in that front in the sense some of the commodities like steel and aluminum still, prices have softened in the last 2 months. So, some of it should benefit.And water heaters especially, we are still having high cost inventory. I think only by October, we should be coming back to -- we should, so water heaters still whatever we are selling is high cost inventory. So, till that goes up from the system, it's going to impact the overall number in terms of gross margin. So all that -- so that's why we are still expecting a further improvement from this. Another, I think, 1.5% improvement is what we think we should get over the next 3 quarters.
Mithun, why not in fans, like what is really wrong with fans? I thought the entire old inventory thing is a parse now and prices have gone up.
Fan is not an inventory issue. Fan is just that, North is a big market for fans. So what happens is, when there is a very bad summer season, what happens is some of the price increases that were taken up by brands in April, finally they resorted to giving discounts in the month of May and June because of heavy rains. So, fans is not the issue of old cost inventory. Fans is an issue of extra discounts being given by brands because there is very poor sales in Northern markets.
Yes. And last question on non-South, could you help us with more color on what are the gaps here now? Are we like present across states -- which states are contributing better and what's the strategy in terms of your sales channel development into non-South markets, please?
So, I think, in non-South, we -- maybe 4, 5 years back, we had a huge lag of contribution from Western markets, but that's now largely solved. I think the gap for us will be Delhi, Bombay and Calcutta, the metro cities where our presence is limited, but we are okay with that because we will -- those are the toughest markets to break. But otherwise, I think we are -- overall presence wise, we are pretty much happy with where we are in terms of our presence. There is, I would say, pretty strong presence, West was a lagger, but even today, I can say that West is also having very strong presence for V-Guard from what it looks like [ the impact ].
Got it. The last 1, small one for Sudarshan, could you help us with the CapEx needs for this year and next year?
CapEx for this year, about -- around INR 100 crores -- INR 100 crores to INR 110 crores. Similar amounts for next year also.
Our next question is from the line of Rahul Gajare from Haitong Securities India Private Limited.
Yes. Mithun, some of the questions have been answered, but I just wanted to dwell a little more on the gross margin. Obviously, product mix has aided the gross margin, but is there any price tag also which have been taken by the company? And if yes, how much is that?
See, the only price tag that has happened was probably for wires where there was actually a -- first there was a price decrease because copper was falling and then towards the month of June there was an increase in copper price, so there was an increase in prices. But other than that, I think we are largely done with the regime for price hikes. I think only in fans, I think there is a bit of more -- maybe a little bit of gap in pricing is remaining. I think most categories are fine, because we are now -- when we look at the replacement costs what we have today, and so we understand where the margins will be in the next 2 to 3 months. Most of them seem to be largely okay. So, I think, price hikes may not be required. We just need for the high cost in this inventory to work. Maybe in fans, maybe a little bit of pricing action is still required in fans.
Okay. With respect to your own manufacturing, now over a period of time, there is a lot of in-house manufacturing that you'll have done. How is it stacked today in terms of your total in-house manufacturing and what is the long-term view as far as manufacturing is concerned?
Yes. Today I think it's about 60-odd- percent overall. And this number was something like 35-odd-percent if you look at maybe 8, 9 years back. I think, we expected to go to close to 75-odd-percent in the next 3 years. We have 2 more -- 2, 3 more plants that are coming up from various categories. And once they start contributing meaningfully, we'll probably go to 75%, 76% of the basket being manufactured in our own factory.
Okay. My last question is, in your opening remarks, you did highlight there was an exceptional item sitting in other income. I have actually missed that. Can you please give us the details of that?
Yes. Sudarshan?
Yes. So that one-off item is relating to that investment we made in Gegadyne. There was a INR 33 crores investment we made. And there was a reassessment or a fair valuation done this quarter. And that's as per the accounting standard we had to do a fair value adjustment once in a few quarters or so. And coming out of that, there is a gain of INR 7 crores that we recognize, which is part of other income.
Our next question is from the line of Achal Lohade from JM Financial.
Yes. Just had a couple of quick clarifications. Mithun, you mentioned that we can look at another 150 basis points kind of a gross margin improvement over next 3 quarters as our high cost inventory gets liquidated and raw material costs get softer. But at the same time, you also indicated the gross margin -- the EBITDA margins could be between 9% to 9.5%. So, what I'm trying to figure out is that, are we planning for substantial investments in terms of employee or A&P or other expenses, which is pulling this, otherwise this should cost 10% in this year itself?
So, I think, gross margins will increase for [ this year ]. So it will not happen that, all the 150 bps will come in the second quarter. Some of it will come in second, some of it will come in third and fourth. So, that's why I said, it will be a mix of -- it will be an average of all this, in terms of gross margin. Yes, I think A&P spends are still at least 1% lower than what we would like it to be. We are still at about 2% to 2.2-odd-percent. We would probably like it to go up by another 1 percentage point more once gross margins reverts back to normal. So, yes, so some of it will go back to A&P.
Got it. Secondly, with respect to the in-house manufacturing, you said the mix will go up to 74% -- 75-odd-percent for next 3 years. What kind of gross margin improvement can we look at because of that, and as well as EBITDA level margin improvement purely because of the in-house manufacturing?
So these are going to be very directional because what will happen is, as we start a new factory, for the first 18 months, we are actually going to probably have a decline in margins because the startup costs, the factory won't be running at full capacity and so on and so forth. So, a lot of the benefits will start to flow in only after the first 18 months. So even -- so these factories are not all starting at the same time. For example, we had 1 factory that started last year in January. We have 1 starting this year in January, and then we have some things. So what will happen is, maybe it's too early for us to start talking about margin improvements because some of these will get masked by additional cost of the new factory startup. So, I think once we have completed all the factories and once we start production and most of the -- majority of the new factories, at that time, maybe it'd be better to come back and -- come back with this number.
Understood. And 1 more question. With respect to distribution, is it fair to say that we've kind of reached a level where we can say that we are fairly present across the country? Or is there a substantial white space which is still remaining, which we can look at over the next couple of years? So, A, in terms of distribution tally, in terms of dealer and retail touchpoint, and how do you see it from a 3-year perspective?
So, I think, there is room for the depth of distribution to increase, which means that we can -- within the markets we are present, maybe we can address more outlets or get into smaller towns that we are not servicing. So that the opportunity there. Second thing is, within our portfolio, the reach may not be uniform across all categories, categories that are recent, right? There is opportunity to increase the penetration of categories. So I think the category access is going to be 1 key access for us to improve the overall market presence of the company. And the recent categories will have opportunity to go through that route. And I think, particularly in non-South, there may be opportunity within the markets we are present and to get into some adjacent markets. So I think that is there. But overall, structurally, in terms of addressing major states and major clusters, we are there already in most of these markets.
The count -- Ram sir, if you can highlight, what is the count?
So, I think, we will be adding about 3,000 to 4,000 retailers every year, and that's what we've been saying and we continue to do that.
Our next question is from the line of Natasha Jain from Nirmal Bang.
Most of my questions have been answered. Just tell a deeper segment-wise. Sir, in your Electronics segment, since this has been mostly a quarter for AC stabilizers, can you tell me how the growth in the battery segment was factually inverted, and finally, have we been able to take a price hike in that segment?
So we don't give out category-wise numbers, but both stabilizers and inverter battery -- I mean, inverters and battery, we don't think it is 2 different categories. It's sold as a bundle product. People buy inverter and batteries, and sometimes people buy batteries as regulations also. But -- so both of them have demonstrated healthy growth, and that's contributed to the 20%-odd growth for Electronics.
Okay. And sir, price hikes, were you able to take there or not simply because of gross margin expansion or [indiscernible]?
No, I think in terms of prices, like I said, only in the case of fans, I wouldn't say it's even in pricing. I think pricing has increased -- improved. But discounts have increased after the summer season in certain parts of the country were not supporting, people have resorted to -- brands have resorted to additional discounts being given maybe from May 15th onwards. So, I think that's the only case where maybe real-life pricing has to improve. In other cases, I think, we are today in an environment where most of the categories, except for copper, is in a deflationary trend. Copper being also not -- it's also range-bound, it's not increasing much. So, we don't foresee the requirement for further increases in prices.
Understood, sir. Sir, then next to your Electrical segment, I know you're talking about 20% of your revenue is coming from pump. So, how has that segment been specifically [indiscernible]?
So, pump business has been impacted, pump is the second largest category after wires and electricals. The pump business was impacted in the first 45 days of the quarter, but I think in the month of June, we saw a little improvement. Pump business did not -- has not taken off to the level that some of the other summer category products have done. So, there still seems to be some challenges. I think this is more of a rural product. So, it could be that there is more stress, but yes, we've come to understand that across brands, pump business -- so it's not degrowing or anything, it's growing at very low single-digit kind of numbers. So, this is not very encouraging, but we are hoping that the situation will reverse when we have better -- probably better environment in the rural market.
Understood, sir. Sir, considering the results that we posted this quarter, and we still have 2 seasonal quarters that remain, so are we still maintaining our top line growth of 14% to 16% or do you see a bump up there?
No, I think, at the moment, we don't like to change anything. And let's see, let's finish a couple more quarters and then we'll come back.
All right. And sir, lastly, can you just throw some light as to how the e-commerce and [ MP ] segment did both for Sunflame and V-Guard?
Okay. Ram?
I think, the e-commerce segment for us would have grown at about 20-odd-percent, muted compared to what typically we have been enjoying. And this is to some degree led by just competitiveness, but it's also -- the growth on the platform has slowed down. I think, Sunflame, we are in the process of integrating the Sunflame e-com business on V-Guard platforms, and V-Guard e-commerce systems. That's going to take some time, maybe another 1 month or 1.5 months before we will start to see the Sunflame business operational for scale up. So, I think, otherwise the Sunflame business continues the old way. I think they do typically about 6% to 7% of the revenue, or maybe 7% to 8% of the revenue typically comes from e-commerce.
Okay. All right. And sir, last question, I could not hear clearly. What was your CapEx number for FY '24 and '25? If you can just repeat that.
CapEx number?
Yes, CapEx number.
INR 100 crores each.
INR 100 crores each, all right.
Our next question is from the line of Khadija Mantri from Sharekhan.
Yes. I just wanted to know if it is possible for you to provide volume growth on consolidated basis, excluding Sunflame.
See, I think there is a problem by giving that because we have products like modular switches where the average price of the product is INR 30. And then, we have products like solar water heater where the average price is INR 20,000. So, I think, it may not make much sense. What I'm saying is that when you give out the volume numbers, it may not make some -- consolidated wise, these things could distort.
But for this quarter, you can assume that pricing has been flat. There's not been much effect as compared to...
Yes. So from Q4 of last year to Q1 of this year, there is not much of pricing action.
Thank you. Ladies and gentlemen, that brings us to the end of our question-and-answer session. I would now like to hand the conference over to the management for closing comments.
Thank you all for participating for the call. And I would like to thank Achal Lohade and the team at JM Financial for hosting this call. Thank you.
Thank you. On behalf of JM Financial Institutional Securities Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.