V Guard Industries Ltd
NSE:VGUARD
| US |
|
Fubotv Inc
NYSE:FUBO
|
Media
|
| US |
|
Bank of America Corp
NYSE:BAC
|
Banking
|
| US |
|
Palantir Technologies Inc
NYSE:PLTR
|
Technology
|
| US |
C
|
C3.ai Inc
NYSE:AI
|
Technology
|
| US |
|
Uber Technologies Inc
NYSE:UBER
|
Road & Rail
|
| CN |
|
NIO Inc
NYSE:NIO
|
Automobiles
|
| US |
|
Fluor Corp
NYSE:FLR
|
Construction
|
| US |
|
Jacobs Engineering Group Inc
NYSE:J
|
Professional Services
|
| US |
|
TopBuild Corp
NYSE:BLD
|
Consumer products
|
| US |
|
Abbott Laboratories
NYSE:ABT
|
Health Care
|
| US |
|
Chevron Corp
NYSE:CVX
|
Energy
|
| US |
|
Occidental Petroleum Corp
NYSE:OXY
|
Energy
|
| US |
|
Matrix Service Co
NASDAQ:MTRX
|
Construction
|
| US |
|
Automatic Data Processing Inc
NASDAQ:ADP
|
Technology
|
| US |
|
Qualcomm Inc
NASDAQ:QCOM
|
Semiconductors
|
| US |
|
Ambarella Inc
NASDAQ:AMBA
|
Semiconductors
|
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
284.2
524.15
|
| Price Target |
|
We'll email you a reminder when the closing price reaches INR.
Choose the stock you wish to monitor with a price alert.
|
|
Fubotv Inc
NYSE:FUBO
|
US |
|
|
Bank of America Corp
NYSE:BAC
|
US |
|
|
Palantir Technologies Inc
NYSE:PLTR
|
US |
|
C
|
C3.ai Inc
NYSE:AI
|
US |
|
|
Uber Technologies Inc
NYSE:UBER
|
US |
|
|
NIO Inc
NYSE:NIO
|
CN |
|
|
Fluor Corp
NYSE:FLR
|
US |
|
|
Jacobs Engineering Group Inc
NYSE:J
|
US |
|
|
TopBuild Corp
NYSE:BLD
|
US |
|
|
Abbott Laboratories
NYSE:ABT
|
US |
|
|
Chevron Corp
NYSE:CVX
|
US |
|
|
Occidental Petroleum Corp
NYSE:OXY
|
US |
|
|
Matrix Service Co
NASDAQ:MTRX
|
US |
|
|
Automatic Data Processing Inc
NASDAQ:ADP
|
US |
|
|
Qualcomm Inc
NASDAQ:QCOM
|
US |
|
|
Ambarella Inc
NASDAQ:AMBA
|
US |
This alert will be permanently deleted.
V Guard Industries Ltd
You don't have any saved screeners yet
Ladies and gentlemen, good day, and welcome to Q2 FY '23 Earnings Conference Call of V-Guard Limited, hosted by ICICI Securities. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Aniruddha Joshi from ICICI Securities. Thank you, and over to you.
Yes. Thanks, Yashasree. On behalf of ICICI Securities, we welcome you all to Q2 FY '23 results conference call of V-Guard Industries. We have with us senior management represented by: Mr. Mithun Chittilappilly, Managing Director; Mr. V. Ramachandran, Director and Chief Operating Officer; and Mr. Sudarshan Kasturi, Senior Vice President and Chief Financial Officer.
Now I hand over the call to the management for their initial comments, and then we will open the floor for question-and-answer session. Thanks, and over to you, sir.
Thank you, Aniruddha and ICICI Securities for hosting this call. A very warm welcome to everyone present today on the call. My best wishes for the festive season, and wishing all of you a very prosperous year ahead. Thank you for joining us today to discuss the operating and financial performance of our company for the second quarter of FY '23.
We reported revenues of INR 980 crores in Q2, which represents 8.6% growth Y-o-Y and 16.6% CAGR over a 3-year period. It was fairly strong performance in Y-o-Y terms, considering the high base of the corresponding quarter of last year. We witnessed some slowdown in consumer demand in the latter part of the quarter, but for which we would have had seen a higher top line growth.
On a segmental basis, the Consumer Durables segment reported strong growth in this quarter. The Electronics segment has sustained its improved growth trajectory. The Electrical segment was nearly flat due to price reduction in wires and related to the dip in copper prices. During the quarter, South and non-South markets delivered Y-o-Y growth of 2.6% and 17.8%, respectively. With consistent growth in non-South markets, we are -- we have a more balanced geographic portfolio today. Contribution from non-South regions rose to 42.7% of total revenue in Q2 FY '23 from 39.4% in the last year. We are attaining scale in all the regions, and this will deliver benefits from operating leverage going forward.
Gross margins for Q2 FY '23 was at 29.2%, a drop of 210 basis points Y-o-Y. A&P spends were higher at 2.2% vis-a-vis 1.5% in Q2 FY '22. As a result, EBITDA margin dropped to 7.4% from 10.5% last year. There was a INR 16 crores impact due to the copper price movement as we had to reduce selling prices while carrying higher cost inventory. But for this commodity-related impact, we would have been close to 9% EBITDA margin for the quarter. Apart from the wires impact, there is continuing margin compression in Durables due to pricing gaps compared to input cost increases. We expect the gross margin in Durables to improve from Q3 and to reach pre-COVID levels by the end of Q4.
As we have shared before, our shift from outsourcing to in-house manufacturing impacts certain line items in the presentation as per economic standards. As own manufacturing increases, there is a shift from material margin to other expenses lines. some volume-related costs like freight and warranty are also classified under other expenses. This has a significant impact as the turnover has increased by 36% in the first half.
We remain positive on improved margin performance going ahead. The recent softening of input prices meant that further price increases will be required. As the existing inventory flows through the pipeline, the pricing graph will reduce. We expect the gross margin to revert to their normative levels by the end of the financial year.
COVID related disruptions had led us to hold higher inventory than normal. With risk of supply chain disruption diminishing, we intend to reduce our inventory holding. Due to lower sales than forecast during September, the inventory reduction has proceeded slower than anticipated. While it may take longer than planned, we will refer to normative stock levels in the coming months.
With that, I conclude my opening comment. I would like to thank the team at ICICI Securities and Aniruddha Joshi for hosting this call, and I would like to request the moderator to open the floor for Q&A. Thank you.
[Operator Instructions] We have our first question from the line of Aditya Bhartia from Investec.
Sir, my first question is on the Consumer Durable vertical. When we look at some of the other companies in [ PCD ] and [ SMEG ] segment, we saw their revenue growth actually being fully muted, while we have managed to deliver 20% growth. So just want to understand, is growth in South also been fairly strong? Or is this growth being driven largely by North of India for this segment in particular?
So I think for V-Guard, the Consumer Durable segment has a lot of category. Some categories that are faster growing than our peers. For example, we have kitchen appliances which is small and growing fast. We have a fan segment, again, that is small compared to some of the market leaders, but growing faster. So some of these would have contributed to higher growth.
And would it be positive for you to share sir how large the fan business would have become now? And given that we had made operational premium fans facility some time back, how is that contributing to overall sales?
So we don't hear out product-wise numbers. So once we complete some milestones, we will give out some information. But today, nothing to speak.
And the second question is somewhat related, which is the margins for this particular vertical. How would gross margins for this segment be different from the Electronic segment? And what we get to see are low EBIT margins for this segment. Is that a reflection of lower gross margin? Or is it overexposure to maybe the economy signal? Or is it just that overhead costs are currently not getting properly absorbed given the smaller scale? And as we keep building scale, you again see margins heading towards high single-digits or low double-digits?
So in the Consumer Durable segment, we -- both the fans on water heater business -- the business units and their margins are impacted. They are largely on account of pricing gaps, in the sense some of the prices have gone up to a some degree and the players in the market due to whatever reason, may be hypercompetition was driven, whatever it is, are not passing on the full effect into the market. A.
Second is, in the fans segment, especially, there's also some flux in terms of changeover in the new BEE norms. So there has been some slowness in the market in that sense. So I think the commodity prices have come down, and I think which also meant that the -- no company has been taking any price increase in -- this April. Also, it is not required with the current level of commodity prices. So I think as soon as the older materials get consumed and we'll buy in fresh materials, raw materials, I think the gross margins should revert back to normal, and we expect this to happen in Q4.
Regarding the gross margin percentage for Consumer Durables pre-COVID, Sudarshan, do you have the number? What are the normal gross margins for the--?
See, the overall gross margin is higher than the company average. That is at 20% steady state. Currently, we're going to say that there is a margin compression.
So I think, to answer your question, the CD margins were actually higher than the company average gross margins pre-COVID.
So it's mainly about an absorption of some of the overhead costs. And as the business scales up on a steady basis, we can see a significant margin expansion at the end.
Yes, that is happening. And also the commodity price inflation has not affected all the products in the same way. So something like a fan, this has been more sharper, because aluminum is one of the key components, and aluminum prices have gone very high because of the war situation.
And sir, the last question from my side is on the BEE rating change, which you just referred about. Are you expecting significant BEE buying to be happening just before these new norms become applicated? And once these norms become applicable, do you anticipate some market share movement within the brand?
So I think the trade will be upstocking in the current quarter, not only for us but across brands, because they are -- branch will have to stop selling them before 31st December. so I think there is definitely going to be up stocking by the trade in this quarter. Going forward, I think market will normalize. I think every company has brought out products that are concerning with the BEE norms. This is not a new thing. It's been in the works for at least 3 years. So we've all had adequate time to prepare to change over. So I don't -- but of course, the companies who are better prepared with the BLDC products, will have more edge because BLDC segment is growing and it's growing fairly fast as the subsegment of the overall fan business.
We have our next question from the line of Rahul Agarwal from Incred Capital.
First question essentially was on industry rather than the company. The demand has been pretty much all over the place and dealer expectations in first half are rural being more slower than urban market because of inflation. So I have one question on -- after this festive season, let's say, November, December and beyond, do you think things look okay? Or would you think [indiscernible] is still out there, the demand actually sustained at decent level. Especially when customer pricing is still at the same level, then hardly any price cuts being done by brands and input costs were actually lower. So any thoughts?
Yes. Ram, you want to take this?
Yes. So I think input costs have come down, but also the inputs had not been fully -- input correction has not been fully reflected in the market. So what we are witnessing today is -- the stress that we are witnessing is a consequence of that. So I think the stress is still going to remain on one side. When it comes to demand, I -- there are -- okay, I think that in the immediate run-up to the festive period, some stress in demand is observed, 30, 45 days. I mean, we found that we fell short of our plan.
Having said that, if we take a 3-year view of how we have performed for the last quarter, then we find that actually we've still grown at about 15% or something like that, even on a half year level, or maybe around 17% if you just look at for the quarter. So I think the -- one of the issues when we are comparing with the previous period, COVID impact for the first quarter of last year is also affecting how the numbers look when you make comparisons.
So I think at this point in time, it's difficult to say how the demand will pan out next half, but I think it's fair to say that there is a stress on demand in rural markets, smaller town or entry-level products, right? So that definitely -- that has been there for some time now. I've seen that actually from the early stage of the commodity run-up, and it was initially reflecting in stress for passing input cost increases. So even the companies were stressed in terms of margins on entry level products because of the inability of the market to absorb.
So this challenge is that -- this challenge will continue for some time. I think business has been dealing with this challenge from the last 12 to 18 months. So in that respect, that's a continuing challenge. But I think there are some other factors also, like the transition to the energy standards, it's causing some destocking in plan. The price reductions in wire is causing some reduction in wire inventory and so on and so forth. So these kind of factors are also playing out because trade is down stocking.
So I think some of the slowness that we are seeing is a combination of these 2 factors also, where there is some short-term destocking happening in the channels, so that they are able to adjust for any potential risks arising out of this energy change or any downward -- further downward impact copper, so -- which is fundamentally reflected in the wire business, right? So -- but yes, there is some stress because -- we found in Consumer Durable and all. The planned selling that we wanted to do did not happen. So there is some stress in terms of sell-out. But I think we will know better in the upcoming 2 months when once post-Diwali uptakes are replenished by trade.
And secondly, on gross margins. Now, South and non-south is almost now becoming equal. So there is -- rather actually, we should not even discuss regional sales henceforth. But -- and that gross margin difference is still there? The pricing is still lower in Northern market versus South for V-Guard and -- how is that moving?
Yes, Sudarshan?
Well, there's no difference between gross margin in South and non-South. Pricing is also uniform. So there's nothing we need to call out with the...
I think for the last maybe 3 years or something like that, this has been the case. So it's almost been -- I mean 3, 4 years, we have had a uniform pricing.
[Operator Instructions] We have our next question from the line of Sonali Salgaonkar from Jefferies, India.
Sir, my first question is regarding the demand in the industry right now. You did mention that the latter half of Q2 saw slower demand. So what are the initial demand trends that you have witnessed in the festive season? And what is the level of channel inventory right now across most of your product categories?
So Ram, take this?
Yes. So I think wire sales have been slower because of down stocking by trade, as wire copper prices have been coming down. They have been adjusting their inventory to adjust risk. We've also seen a bit of pressure on fan because the fans also -- the trade is preparing for the post BEE scenario. So they are slower to upstock. And they are slow to upstock even on growing categories like BLDC because they want to correct their overall portfolio, and they are focusing more on liquidating fans if there is fall in line with the old energy standards. So I think these are 2 areas.
I think what is the sales also -- our plan has been more bullish, but what we have seen, although it's good growth, but it is less than what we would have wanted to. So I think these are some areas where we have seen, I would say, like some stress point.
But having said that, I think there is also an issue of appreciation of the subject because, see, when you are making -- for example, we've grown at close to about 8.5-odd percent, and that is like 8.7%, 8.8%. And if the wire prices were constant, this would be more like 11%, 11.5% kind of growth, which will not be bad because the base period was a higher base as there was shift of sales from Q1 to Q2. So I think there is a bit of maybe -- I mean we also anticipated a much higher sales.
But definitely, some slowness was observed in some of these categories. It may also be because - this -- the Shraad period and all that was coming, especially for the month end, right? So as far as channel inventory is concerned, yes, I think there is -- that is also reflecting some increase in terms of number of days. And that's also one of the factors why we still said that there may be a slowdown in the last 30, 45 days. There is some increase of channel inventory. So, I mean, it's not alarming or anything, but we are seeing that there is some increase in channel inventory.
Sir, and what about real estate demand? I mean you have 2 categories...
Real estate demand is also a bit lower, yes. But that is a bit difficult to derive because there may be some amount of -- see, because in our portfolio, we primarily need to look at wires, switches and switch gears. We are not a very big player from an industry standpoint on switches and switch gears, and most of our switches and switch gear sales is primarily retained. But yes, wire is also retained, but we have a reasonably large wire business. And yes, there is a bit of, what I would say slowness. We're finding collections are getting a bit slow, rotation of money is getting a bit slow. So some of -- these are some of the indicators which are contributing to making a feel, right, that there may be some slowness in the last 30, 45 days of last quarter.
Sir, my second question is on price hikes. Last quarter or this quarter that we are in, have you taken any notable price hikes also in the fans with respect to the new BEE norms? How much price hikes do you expect?
Ram -- During the -- actual price movement during the current quarter, prices have largely been flat compared to the -- there has been no price increase for wire. There has been no price increase per se between Q1 and Q2. I think in wire there would be a drop of prices. Other than that, there is no change.
B, I think there primarily going to be new models. So I think in the entry segment, the price increases are about 5%, if I'm not mistaken. Ram, do you want to clarify?
Yes. It's in that range. So I think fundamentally what will happen is that the newer models will get launched. So it will not represent an increase in price per se. But the newer models will probably be positioned at higher prices, anywhere between 5% to 8% depending on the segment that we are talking about, right?
Sir, and how much percentage -- or rather how much portfolio of our fans is into premium funds right now?
I think -- mid and premium would be about 40% I think. Ram?
Yes. It's a bit more than that, Mithun. I think the last year, 1.5 years, I think the entry level has been also stressed relatively. So I think it probably would be over 50% now, 40% to 50%, you can take it as.
And last question from my side. Could you give us the broader idea of volume versus value mix in cables and wires this quarter?
Okay. This quarter -- Okay. Can we share that offline? We'll share that offline, Sonali.
We have our next question from the line of Nirav Vasa from Anand Rathi.
Sir, just wanted to check, what is the kind of growth prospects that you are seeing in our core product category of stabilizers? And how do you see that for the second half of the year? And the second question will be pertaining to the range in reach expansion. So we are --- already South and non-South we are favorably placed, but what would be our next steps with regards to expansion of our channel base?
Ram, you want to take this?
Sure. I think I'll address the second question first. I think you're basically looking at what are our plans for channel expansion, right? So I think -- yes, I think, the mix of South and non-South is favorably progressing. But I think we probably are in what I would say -- we have probably covered the 60%, 65% of the journey. I think we still have significant scope in non-South to increase reach also and improve extraction also. I think there is the throughput for counter and the reach. I think the reach will continue to expand at the rate of around 5,000 to 6,000 outlets every year. We will continue to add as far as non-South is concerned and as far as the distribution reach is concerned.
Additionally, we are increasing focus on the organized retail. I think we have been weaker in organized retail, and this is an area that we will be focusing on in the next 2 to 3 years, and that will also represent, what I would say -- lever an opportunity for us to expand our business here. So I think these are the 2 broad levers that we'll be focusing on. 5,000 to 6,000 new counters annually, as we have been doing over the last 5, 6 years, and improving our width and depth in organized retail. That's a lot more easier relatively in terms of access compared to retail expansion. I think your first question -- forgetting…
Growth in stabilizers?
The stabilizer growth. See, I think stabilizer growth has been in the region of around -- if you look at our Electronics growth, for example, right, it's in the region of around 7-odd percent, right, if you look at a 4-year CAGR for Electronics as a segment, right? It's, of course, lagging the growth in Electrical and Consumer Durables, right? That being said, I think that's part of our growth trajectory. And if you look at our 3-year half yearly growth of about -- 3-year CAGR of 15% that we have achieved, the Electrical and Consumer Durable segments are segments that we are focusing to drive for faster growth, right?
Just one more point. I think one of the key challenges with the electronic segment and the stabilizer in particular, I think COVID stress has impacted at least, I would say, 2 of the 3 or 4 quarters over the last 2 years because COVID typically has come in and impacted in summer months. So I think a couple of years of free and open summer should give us a better sense of how Electronics growth CAGR will move.
And sir, because we are a very strong player in the stabilizer market, can we target export markets using this product?
See, there is an export market, and exports are certainly possible. The only thing is, each market is having a different requirement. And that requires a lot of focus, and there is a lot of competition, particularly in the -- in Africa and those kind of markets where this kind of product has some opportunity. There is a lot of, what I would say, competition from China also. So we've chosen to focus our energy on the Indian market and the Indian business fundamentally when it comes to stabilizers, right, and build V-Guard as a consumer brand in the Electrical an Consumer Durable space, right? So I think that's more value creating, and that's why we have chosen that kind of a path.
[Operator Instructions] We have our next question from the line of Dipak Saha from Savart.
My first question is regarding in terms of high cost inventory that you all are sitting with. So the amount of high cost inventory you're sitting with compared to the current level of [indiscernible], is it still significant? Or it's almost gone? If you can share some color on that side?
On copper, the issue is gone. It was during July and first half of August we were having higher cost inventory. Once that has gone out, wires margins are back to normal in September. So it's not going to issue with wires anymore.
And on the aluminum front?
Aluminum. So I think it's primarily in the case of fans where we are holding some high cost inventory. But I think by end of Q3, even that will get exhausted. So we are not too concerned about that, but yes, that would mean that the margin improvement in fans will take some more time to kick in.
And if the commodity prices kind of stabilize at this level, so do you think by the end of this year you'll be able to kind of reach the similar EBITDA margin revenue to 9%, 9.5% of where we ended last year, given the operational efficiencies that we have or it will [indiscernible] some time for the operational efficiencies to reflect in terms of margin -- EBITDA margin at?
I think given the current cost environment, prices do remain where they are. I think by end of Q4 we should -- if the kind of gross margin that we had before all this inflation started. So that's our expectation as well.
And my last question, sir, is on the Electrical. If you can share some idea. Does the demand -- is there any softness in terms of demand on the Electrical cost, given the growth that we recorded on a Y-o-Y basis? Or is the high base impact that we're having on the Electrical spend?
No, Electrical, it's primarily for us -- if you look at Electrical, it's the largest component in wires. So whenever there is a copper price decrease, the trade destocks. So when the trade destocks, obviously the sales will slow down. And that is -- the trade will wait to see a bottoming out of copper before they restart stocking. So that's the kind of thing we are seeing. So it may not be fully explaining -- it is probably more to do with the pricing environment rather than the demand.
And last one, sir. As you said, by the end of Q4, we'll be able to get back to this high level of margin. So does it mean that we'll get back to this level of margin, but we'll not end at the close -- I mean, close to somewhere where we ended last year and -- in terms of full year basis?
So I don't want to give out any specific numbers, but what we believe and hope is that, given the inventory we are holding, given the current price environment and given the pricing in the market and the overall -- so our expectation is that by somewhere in Q4, we should start to be in the gross margin levels which we were before the -- before COVID. I think in COVID what happened is, there was an expansion of gross margin also, because when you see the copper prices -- I mean, the commodity prices came down. Then it shot up. So I think the good way to -- what we will look at is probably pre-COVID margin number.
We have our next question from the line of Pranjal Garg from ICICI Securities.
Sir, my first question is regarding our inventory days. You highlighted that inventory days will get normalized. Sir, what will be the target range where we should expect inventory days going forward?
Yes, we normally operate at about 70 to 75 days of inventory. Currently, we are holding more than that, and we would want to come back to those levels.
We are probably, I think maybe 20 days more inventory than what we used to hold before COVID. During this time, we decided to increase a few stocks and stuff like that. So we wanted to reduce it significantly by the end of this quarter. But like Ram mentioned, the things are being less than what we anticipated. So we're still carrying some inventory. And we hope by end of Q3, we can reduce inventory by 15 to 20 days.
Sir, next is regarding the [indiscernible] has also asked about the distribution strength in non-South states. Can you quantify your South versus non-South distribution stream as of now?
You are talking about the number? Ram -- I don't know whether we have the exact numbers with us today.
I don't have ready numbers of...
We'll share that offline. The retailer numbers we can share it offline.
I think one important point to understand also is it's simply not number, it's also extraction. So we can try and sell it to 100 dealers in a town or we can try and sell to 20 dealers in account with 30% share of the counter which will be more meaningful. So both these are important.
Sir, apart from that, the company has started its Roorkee facility. Has it made any new greenfield CapEx to see its growth in the near term? And what are the CapEx plans for FY '23 and '24?
Sudarshan, CapEx projection?
Sorry, your first part of the question, you had what -- did you talk about manufacturing activities?
You're talking about on plan, right? What--?
Yes.
Can you repeat the question, the first part?
Sir, the company has started its Roorkee facility and -- which has a greenfield Capex. So I wanted to ask, does it need any new greenfield CapEx in the near term to meet it's growth assets?
So we are having 3 more plants under construction, and it will take over 18 months to complete them. And we -- and I think another 70 -- I mean, this year and next year, I think INR 70 crores of CapEx has been earmarked for that. Some part of the CapEx [indiscernible] has already been spent out of the INR 70 crore.
And sir, my last question is regarding the new categories in which V-Guard are entering, like what are the [indiscernible]? Sir, what is the strategy for this new category, [indiscernible] has been endorsed, and how has been the traction?
Ram, you want to take this?
Yes. So I think we are still in early stage of the introduction and roll out of the water purifier business. We are still expanding our product portfolio and lineup to improve the addressability. Our current focus is to work through e-commerce, right, and what I would say is build a decent business through e-commerce focus, and that should give us comfort on, what I would say, the competitiveness of our mix, right, based on the depth of extraction that we are able to make in the category. After that, we would open out into organized retail, and then only we will get into [ GP ]. So that's how we are going to travel with water purifier.
We have our next question from the line of Rushabh from A.C. Choksi Share Brokers Private Limited. We are not able to hear you. There's a lot of background noise.
[Operator Instructions] We have a question from Mr. Anil Passi from ICICI Securities.
Yes, sir, 2 questions. One, how do you see the kitchen appliances growth panning out? And how is the penetration of kitchen appliances in South India as well as non-South India? And do you see any competitive intensity with the acquisition of Butterfly?
Also, the second question is on the effective tax rate. As the products and the unit ramps up, so how do you see the effective tax rate panning for FY '24 and FY '25? Yes, that's it frim my side.
Okay. So I think the kitchen appliances part, Ram, do you want to take it?
Yes. See, kitchen applies business is currently mostly focused on South for us. It's growing much faster than the overall company growth. But still, we are in very early stages. I think we have established the product breadth, the supply chain, and these competitors of our category. We are currently working on putting in place a manufacturing facility which should come up in the next 12 to 18 months so that our competitiveness in this category can be enhanced. So that's our near-term focus. And we believe, doing so will help us to improve our ability to grow this category and business aggressively. On kitchen, I think, Mithun, do you want to take the second part?
Yes. Regarding Butterfly, I think we don't want to make any comments on competitors. I'll get there. Regarding ATR provision, yes, the new manufacturing entities will have a tax rate of about 17%. So there is some amount of tax benefit that can come from there. FY '24 is going to be a ramp-up period. So we may not see very significant -- there'll be some reduction. But in FY '25, we can expect a 2% ATR benefit coming from there.
Sir and last question, any change in market share that you would have noticed in our categories in the last 6 months or so?
I think market share is not to be seen on a quarterly basis. When we complete a year then we shall talk about it. Maybe it's too premature to talk about market share.
[Operator Instructions] We have our next question from the line of Aniket Mittal from SBI Mutual Fund.
Just a few questions. Firstly, want to understand the margin trajectory a little better, so guiding for the margins to recover by 4Q to the pre-COVID levels. Just wanted to understand what would this be dependent on? It's largely a function of the high cost inventory being absorbed, or are there certain amount of volume pickup or price hikes that you are basically building this in?
So I think our gross margins are of wires between 2.5% to 3% from there should be, from normative level. And we believe that the current level of commodity price offers that [indiscernible] reduction, provided the current high value -- high cost inventory is phased out and we are purchasing cables at today's prices. So I think this entire project will take 4-odd months when the supply chain will keep liquidating the current inventory and buying raw material when manufacturing [ books ] at the current prices going forward. So that's going to be the main reason for the margins to come back to normal.
This would largely be on the wires business and the fans business.
Wire is more faster. This will be primarily on the Consumer Durable business where we are having more stress. Mostly Consumer Durable and maybe even inverter battery, little bit of inverter battery, but I think it's mostly Consumer Durable business. The wire business, this impact -- we don't carry much inventory. So we would have already -- the reduction of prices also needed and the consumption of new materials will also be immediate. So it does happen more faster on categories like wires.
Yes. So then, recovery has to happen in Electronics and Consumer Durable segment. The Electrical segment will come back faster.
The second question was, one of your remarks, you mentioned that the growth in water heaters has been less than what you would have anticipated in the quarter. So just wanted to get more light on how that market is sort of panning out and why has the growth not come in this quarter?
See, water heater business, we have lost some market share a couple of years back. So last year and this year, we plan to grow more aggressively than we have been growing to -- I mean, of course, we have regained all these market shares that we've lost, but we have to -- we still have a year of -- lost year that we need to catch up on. In that sense, yes, our growth has been less than what we anticipated. But we probably have grown still faster than the market.
I just had just one more question actually. This is just to understand a bit better on the growth in certain individual categories. So if I look at, let's say, the ECD segment of fans, water heaters and the electrical segment of pumps and wires, could you give a broad understanding of what's been the Y-o-Y growth for this quarter in the first half?
No, we don't give out product wise numbers.
And just one last question. So you had acquired the [ Simon ] brand on the switches front. I think a fairly positive -- in switches and switch gears and the segment. So just wanted to understand what is the traction that we are seeing within the segment? And how are we planning to merge the Simon brand in our portfolio?
Ram, you want to take this?
Yes. So I think we are filling the acquisition process, and this is not complete yet since it's going to be a merger, which means this is a core event which is in process. And if you take another couple of months maybe for the process to be complete and from the NTD-2 -- in hand. So I think this is not yet materialized on the ground in terms of initiatives, right? So the merger is work in progress, and we should come back on this sometime in next quarter.
So by next quarter is when we'd expect it to be completed.
Yes.
We have our next question from the line of [ Keyu ] from ICICI Prudential Life Insurance.
I think the question is on the overall profitability also, operating profitability. As you mentioned that as high-cost inventory is consumed, the current prices will go back to pre-COVID levels gross margin. Now if I look at pre-COVID gross margins which we had in those years, but from that level, our change levels have gone up. So in that backdrop, how should we think about our operating margins?
And just to add another layer, is -- as you hinted that there is some slowdown in the demand and you are seeing competitiveness in pricing as well, so do we see any risk to this increasing gross margin as people go for volumes over profitability to push the demand? So how do you see this equation is playing out and the net impact on the operating margins of the company?
I think the way -- we have a portfolio of products and when we see it as a portfolio, yes, this particular issue is there in maybe some of the categories, but not all. But as a company, we don't foresee that much of an issue. So like I said, we were off between 2% to 3% in gross margin on a company level. And the price reduction sales may have been almost in that same range. So that is what the business believes that it is possible to go back to the margins.
We will have the all the hypercompetitiveness happening either in category A or category B, but it doesn't happen across. So I think this may not be an entire portfolio problem, but the individual categories this issue may be there. But we also found that these are transient issues and I think -- because after some time, people do understand that cutting prices is zero from gain because everyone else will also do the same and then finally, there is very little evidence that someone will actually gain market share by cutting prices.
So I think once that realization happens, we have seen these things are transient and they will move on. For example, about 4 years back, 5 years back, kitchen appliances was a very hypercompetitive activity -- category. Then after 5 years, we found it to have mellowed down. Then few years back water heater was in the same position. Today, we are seeing it mellowing down. So I think it will keep happening. But I think as a company or as a portfolio we don't see it as a risk.
So just to and elaborate this question. So when we talk about the pre-COVID gross margin, but from those levels, our sales is at much higher level. So should it boil down to a much higher EBITDA margin also as we improve gross margin?
I think it's not that high. If you look at a 3-year timeline we're talking about 15%. It's not -- so because 3 years have also passed after COVID has started. So I think we should also look at it from that lens. Time has also passed.
Yes, there has been some increase in prices, but this has been only maybe for 1 year, there is really an increase in prices. And if you look at the previous year, the price increases were very minimal because commodity prices have remained flat since maybe 2016 or '17.
And just to add to what Mithun said, right, we continue to grow at 15% per annum, but we are also a company which is continuously making investments. We've got into manufacturing and by maybe another 12, 18 months, we'll complete the manufacturing footprint expansion, right? We are investing in talent, we are investing in technologies, we are investing in the future. So I think the other part is that these investments will also come at a cost, not -- so I think that also you need to keep in mind, right. It's not just sort of -- let's say this kind of growth will automatically translate into bottom line. There will be investments for the future. And those needs become more strong and become more stronger, right, because of the changes in environment that have happened in the last 3, 4 years. So that also you need to factor. So that's why it would be fair to say that the margins will be similar to what we were enjoying pre-COVID years.
Thank you. I would now like to hand the conference over to the management for closing comments. Over to you, sir.
I would like to thank ICICI Securities and Aniruddha Joshi to -- for hosting this call. And thank you all for participating on the call.
Thank you, sir. On behalf of ICICI Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.