V Guard Industries Ltd

NSE:VGUARD

Earnings Call Analysis

V-Guard Q2 Revenue Rises with Margin Improvements

V-Guard Industries' Q2 consolidated net revenue hit INR 1,134 crores, growing by 15% year-on-year (YoY), and 8.7% excluding Sunflame. The South market grew by 6.7% and non-South by 11.3%. Electronics saw a 12% increase, while Electricals, the largest segment, had a 9.6% rise. However, Consumer Durables growth slowed to 5.1% due to weak demand and weather. Gross margins improved significantly to 33.8%, up by 450 basis points YoY. EBITDA, excluding other income, climbed 26.5% YoY to INR 93 crores, with EBITDA margins up by 80 basis points to 8.2%. Profit after tax soared 35% YoY to INR 59 crores.

Top Line Dynamics and Segment Performance

The company experienced a muted consumer demand in discretionary categories such as Consumer Durables, impacting overall revenue growth. Despite this, consolidated net revenue increased by approximately 15% year-over-year (YoY) to INR 1,134 crores in the second quarter, or an 8.7% growth if we exclude revenues from Sunflame for a like-to-like comparison. The South market observed a 6.7% YoY growth, while the non-South market expanded by 11.3% YoY, increasing non-South market revenue contribution to 43.8% and demonstrating improved regional scale. V-Guard's Electronics segment saw a 12% YoY revenue increase, whereas the Electrical segment, which is the largest contributor, improved by 9.6% YoY. Consumer Durables growth decelerated to 5.1% YoY, affected by slower consumer demand and weather conditions.

Growth Amidst Cost Efficiency

Notably, the company improved its gross margin to 33.8% this quarter from 29.3% in the same quarter last year, marking a 450 basis points increase YoY and an improvement over the first quarter's 32.5%. The softening of commodity prices has benefited the margins, with an expectation to further enhance gross margins by 100 basis points to achieve pre-COVID levels. EBITDA, excluding other income, rose by 26.5% YoY to INR 93 crores. Profit after tax also augmented by 35% YoY to INR 59 crores. Operating cash flow remained strong, enabling capital expenditure funding, capacity expansion, and complete repayment of a INR 100 crore working capital borrowing.

Investments and Future Prospects

The company recognized a fair valuation gain of INR 10 crores in its Gegadyne investment, with the V-Guard Board approving an additional INR 20 crores to support scaling of the pilot plant and product enhancements, highlighting its commitment to pursuing strategic investments for future growth.

Examining the Electrical Segment

Despite a generally subdued demand in the Electrical segment, particularly for house wiring cables in both the B2C and B2B markets, V-Guard retained growth, achieving approximately 9%-10% in Electrical segment growth. However, the wire business experienced a slowdown even amongst prominent peers, suggesting an industry-wide trend rather than a company-specific issue.

Consumer Durables Segment Outlook

The company maintains a strategy to increase its Consumer Durables segment margins by 1 percentage point, with a focus on water heaters and fans where new premium offerings are gaining traction. However, sluggish market demand and competitive pricing pressures have delayed margin recovery, with hopes pinned on upcoming seasons to improve sales.

Plans for Manufacturing and Staff Augmentation

Transitioning from sourcing to manufacturing, V-Guard is opening new plants which will inevitably increase staffing costs. A stabilizer and inverter plant is already operational, and new battery and kitchen product plants are scheduled for commissioning. An expected headcount increase of approximately 120, along with the establishment of these manufacturing units, is estimated to raise payroll by 15% to 16%.

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to V-Guard Securities (sic) [ Industries ] Limited Q2 FY '24 Earnings Conference Call hosted by ICICI Securities. [Operator Instructions] Please note that the conference is being recorded.

I now hand the conference over to Mr. Aniruddha Joshi, sir. Thank you, and over to you.

[Aniruddha Joshi, analyst]

Thanks, Akshay. On behalf of ICICI Securities, we welcome you all to Q2 FY '24 results conference call of V-Guard Industries. We have with us senior management represented by Mr. Mithun Chittilappilly, Managing Director; Mr. Ramachandran V, Director and Chief Operating Officer; and Mr. Sudarshan Kasturi, Senior VP and Chief Financial Officer.

Now I hand over the call to the management for the initial comments on the quarterly performance, and then we will open the floor for a question-and-answer session. Thanks, and over to you, sir.

[Mithun Chittilappilly, executive]

Thank you, Aniruddha and ICICI Securities for hosting this call. 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 second quarter and the first half of financial year 2023-'24. I trust all of you have had a chance to refer to our investor presentation, which was shared yesterday.

The second quarter witnessed subdued consumer demand, especially in the discretionary categories like Consumer Durables, thereby impacting top line growth. We have reported a consolidated net revenue of INR 1,134 crores in Q2, which is higher by almost 15% on a Y-o-Y basis.

Excluding the revenues from Sunflame like -- for like-to-like comparison, the revenue growth is 8.7% Y-o-Y. In Q2, the South market grew by 6.7% Y-o-Y, while the non-South market grew by 11.3% Y-o-Y. As non-South markets continue to grow in double digits, their contribution to total revenues has increased to 43.8%, indicating enhanced scale for V-Guard across all regions of the country.

In our Electronics segment, comprising of stabilizers and inverters, we reported revenue growth of 12% Y-o-Y. In the Electrical segment, which remains our largest revenue contributor comprising of wires, pumps, switchgears and switches, we registered a growth of 9.6% Y-o-Y in Q2 FY '24.

In the Consumer Durables segment, where we market fans, water heaters, kitchen appliances and air coolers, the growth has slowed to 5.1% Y-o-Y. The effect of sluggish consumer demand and tepid weather conditions has impacted top line growth, particularly in the Consumer Durables sector. We have reported an improvement in gross margin to 33.8% in this quarter from 29.3% in Q2 of last year, an increase of 450 basis points Y-o-Y. Further, the gross margin is also higher by 130 basis points, compared with 32.5%, which we reported in the first quarter.

Softening of commodity prices is reflecting in the gross margin, and we are now moving closer towards the pre-COVID level. We believe we can further drive another 100 basis points improvement to reach the pre-COVID level gross margins. EBITDA, excluding other income, was INR 93 crores in Q2, an increase of 26.5% Y-o-Y. In Q2, we have recognized a fair valuation gain of INR 10 crores on the Gegadyne investment. Gegadyne is making good progress towards making technical and commercial milestones.

The V-Guard Board has also approved a further investment of INR 20 crores in Gegadyne in order to fund scaling up of the pilot plant, product specification improvement and proprietary work required for [indiscernible] funding. Excluding other income, EBITDA margin of 8.2%, is 80 basis points higher compared to the margin of 7.4% of Q2 of last year. Profit after tax in Q2 FY '24 was INR 59 crores compared with PAT of INR 43.7 crores in Q2 of last year, an increase of 35% on a Y-o-Y basis.

Cash flows have remained strong. Cash from operating activities are at about INR 300 crores during the first 6 months and it has helped us to fund CapEx and capacity expansion. And we have also fully repaid the working capital borrowing of INR 100 crores that existed at the beginning of the year.

In V-Guard Consumer Products Limited, our wholly owned manufacturing subsidiary, was progressing well as the manufacturing coming up as scheduled. The first plant in Pantnagar has reached its planned output. The battery and kitchen products unit will be commissioned in Q3 and will be scaled up in Q4.

In the case of Sunflame, there is a decline in top line growth, although the margins are healthy. The entire kitchen appliances industry at large is currently witnessing sluggish demand. There are also some internal gaps we have identified and we have undertaken actions to arrest the decline. We are also working on initiatives to start realizing the synergies between both V-Guard and Sunflame. Consumer response for our recent launches like fans and mixer grinders have been positive. And starting with the upcoming festive season, we expect strong top line growth in the second half of the year.

With that, I conclude my opening comments and would like to thank Aniruddha and his team at ICICI Securities for hosting this call. I would like to now request the moderator to open the floor for Q&A.

[Operator]

[Operator Instructions] The first question is from the line of Natasha Jain from Nirmal Bang.

[Natasha Jain, analyst]

My first question is on the Electrical side. So our product category consists of wires, switches and switchgears and all these are ancillaries to real estate, which is doing well. So what could be the reason for us to not post a stronger double-digit kind of growth here, compared to all our peers? So first question is that.

And in the same segment, can you also throw some light as to how the pumps segment did? Like are we beginning to see some strength building there? Or is the market still stressed?

[Mithun Chittilappilly, executive]

Okay. So regarding Electrical, V-Guard sells a lot of its product on a B2C basis, which means we sell through distributors to our retailers, which then goes into individual housing or small projects. V-Guard's presence in very large projects is limited. So -- but apart from that, most of our peers have also mentioned that demand for house wiring cables has been muted for the last quarter.

So what we have come to know is that even in B2B segment in house wiring cables, the demand has been muted. The only segment that is doing well is the large infrastructure projects run by central and state governments, which are using industrial and underground cables. That is the only segment that seems to be doing well within the cable and where V-Guard does not have any presence.

Regarding pumps, yes, so we have now completed almost 2, 3, 4 quarters of decline. And I think in last quarter onwards, we have started to see an increase in sales. However, it's not enough -- the largest contributor in Electrical is wires. So -- but the wires sales not growing very fast. The entire Electrical segment growth has come down to something like 9%, 10%.

[Natasha Jain, analyst]

Understood, sir. That's helpful. And sir, my second question is on the Consumer Durables portfolio. So our channel checks indicate a slowdown for demand -- for fans demand and also a possible price cut. So did we at V-Guard experienced something similar for fans?

[Mithun Chittilappilly, executive]

See, we have not cut any prices. But I think when the -- there was unseasonal rains in North, some companies, I think, on us, we were forced to offer some discounts in those parts, Northern region because North was completely washed out. This has also meant that in fans and water heaters, especially the price increases that were required to be taken for offsetting the raw material prices increase has not been fully taken. And we hope in the next 6 months, some of that will get corrected as we enter the season for water heaters and as we will be entering season for fans in March.

[Natasha Jain, analyst]

And sir, how was coolers -- air coolers?

[Mithun Chittilappilly, executive]

I think, for us, coolers has done well, but coolers is still -- coolers on an annualized run rate will be close to INR 90 crores to INR 100-odd crores. So it is not enough to really pull up the entire Consumer Durables basket. The larger products like water heaters and fan contributes most. This quarter, especially, we have seen softening off demand for water heaters, which is better last year, and that has pulled down the overall performance.

[Operator]

The next question is from the line of Rahul Agarwal from Incred Capital.

[Rahul Agarwal, analyst]

Sir, first question on ECD margins. Where do you see this number by March '24?

[Mithun Chittilappilly, executive]

So I think we used to be something around 5%, 6% EBIT margins for ECD. And I think we have indicated that we would like to increase our margins by at least 1 percentage and most of that increase would come -- at least 2% to 3% of that should come from Consumer Durables segment. So we are hopeful that starting with water heater season, I think -- we are also little unfortunate in the sense we are sitting still with some old inventory of water heaters, which were produced last season. I think once that starts getting offloaded, we are hopeful of increase.

But we have to also understand that demand is extremely sluggish. So market leaders, major market brands are refusing to take timely price increases or like someone mentioned earlier, some of them are referring to price discounts, which will mean that it's going to be difficult for us to recover these margins, it will get delayed.

But I think apart from water heaters, fans, we are seeing some traction. So we have some new launches. That's gaining good traction, and they are also on the premium side. So we are hopeful that in fans at least we should see a better performance this year. Water heaters, we have to wait and see. The season is yet to start. There is -- we are hoping that the winter does tick in soon, and that should drive the demand for water heaters.

[Rahul Agarwal, analyst]

Got it. Secondly, on Sunflame, given what's -- how the first half has been, would you still think that INR 330 crores, INR 350 crores of top line with 11%, 12% operating margin is possible for the full year?

[Mithun Chittilappilly, executive]

So I think we have also the Sunflame in relation with the performance of the entire kitchen industry. As you would have noticed, a few of the players have already announced results. The largest -- the larger players are talking about 15% to 16% Y-o-Y revenue decline. Sunflame's decline has been slightly higher, because it has -- like we mentioned in the opening remarks, there were some product gaps. There were some issues in terms of after sales, which has all got resolved.

And we have also -- the new team has settled down well. They came onboard early in April and May. So they needed 3, 4 months to take over -- the proper take over the management of Sunflame. I think H2, we should post a much better numbers. But we have to also keep in mind that the entire kitchen industry is degrowing sharply. So our hope is that in relation with the industry, we should do better. I don't think we will be able to post full year increase in sales.

But I think in H2, we are hoping to at least look at the numbers we did last year. So at least that is the decline. We'll wait and see. I think let's see how the demand goes. But the good thing -- we'd also keep in mind that post-Diwali, the sales have been very muted for kitchen appliances in last year. So the base is also low for Sunflame for last year in H2.

[Rahul Agarwal, analyst]

Got it. And lastly, on Gegadyne, just [ the offering for ] equity valuation, I think it's a bit not clear from the press release what is it right now? And how will V-Guard benefit from this investment in -- on the monetary upside on the financial side of it? What is the business goal here?

[Mithun Chittilappilly, executive]

Okay. Ram, I'm not sure whether you were able to hear the question properly...

[Ramachandran Venkataraman, executive]

No, I heard the question, Mithun. I'll answer. So I think there were two parts to the question. One was you were trying to understand the source of gain. So fundamentally, what has happened is there was a valuation on the basis of which we had invested into Gegadyne. 2 years had passed, so the accountants, annually, they look at these investments and their mark-to-market. So they felt that the technology development agenda has progressed further and with the pilot plant, the technology has also been commercialized at a pilot plant scale what was otherwise very basic and getting done at a large scale.

So I think they wanted to reflect the improved valuation consequent to the progress on technology development and technology commercialization. So I think we have got the valuation done of the entity, and we are just reflecting the increment valuation and accounting it has gained. But it is notional. So it is remaining on the books and will be the case. So it's -- I mean it's basically an accounting requirement.

Coming to the second part on how V-Guard will gain from Gegadyne? I think Gegadyne is not a financial investment for V-Guard. It's a strategic investment for V-Guard. And with that investment, we are making investment in, what I would say, in the deep tech space, which has high risk also. I mean not every one should invest [indiscernible] and we must keep that in mind. But fundamentally, we believe that this technology is the best fit for our application in inverter and battery. And -- which is the reason why we have decided to back this technology development. We believe that in the next 18 to 24 months, they should be able to move from pilot scale to manufacturing.

So I think once the manufacturing activity commences, I think V-Guard should be able to place these products in the market as a V-Guard offering, and I think that should be able to drive our revenues and maybe in time profitability once the initial investment towards building this concept in the market is created.

[Rahul Agarwal, analyst]

What is the value of Gegadyne today?

[Ramachandran Venkataraman, executive]

Sudarshan, it's -- I think it's...

[Sudarshan Kasturi, executive]

The valuation is now at INR 293 crores.

[Operator]

[Operator Instructions] The next question is from the line of Bhavin Vithlani from SBI Mutual Fund.

[Bhavin Vithlani, analyst]

So my first question is on the Electrical segment. So if you could just help us understand what percentage of the segment is wires and what was the Y-o-Y growth in the wires segment in the quarter or the first half?

[Mithun Chittilappilly, executive]

See, we don't give out these figures. So we will discuss this offline. But wires is a very large part of Electrical, I mean, wires is the largest constituent of that subcategory.

[Bhavin Vithlani, analyst]

Sir, actually the question was because you mentioned pumps has been degrowing. So -- and in that case, is it that...

[Ramachandran Venkataraman, executive]

If I may answer that, I think the wire growth is bringing down the Electrical growth. The pump growth is moderate and not recovered to long-term growth level. So typically, pump, we would grow between 8% to 12%, right? And I think that it is much below that. However, we have not degrown for the first half. So yes -- so the other categories have posted strong growth and cable growth has been lower than the category -- Electrical category for this...

[Bhavin Vithlani, analyst]

Sure. Because I was surprised because [indiscernible] results today that they list out the wires and segment that segment grew like 22%. And so I was a little disappointed looking at single-digit number. So is it that something that the competition has got aggressively into Class 5 in which V-Guard has not in given the quality standards that you have and that has been hampering the growth sales?

[Mithun Chittilappilly, executive]

No, I think it's a question of choice. So many years back, V-Guard had made a choice to be in the B2C space. So we exited whatever we have used to have businesses that was supplying U.K. systems to banker teams, which we shut down. We had businesses that were supplying large underground cables to big EPC contractors, which was shut down. So these are all conscious choices that were taken from 2009 to 2016, '17.

And for many years, EPC business in India struggled. But now there seems to be a cycle. So we believe it's a cycle. So maybe there is a infrastructure boom that is happening in the country. Probably also, it is going to happen before the election and they want to showcase some growth, some investments in the country before the election. So all these things will happen. But I think long term still the consumer business will do well. So many players like KEI and Polycab are heavily indexed towards profit business, whereas brands like us are more into the retail part of the business. .

So yes, so we -- but I think even in house wiring cable, many of our larger peers have shown that -- have indicated that there has been slow growth. So I don't think it's a V-Guard only issue. KEI, I'm not sure. I mean, again, it's a projects company. It's there in retail, but it's more of a projects company, but I can tell you that the retail consumer, the B2C part of wire business has been slow.

[Bhavin Vithlani, analyst]

The second thing is I want to understand the margins on the Consumer Durables segment, which has been negative in most quarters, even in this quarter. And in prior quarters, you highlighted that the newer -- newly commissioned fans, the facility, which was underutilized and there was a ramping up and then there were issues related to the TPW fans, which were imported and you had pivot to the local and had some cost issues. So sir, could you help us understand the negative margins in the Consumer Durables segment and the efforts taken by the management to kind of turn these around and when could we see the 5%, 7% margin bracket as you alluded to earlier in the...?

[Ramachandran Venkataraman, executive]

Mithun, can I take this?

[Mithun Chittilappilly, executive]

Yes, yes.

[Ramachandran Venkataraman, executive]

So I think we need to look at it in two parts. One is gross margin and one is EBITDA. I think EBITDA is fundamentally, there's business is -- I mean it's the growth -- I think the Consumer Durables growth has been weaker in first half of this year, compared to the kind of growth rates that we have been enjoying in the last 2 years and compared to what we had planned. So I think some amount of stress is coming because of that, because the growth has not been adequate to cover the investments that we have been making to scale up this business. That's one part of it.

I think the other part of it is fundamentally related to the margin recovery. I think while margins on Electrical and margins on the Electronics, by and large, recovered, gross margins, yes. I think the -- and then we have an intervention in terms of manufacturing facility coming up for battery. And we had commenced factory for inverters and stabilizers, which I think some more benefits we expect in the next 6 months to 1 year. So I think the margin recovery journey on Electronics and Electrical is, by and large, complete, right?

However, I think because of the slowness in the market, actually, the market has been slow from, I think, September, October of last year. I think it was more strongly seen in the fan category and kitchen. And lately, it is also being seen in water heater and fundamentally, because part of it is seasonal also, because I think the summer season have extended in West -- sorry East and South. So I think this year, the water heater season is slower to come back. So these factors are affecting the top line growth, and that's kind of affecting the conversion of gross margin to EBITDA.

Second thing is the pricing transmission. Because of the slowness in the market, I think there is a lot of contribution. So the pricing transmission has also been impacted. So although our gross margins have improved in this category from last year. If you look at half-year basis, we have improved our gross margin by about 2-odd percent and probably, we exit gross margin maybe even 2.5%, 3% higher. But I think there is another 3% to 4% of recovery, which has to happen, yes.

I think we have some interventions in this area. I think we have product launches in fans, and I think that should change the product mix and support the margin improvement even if the growth is tepid. Thankfully, for us, our fan growth has been all right, yes. Fan growth has been all right, even air cooler growth has been all right. So I think the kitchen, again, we are setting up a factory, I think, which will help our competitiveness and help us to recover our gross margins in this area.

So I think water heater and fan are the 2 categories where we are expecting that it will take some more time. So hopefully, the next 3 to 9 months, I think fan should come back. Water heater should partly come back towards this upcoming quarter. And I think some recovery will happen in the next year, again, when the season starts, because of the lower uptake in the water heater, the inventories are stretching later into the season. So -- and that's affecting our ability to benefit from the easing commodity environment, right? And also, because of slower growth, I think the pricing transmission is also getting impacted.

So I think there are no fundamental issues here to my mind. I think some of the categories will roll over. I think a bit of challenge on water heater [indiscernible] they come out of the transition happens [indiscernible]. That part of it is a bit of a problem for us compared to the market. But I think to the extent that growth is slower in water heater, I think there is some pricing pressure also which can develop. So keeping all that in mind, I would say that it will take us slightly longer for water heater to fully recover to pre-COVID levels. But I think you'll see some recovery further in the upcoming quarter.

[Bhavin Vithlani, analyst]

Last question from my side. I mean if you take out the Sunflame acquisition, the value growth is high single digit, 9% thereabouts, but the employee cost increase is closer to the 20% mark. So could you just help us understand this...?

[Ramachandran Venkataraman, executive]

Sudarshan, do you want to take it?

[Sudarshan Kasturi, executive]

No, there are some swings in employee costs when you compare with last year. It basically comes from, one variable pay provision and second, the addition of [indiscernible] subsidiaries. Last year, we had -- we have reversed the variable pay provision because at the end of H1, it was clear that a pay provision is not going to happen. This year, we have provided in full. So there is about INR 20 crores swing in that alone.

[Bhavin Vithlani, analyst]

So on a like-for-like basis...

[Mithun Chittilappilly, executive]

The underlying payroll increase is about 15%, 16%.

[Sudarshan Kasturi, executive]

About 15% to 16% is the like-for-like increase, if you remove all these things.

[Bhavin Vithlani, analyst]

Okay. So this looks like much higher than the growth -- the underlying growth in the industry. And -- so is it that because -- are you seeing growth in the other sectors and that the pressure on the...?

[Ramachandran Venkataraman, executive]

Yes. Can I answer that?

[Mithun Chittilappilly, executive]

Yes.

[Ramachandran Venkataraman, executive]

So I think you also need to see this together with our transition from, what I would say, sourcing to manufacturing, right? So if you look at it last year, we had 1 new factory come up, which was in Pantnagar, where -- which was stabilizer and inverter, okay? And we have the battery plant, which is -- and the kitchen plant [indiscernible] come back in December. I think staffing costs related to that are also sitting there.

[Mithun Chittilappilly, executive]

And even if you take out Sunflame also, Simon addition itself has brought in like 120-odd headcount, plus establishing [indiscernible] and manufacturing units. So there are some FTE increases, which takes the payroll increase to about 15% to 16%.

[Bhavin Vithlani, analyst]

Understand. So it's just a lag impact and revenues catches up?

[Ramachandran Venkataraman, executive]

Yes. I think also what needs to happen, right, our gross margin improvement has to be more, because when we were sourcing, the gross margin was including the manufacturing cost, right? But yes, that's been accounted below.

[Operator]

[Operator Instructions] The next question is from the line of Sonali Salgaonkar from Jefferies.

[Sonali Salgaonkar, analyst]

So my question is an extension to Bhavin's earlier question. We have seen about 450 bps rise in the gross margin and just about 70 to 80 bps rise in the EBITDA margin. Of course, one of that you explained as an employee cost. But there has been a sharp rise in the other expenses as well, wherein we maintain that we have retained our ad -- our promotion spend, it's about 2.2 percentage of sales. So could you please throw more color as to where we are seeing this increase and how sustainable it is going forward?

[Mithun Chittilappilly, executive]

I think there are -- apart from employee costs and A&P, the other -- of course, A&P has not gone up significantly. The other thing that has gone up much more than last year was travel costs. So the frequency of traveling and all that has increased much more because we have now -- there is no restriction on travel as such. So the sales team traveling, that also includes local and outstation travel that have significantly gone up.

And also, some of it is due to the increases in hotel prices and all that, which we've been reading about in the paper where there has been a rebound in tool. In some places, the hotel prices have gone up significantly. So all these things are heading to the other expenditure. One more item -- one major item in other expenditure is what Ram mentioned. So outsourced manpower cost, which is bulk of it is sitting in the factory, they come in other expenditures.

So like Ram said, the increase in gross margins had to be more than this to offset that. So some of the increases are due to reduction in commodity prices, but some of the increases in V-Guard is also because of a change from outsourcing to insourcing. And once these factories gain scale, we will have further increases in gross margins. So Ram, anything to add on this?

[Ramachandran Venkataraman, executive]

Yes, that's -- the other expenses line has elements relating to factory. And during this transition, when we are moving from outsourcing to in-house, the base year and the current year are not really comparable. Just wait for another 2, 3 quarters, then the base also becomes on the same basis.

[Sonali Salgaonkar, analyst]

So what percentage of our manufacturing is in-house this quarter versus same quarter last year?

[Ramachandran Venkataraman, executive]

Currently, it's about 65%.

[Mithun Chittilappilly, executive]

It is 65%, plus there is Sunflame -- not Sunflame, sorry, there are -- yes, 65%. Last year would have been...

[Ramachandran Venkataraman, executive]

7%, 8% less.

[Mithun Chittilappilly, executive]

About 8% less, yes.

[Ramachandran Venkataraman, executive]

But also, Mithun, what happens is the -- it's not a matter of sales percentage like the factories which are coming up, the manpower that because they're all going to get commissions in November, right? People would have been hired before trained and all those things.

[Mithun Chittilappilly, executive]

Yes. So we have 1 factory that is getting ready...

[Ramachandran Venkataraman, executive]

Sonali, if you see the movement also, it's not really that significant. If you look at first half, other expenses has gone from INR 293 crores to INR 370 crores. INR 293 crores did not include Sunflame. Sunflame is INR 23 crores. So INR 293 crores plus INR 23 crores, it's INR 316 crores. INR 316 has become INR 370 crores. It's not really a huge movement actually.

[Sonali Salgaonkar, analyst]

Understand Sir. Sir, my second question is about the festive demand with Navratri behind us, what kind of consumer sentiment did you see, especially in your appliances portfolio during the festive season? And what are the indications you're getting for the upcoming Diwali season?

[Mithun Chittilappilly, executive]

So see, like Ram said, in fans, we are getting traction also because we have some new launches that are doing well. We have recently launched a new range of fans that is getting good traction. Water heaters, like I said, more than Diwali, it is that season is yet to start. Although because of Big Billion days and those kind of pre-Diwali sales, e-commerce seems to be -- some sales will be happening, but general trade sales have not yet really started.

So we'll wait and see how it plays out. Typically for us, it's both -- I mean, like once we complete the full month of Diwali only we can comment. But we can say that water heaters, we are still seeing some stress. The others are largely doing okay.

[Sonali Salgaonkar, analyst]

Understood. Sir, my last question, any significant pricing action if you have taken during Q2 or any planned pricing actions in Q3, either in upwards or downwards?

[Mithun Chittilappilly, executive]

See, there is hardly any pricing -- at the best, I think almost entirely it is volume growth. Whatever sales growth we are seeing is volume growth. There is no pricing increase happening. Like I said, there is still pricing gaps existing in fans, especially ceiling fans and electric water heaters. And that we are hoping to take in the next 6 to 9 months time.

Ceiling fans, we still are not -- we believe that the industry has still not fully passed on everything, primarily because there is also a major shift from the traditional fans to BLDC fans. So some -- so it's not -- the older models are not finding taker, and that's also one of the reasons why some companies are not fully passed it on.

[Sonali Salgaonkar, analyst]

Sir, how much of your fans portfolio is premium and how do you define premium price point?

[Mithun Chittilappilly, executive]

Ram, do you want to take this?

[Ramachandran Venkataraman, executive]

Yes. I think I would say that about -- now about 40%, 45% would be premium for us, yes. And that would be like above, let's say, closer to 3,000 plus kind of price contraction.

[Operator]

[Operator Instructions] The next question is from the line of Aniruddha Joshi from ICICI Securities .

[Aniruddha Joshi, analyst]

Yes. So sir, [indiscernible]

[Mithun Chittilappilly, executive]

We can't hear you properly.

[Operator]

You're not audible.

[Aniruddha Joshi, analyst]

Is it okay, sir?

[Operator]

Yes, sir, please go ahead.

[Aniruddha Joshi, analyst]

Yes. Sir, we have a fans facility at Roorkee, I guess, under a separate subsidiary with a lower tax rate, effective tax rate, but we are still not seeing any reduction in the consolidated tax rate. So how should we see the overall profitability happening at the new plant? And [indiscernible] tax rate guidance that you would like to give? That is question one.

And secondly, I guess, 3 to 4 quarters ago, I guess, we had introduced water purifiers through the e-commerce channel. So any update on that? And regarding the general trade launch, any update on that?

[Ramachandran Venkataraman, executive]

Yes. Roorkee plant is under V-Guard. So that will not impact the ETR. The plants are coming up under the new subsidiary. The only one, which has reached scale as of now is Pantnagar. So for the effect to be seen, we just need to wait for a few other plants also to come up.

[Mithun Chittilappilly, executive]

So the new manufacturing entity, the first plant, the only plant that is running today is the Pantnagar plant. That is giving us some tax benefit, but it's still small in relation with the overall tax outgrowth we had. So we will start to see maybe end of next year some reduction in ETRs because as the new manufacturing entity will be under is about 17% tax vis-à-vis 25% for the company.

[Aniruddha Joshi, analyst]

Okay. And regarding water purifiers?

[Mithun Chittilappilly, executive]

Ram, do you want to take this?

[Ramachandran Venkataraman, executive]

Yes, Anirudh, water purifiers are doing well. I think one of the reasons that we decided to [indiscernible] through e-commerce [indiscernible] development of offerings, right? And we had a very good success with the offerings that we have bought to the market. And the e-commerce is selling well. Even today, I think top 3 largest [indiscernible] water heater [indiscernible] and I think we will get to the product portfolio [indiscernible] And we are able to [indiscernible] having...

[Technical Difficulty]

We have a good installed base to get good feedback. I think -- post that, I think we will get into general trade. And I think even there, I think our focus would be on organized retail because I think that it's easier to reach and better to manage because of being [indiscernible] in the category. I think educating the consumers about V-Guard and the benefits of our products, right? I think that will be key for us to take into the market.

So I think, at this stage, we will remain at least for another year on e-com before we plan to [indiscernible] market. But it's going on course, and we are quite satisfied with the kind of traction that we are getting.

[Operator]

The next question is from the line of Rahul Agarwal from Incred Capital.

[Rahul Agarwal, analyst]

The question essentially is on the working capital cycle. The 68 days, I think, we've done quite a bit of improvement, I think, over the last 3 quarters. Should we stabilize here or there is more to improve here?

[Ramachandran Venkataraman, executive]

It will be more or less around this. Some incremental opportunities may be there, but it's largely in the right place.

[Rahul Agarwal, analyst]

Okay. And secondly, on Gegadyne, I think -- so obviously, it's a strategic investment and there is some business to be done on the inverter, battery side of V-Guard. But are we looking for an exit from this company, let's say, 3 years down the line where there is a larger fundraise, which will happen eventually to get the product to the market?

[Ramachandran Venkataraman, executive]

See, I mean, we wait for a strategic investor. So that means we are interested in that product getting developed and how we can deploy it in our business. When as soon as the investor comes in, the ticket size will be much larger. So we will hold a small stake. At this point, we have not decided whether we will exit or sell or resell. We are interested in the product capability.

[Mithun Chittilappilly, executive]

V-Guard is not in the business of private equity. So our current focus is on making sure that this idea moves to lab -- from lab to pilot plant and from pilot plant to the mother plant, that's the next stage. And we are working very closely. We have a couple of people who are working -- some V-Guards are working very closely with the Gegadyne on that. And we will see. I think we have -- we can't comment what we will do after 3 years and 5 years. We'll see that at point of time. But yes, I mean, like I said, we are not bought into this company to sell out, so to speak.

[Operator]

[Operator Instructions] As there are no further questions, I would now like to hand the conference over to management for closing comments.

[Mithun Chittilappilly, executive]

Yes. We would like to thank Aniruddha and ICICI Securities for hosting this call. Thank you all for listening, and have a happy Diwali.

[Ramachandran Venkataraman, executive]

Yes. Happy Diwali everyone.

[Aniruddha Joshi, analyst]

Happy Diwali, everyone.

[Operator]

Thank you. On behalf of ICICI Securities, that concludes the conference. Thank you for joining us, and you may now disconnect your lines.