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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 Q3 FY '23 Earnings Conference Call hosted by Nirmal Bang Institutional Equities Private Committed.
[Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Prasheel Ghandi from Nirmal Bang Equities. Thank you, and over to you, sir.
Thanks, Amit, and good afternoon, everyone. Nirmal Bang institutional equity welcome to all to 3Q earnings conference call of V-Guard Industries Limited. On the onset of call, I would like to thank the management team for giving us the opportunity to host the call.
From the management team, we have Mr. Mithun Chittilappilly, Managing Director; Mr. Ramachandran V, Director and Chief Operating Officer; Mr. Sudarshan Kasturi, Senior VP and Chief Financial Officer. I now hand over the call to management for opening remarks, post which we can take questions from the participants. Thank you, and over to you, sir.
Thank you. 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 third quarter of FY '23.
I trust all of you have had a chance to refer to our investor presentation, which was shared yesterday. We reported revenues of INR 981 crores in Q3 FY '23, higher by 1.4% on a Y-o-Y basis. Revenue growth has been impacted by the high base in the corresponding quarter of last year. Over the last 3 years, the CAGR for revenue is 15.8%.
During the quarter, the spot market degrew by 5.2% Y-o-Y, while the nonsubmarket grew 10.5% Y-o-Y. With continued strong growth from nonsubmarkets they contributed 45.6% of the total revenue in Q3 FY '23. Higher than 41.8% in Q3 FY '22. .
We are making sustained progress in growing our business in the launch of markets, and they are now making a significant contribution to overall business. Within all our segments. Within our segment, the consumer durable segment led the growth trajectory for the quarter. In this segment, the market fans, water heaters, kitchen appliances and air coolers. And Q3 revenues registered a Y-o-Y growth of 4.5% and 17.8% for [indiscernible]. This segment has now gained reasonable scale in top line and will begin to consider more to profitability going forward.
In our Electronics segment, comprising of stabilizers, inverters and UPS systems, we reported revenue degrowth of 4.3% Y-o-Y and a CAGR growth of 5.8% for 3 years. In the Electrical segment, comprising wires form switchgears modeler switches, we registered a growth of 1.5% Y-o-Y and a 13.2% CAGR for 3 years. input prices have stabilized, but still remain higher than their long-term averages. We are also carrying higher loss of inventory in both RMs and finished goods at higher. We had an impact on gross margin for the quarter.
Sorry, which had an impact on the gross margin for the quarter. The gross margin at 29.6% in Q3 is an improvement over the immediately preceding quarter, but lower than gross margin of 31.2% to consult in the corresponding Quarter of last year.
The EBITDA margin was at 7.3% during the quarter and has improved slightly on a Q-on-Q basis, but remained lower than pre-COVID levels, especially in durables. There is some impact of advertisement and promotional spend, which have returned to normal levels after 2 years of lower spending during COVID.
With inventory levels having come down, we should see margins reverting to pre-COVID levels in the next 1 or 2 quarters. We have made substantial progress in reducing inventory back to normal levels. Inventory days for the quarter were at 92 days compared to 105 days in Q2 FY '23 and compared to 134 days in Q2 FY '22. We expect some more reductions happen in the coming months.
We have concluded the acquisition of Sunflame in January. We have placed the initial set of team to run the operations. In the next couple of months, we will have the full management team in place and start the integration process. With that, I conclude my opening with comments, and I would like to thank the team at Nirmal Bang for hosting this call, and I would like to request the moderator to open the floor for Q&A.
[Operator Instructions] First question is from the line of Rahul Agarwal from Incred Capital. .
Three questions. Firstly, the South degrowth is more of a base issue or you are seeing more competition there? That's the first question.
The South degrow is mainly a base issue. Last year Q3, the South markets have grown substantially faster. I think the recurring was post COVID for us in South. So if you look at YTD outgrowth is about 15%. So we think it's a big issue. It's not a competition issue.
Got it. Secondly, on gross margins, I think quarter-on-quarter, we have largely stayed flat. Do we -- so recovery of margin, obviously, is right on the corner, but my sense is, do we go back to 30%, 31% of pre-COVID level? Or should it be higher because you will have more in-house manufacturing going forward?
No. I think immediately, we will look at those with pre-COVID levels. The manufacturing facilities, for example, the fan is already online for inverter and compressor we are commissioning the plant as we see. And there are 2 more facilities that are coming online in the next financial year. So I think it will be in a safe way when we get improvement in margins. So immediately for us, we should look at going to pre-COVID level. And then after that, in the longer term, we should look at more improvement in over manufacturing.
So over manufacturing takes the gross margin up? Is that understanding correct? Directionally?
Yes, directionally, it will take it up, of course.
Okay. And lastly, on the segment margin, both for Electronics and LCD, again that's an inventory problem and hence, the margins were low? Or is there any other reason?
We had planned for a much higher growth in, let's for example, in a category water heaters, we have planned for a very high growth this year because for 2 years, we had lost market share. Although we have regained a lot of the market share that we've lost, we have not silent numbers we wanted to get. So in water heaters, this is the case. So there is high cost inventory sitting in and utilizers, which is almost like maybe 25% of the overall sales. The other products, not so much. Most of the high cost inventory is observed. And I think this quarter not we are seeing some improvement.
Okay. And maybe I'll squeeze in 1 short thing. So demand obviously has been weaker. I mean that's the commentary across. Any thoughts on how do you expect demand to basically pan out what could be like a few reasons here, like why are you seeing demand going weak?
So I think the general consensus is that there has been sustained price increases, not only for our products, but also for sure also for food items and for everything. And there has been sustained increases across -- so basically, expenditures of every household has increased substantially. So this is a kind of a shock for a consumer and then maybe not experience kind of an inflation in the long term.
Although in India, we have lot of inflation, this level of inflation, we are not experiencing sometimes. So I think we will take 1 or 2 quarters that people do at existed and then consume again. And I think we are seeing slowly the food price inflation is coming down. So that's a good news.
the next question is from the line of Bhavin Vithlani from SBI Mutual Fund.
So the question is on the margins, again, especially on the Electronics segment where from a pre-COVID level of 16.5%, 17%, we have seen 10.8%. What do you attribute to such sharp fall in the margins? And what in your view are the sustainable levels?
Well, I think there are 2 particular issues in the iconic moment. One is even in stabilizer, which is the largest segment, we have had a small written margins. That, I think, is mostly due to the high cost inventory issue that I talked about because we understand that in stabilizers, we have used a lot of electronic components, and we are having inventory of almost 1 year or 9 months of So in the case of stabilizers because of the supply chain issues in electronics, we are holding only stabilizer inventories we are holding, but stabilizer is our larger segment, we are seeing this issue.
We have also seen some margin pressures in the battery segment. That is primary -- what we could understand is that battery -- core battery companies, because of the higher demand in automotive batteries are basically enjoying better margins than the core automotive business and cross-subsidizing their industrial battery business, which is the inverter battery business. So the 2 large core automotive battery brands in India. They are aggressively discounting batteries in this segment. And we think this is maybe a transformation, and that probably should get resolved soon.
Sir, just a follow-up on this. So -- and correct me if I'm wrong, 2/3 is destabilizes in 1/3 is inventory -- 1/3 is the inverters in this segment. Have we kind of within the segmental, is it like a loss at the EBIT level in the inverters because your commentary is more negative on the inverters when you're saying stabilizers marginally lower.
We don't give out the product-wise numbers, but the decline is almost similar. So I think there is a 4% to 5% decline in inverter business. It only negative, but there is a decline in the battery side as well as the stabilizer business. And both of them have declined by 4% to 5%. But we are less worried about the stabilizer business because it is, like I said, the high cost inventory issue and that's a transfer issue.
The other 1 is external issue. So we are hoping that once -- of course, we have also had increases in lead. So basically, in the battery business, the lead prices have gone up and price increases have not happened in the market. By being battery bank. That's the more worrying issue. And we hope that the summer approaches and season begins we should -- the price increases will be taken and will move.
So in your view, is there a change in the margins that we have been seeing, 16.5%, 17% pre-COVID levels to your view on the new sustainable levels?
No, I don't think so. I think at least in electronics, we should come back. I think we have more -- I think our work more we are doing is on the margin improvement is on the consumer durable side, where I think we need to do a lot of work on pricing transmission; in some cases, value engineering and all the other activities we have undertaken. So the results we should start being in the next 1 to 2 quarters. So I'm not that worried about the electronics segment as of.
Understood. Appreciate it. The second question is used, there is a lot of expansion underway. If you could give us any category-wise expansion that you have been undertaking what's the kind of investments that you are -- so you have mentioned towards these the kind of incremental revenue potential out of those investments.
The second is a couple of quarters ago, you had highlighted one of the reasons for the lower margins in the durable segment is the TPW fans, where you are importing and now you are setting up local manufacturing or local sourcing. When do we see that getting corrected? And what in your view are the sustainable level margins in the durables segment?
Yes. Ram, do you want to take this?
Yes. So I'm not sure what you're referring to by way of investment, but I suppose you're talking about the investments that we are making at the back end in the manufacturing capability. I think the investments in manufacturing are fundamentally driven towards improving our competitiveness, right? So some part of it will translate into margin improvement. Some part of it will translate into competitiveness improvement, which basically means that we can price our products more competitively and participate better in the opportunity for which we are challenged to do.
Now this method of investment is fundamentally happening in forward verticals. Stabilizer is one vertical, battery is one vertical. Then we are making investments for PPW fan, and we are also looking investments for kitchen, mainly in the manufacturing of [indiscernible] Gas tower and the area. So these are the projects which are underway. And this should benefit us -- we should start to see the benefits flowing through in the case of, for example, a stabilizer and inverter should start to flow through from more seriously from the next quarter.
I think there is some flow-through in the pattern. But I think more of it will start to happen over the next year. I think in the case of the other -- in the other 3 cases, right, I think the plants are going to be asked and running reasonable through somewhere in second half of next year. So that's in terms of the time frame.
And I think we will benefit both ways. Margin improvement will be there. But most importantly, in some of these categories, we will be able to seriously participate, which will then mean that we should be able to grow those categories better. So because our hands have been tied particularly to PPW fans, battery, our hands are being tight and we should be able to some of these structural challenges to participate as far as this is concerned. Now coming -- sorry, I forgot your second question?
The second question was when you partly answered it, like the durable margins, when do you see back to the [indiscernible].
Yes, the durable margins have multiple issues. I think in the case of PPW, in the case of ceiling fan, we are hopeful to get back to our historical margins maybe in the upcoming quarters once we see how the energy efficiency trends pricing is transferring into market here. I think we should be able to see that. And hopefully, I think maybe quarter 1 of next year, partly quarter 4 this year and then probably quarter 1 of next year, I think we should be able to see the picture back there.
So on fans, so while our own internal manufacturing capability will take some time. I think what has also simultaneously happened is the freight rates have got normalized with some improvements to the extent that we are importing we'll be able to see. So I think TPW margins have got a bit better from where they were. But I think normalization is below maybe another 6 months there. Also what happens is there most of the consumer durable businesses are seasonal. And the timing of the improvements should coincide with the season if you have to see the impact and the benefit of that. In the case of water heaters, right, in the case of I think in the case of air cooler, I think the margins are coming back, and I think we should see the coming quarter. I think we should see the margins normalize.
In the case of water heater, I think water heaters what has happened is it's a seasonal business. The season has not gone well. And therefore, what has happened is that we are running behind plan, although we have regained our lost market share. Now on a higher plan, the inventory that we had secured, right, will be extending into Q2 of -- the early Q2 of next year also.
So I think -- so that is why we are really taking some pricing corrections there on top of the commodity in out, and we have some value engineering and other efforts which are underway so that we are able to record margins. So I think on a replacement basis, we should be able to restore margins by the time we get into the season. Consumption basis, I think we -- this is actually what when from a timing point of view, when it will reflect in our P&L. I think that's something looking now like for Q2 of next year. That season will be the slowest, right? Because it is -- see, the 1 big challenge that happens, right, any pricing transmission in seasonal category typically is coinciding with the commencement of the season, which is one of the reasons why in battery, the margins earlier it was talking about the prices started to increase towards the end of the season last year, right?
And therefore, as we exited the season, the margin started to drop. And I think the markets have not passed on because it's not a conducive to the current prices off season. So we are open that some correction in some of these categories will happen as we enter the season also.
[Operator Instructions] Next question is from the line of Renu Baid from IIFL Securities.
Yes. My first question is, given that now broadly the everything is over, we have winter also approaching towards the end. How are we looking at demand outlook for summers on the backdrop and sufficient inventory of the non-default already built up in the system. So if you can give some inputs in terms of the likely demand outlook and especially in the fan segment ahead of the season where sufficient the inventory of the old ceiling fan and I would say our preparedness on the range -- which is there.
Yes. So I think V-Guard has been more proactive in preparing the transition into the range. To put it in context, we had very little inventory of non-B rated fans by the mid of November, but I think by 15th of November, we had almost sold out whatever the fans we had. Because we have planned the transition and we have stopped production of these fans much earlier.
But of course, that is only our story, but the other companies in this category has continued to produce these products, and they continue to heavily discount and sell them in the market. So that overhang will be there. But our own distributors are very, very lean with inventory. And we have already started the supply. We're one of the first to started supplying new fans, 5 star or 1 Star or whatever in the market with the new bridge and all this.
So we are -- but definitely, we will have an issue in the month of -- we had an issue in the month of January because like we said, most companies are heavily discounted and these products and retailers in before they start picking up.
So I think we will see maybe the demand picking up maybe end of February for fans. Our numbers have not been bad, but they are less than planned. But I think if you ask me, we are in a better position because we had a little less of the [indiscernible] margin. But wherever we are common distributors or wholesalers we have a problem because they are all stacked with inventory of other brands. So they will be trying to liquidate that. So I see this sale happening maybe by the end of it beginning of March, we should start to see because that always given the 60 days to sell out the old non-rated fans.
Right. And sir, what is the kind of price hikes that you have taken for this new range? Has the entire cost of the transition being fast on or it would be done over phases in the coming season?
Yes, Ram, you want to answer that?
I think we have communicated price corrections in line with the industry. I think it should overall average somewhere between 6% to 8%, higher in the premium segment and lower in the popular entry-level segment, right? Maybe at the premium level, it is also going in some cases to double digit. So this is more or less we have taken a price increase in line with other players in the market.
I think the pricing transmission, I think we will have to wait and see at what pace this is going to happen. But I think almost all players in the industry have communicated the price revisions. And we are hopeful to realize fully once we have initiated. And this will cover basically the increase in material cost, consequently the shift to energy efficiency.
Got it. And the second question is in the large kitchen appliances, especially post acquisition of Sunflame. Could be a bit of repetition from the previous call, which was acquisition. So if you can just help summarize now though we're in the initial phase of completing the acquisition. But what are the key strategies and the key integration targets that you would like put on place for the initial 2 to 3 years in terms of integration and ramp up?
Ram, you want to take this?
Yes. So I think we just closed the Sunflame transaction around on 12th of Jan, and we just 20 days after that. So I can give you some sense of at a high level what we see as the key levers that we can continue to we can leverage. But I think a detailed plan and outlook I can give, I think we will prepare once the new management team of Sunflame will come into place, right? And which is still work in progress because right now, with the integration, we have a crack integration team, which we have put in place by what I'd say the operating long-term operating teams is moving.
So now as far as the growth levers are concerned, I think there are multiple growth levers for Sunflame. I think South is a huge opportunity for Sunflame when Sunflame is underrepresented in South, yes. e-commerce and organized retail where we have the organization and the business system, that's something that Sunflame can leverage. I think Sunflame brand shops also for what I would say supporting the sale of built in hooks and [indscernible] kind of -- is also a very interesting opportunity in space. They have 8 to 10 outlets, and that can be scaled up.
So these are some levers. I think Sunflame has been doing most of its general trade business on cash. And I think there is a lot of opportunity to expand the network since I think they have been risk covers when it comes to going to market.
So these are levers -- significant levers that are available. And I think there is also opportunity to transfer knowledge across both the organizations at the back end and to leverage the sourcing capabilities and make capabilities on both sides, which should benefit both the portfolio. So I think these are the broad levers, but I think we will probably let us say, somewhere in the June quarter, I think we will have a better view, having done some more serious work to assess the opportunities and priorities and put the resources on the ground to drive the key levers.
Got it. And lastly, just a bookkeeping question for Sudarshan sir. If you look at the electrical segment there, the margin is much better than the rest of the other segments with a slight improvement there. So did that also include inventory gains in the cables and wire business with the commodity price inching up with the end of the quarter. And if you are approximately what portion of the segment margin on like inventory gains?
Does it include the stock gains? No, that's not the time, but it's -- the margins in the wires have been pretty stable, except when there was a significant drop in copper in the quarter that impact we took during the last year -- last quarter, okay. It's just that the margin compression of the margin gap is higher in durable and electronics.
Right. So the margin in the 8.5% kind of margins in this category is also driven by better performance -- probably better performance of the switchgears, switches and some portfolio? Or it would be by all 3 or cables and wires driving this improvement?
Wires is making steady margins and it's fairly steady business. Switchgears, switches has less impacted by the margin.
Some margins are impacted, but this is lesser than what we have been impacted. The impact on electricals is less. Just 1 more point I want to make, right? The electrical business is a business which is stable, steady around the year, right? So I think margin recovery is quicker and faster because it's a 12-month product, right? The material is also getting consumed faster and because it's a 12-month product. Into the consumer durable segment and to some degree, the electronics segment where the sales are seasonal.
So depending on the timing of your inventory purchase and the quantum of inventory rise, it takes longer to consume. For example, like last 3, 4 months, right, from September onwards, the sales have been lower than planned, right? So our expected what I would say, consumption of high-cost inventory has not happened yet, and it has carried forward longer. So I think in some part, it is like that and below where the last 3, 4 months compared to plan, although if you look at last year, YTD, exclude 20% to 23% growth.
But I think internally, we expect it to do better and that has not translated because of the change in sentiment. So that's extending some of the inventory, and that is amplifying the issues in seasonal categories because the consumption of the material is happening more in the season and that's when it's going to go out, right.
And also, any pricing action also can happen related to the season price. So these are the challenges, whereas in the case of wires, switches and switchgears, transmissions are fast because it's around their business, right? So the input cost increase also with the lack of, you will see hitting the business. So I think we should see it like that. It's...
Most of the high-cost inventory which you have, which hasn't built up, that is fully absorbed by the end of March quarter or that will continue April, May as well?
I think water heater will take longer. I think some part of electronics can go into June quarter also.
The electronics, we have 6 months to 1 year in some cases, right? So -- what you will see, what we will start to see that the blended margins every quarter will start looking up smoothly, right? So for example, November or October, I think November was our bottom. December was better. Jan will be better than December. Like that, it will slowly keep it inching up, right? And as more and more categories participate, this will keep moving up rolling margins.
I think what we are saying is that we.
Believe the margins have bottomed out, and we will see a sustained improvement. Now like otherwise to the question of high-cost inventory, it's more or less what Ram mentioned, I think most of it is over. Some will linger on like what it does in electronics but others would be more or less no.
Got it. Got it. I'm not sure if I can ask 1 more. Any indication on volume growth in cables and wires and in the fans portfolio for us.
We don't give product-wise numbers, but we can say that the performance in wires has been good. Like Ram has earlier mentioned. It is also because the fact that copper prices have gone up. So in the expectation of price increases, dealers have up stock prices. So some of the volume growth has come from that actually. Fans volume growth was slower because there was a churn on what we call moving from the old to new. And we unfortunately did not have much inventory of 3 old items. So our numbers look a little less than what others would have done.
Because we have less -- dealers are buying only the old items because they were available for a good discount. And the difference between the old price to the new prices also, like what Ram mentioned, 68% plus it is considered a huge gap, so which the dealers have taken advantage of.
The next question is from the line of Aniruddha Joshi from ICICI Securities.
Is it okay now? Sir what is the 9 months FY '23 versus 9 months FY '22 performance? And because we have seen many kitchen appliances companies also getting impacted, which had no really relation with fans issue, although. So how is the performance of Sunflame percent? And secondly, how has the water purifier done in this quarter on a Y-o-Y basis? .
We will not give any specific numbers, but we can give some colors, Ram.
I think from what I understand, I think it's broadly flat. There is some decline of 3% to 4%, which is driven by the institutional business. The institutional business, I think there have been some changes in the income tax act, which has affected the existing business. So there will be a significant drop in the existing business. So I think that's a better side. There is a good, But minus of that, I think it's almost flat, is almost flat, maybe 2% or 3% down.
The big chunk is the solution business where the institutional customers have stopped buying because I think they are required to -- there are some changes in the income tax act. That's where they require GST and be charged some trade is getting created on the. So companies who are typically buying for gifting, they have stopped buying. So that's got a drag of 2%, 3% on the overall. So I think the core business is almost flat, maybe plus or minus 1 percent would be is top of mind as I remember. Is that clear?
That's clear. My last question is [Technical Difficulty]
May I request you to please reconnect from a different device? In the meanwhile, we'll take -- move on to the next question. That is from the line of Rahul Gajare from Haitong Securities.
I've got a couple of questions. First, congratulations on the Sunflame acquisition closure Now you have said almost INR 680 crores in this acquisition. You are looking at adding more manufacturing. Could you to as the kind of CapEx that you are doing in the manufacturing. So we know how to shape up the balance sheet from there?
So Sunflame has 1 large manufacturing facility, which I think only some 50% is utilized there whereabout 150,000 square feet of large plant in site and they have 1 more factory in [indiscernible], which is not old, but it is also the and also not utilized.
So we have almost 100,000 square feet of manufacturing space ready with all license with everything. So I don't see a investment for factories happening in Sunflame for at least 2 years -- 2 to 3 years. I think any CapEx will be mainly for more than or any new FTEs we launched, and that may not be that large.
I think you also mentioned about adding more assets in V-guard so that is what I was referring.
V-Guard, yes. So I think our CapEx, like what we have mentioned is we will spend between INR 50 crores to INR 70 crores annually every year. And that will continue to happen. And we have done that for the last year, this year and even next year, I think some part of the CapEx will happen. So that's how we can look the balance sheet for V-Guard.
The manufacturing, what we talked about is in a fall under this.
And after this, how much of your spend will come from owned manufacturing in and how much will be...
Very disturbance on our line.
Yes. Is it better now?
Yes.
So I want to know with this entire contain manufacturing and adding capacity in V-Guard, how much of your total revenue will come from manufacturing?
I think for us, I think close to 65% to 70% will come from one time manufacturing and that's what we see. and Sunflame I think already have two thirds. So roughly 65% is own manufactured. So it is going to remain between 65% to 70% as a comparative. And probably in the next 5 years, probably go to over 75%. And we will still continue to work with some vendors in some cases where we are buying certain products where we find it better to trade than to manufacture.
And one of the reasons you indicated about having low margin on the consumer division is imports. But from what I recollect, I don't think the imports are very high. Maybe 20% is what you for. Correct me if I'm wrong on that imports numbers?
So the margins in consumable is lower because what Ram had mentioned is in Kitchen, we are working with Indian outsourcing vendors. So when you work with Indian vendors or imported vendors, they also have their own. So it's not because of imports. The import issue is mainly for fans, which was really table fan and wall fan, which is now largely resolved. For the other segments, the issuance margin is also because our competitiveness is not there. That is what I think Ram was talking about in terms of putting up manufacturing protected.
So for example, we are selling induction cooker, gas stoves, mixture grinder roughly doing INR 130 crores, INR 140 crores for revenue, where we believe we are not competitively pricing the product in the market. That's what he was talking about.
My last question is on certain bookkeeping questions. I see cash of almost INR 130-odd crores in December. What is the cash right now cash level right now?
Sudarshan?
So the cash would have been close to 400.
No, that is as of 3oth December, is it? .
Yes.
Current investment and cash book together will be closer to INR 400 crores or, but what would be this number now with this Sunflame.
We've used the cash for the acquisition.
So what is the cash balance on?
INR 40 crores INR 50 crores or something else.
[Operator Instructions] The next question is from the line of Nirav Vasa from Anand Rathi.
Let me congratulate the entire team for successfully executing the Sunflame acquisition. But clearly that pertaining to that. So sir, would it be possible for you to share how the funding has been done and what is the amount of debt which has been raised and at what cost?
Yes. Sudarshan?
Yes. We have taken debt of INR 275 crores. The balance INR 400 crores was through internal accrual. And that comes to us at slightly less than 8.95%, 8.98%.
My second question. So sir, so maybe because this transaction was executed in January. So the February and March revenue would be consolidated. Is that right assessment?
Yes, we will consolidate Sunflame from January onwards.
From January onwards.
The next question is from the line of Harshit Kapadia from Elara.
Just wanted to check with you in terms of volume growth, if you can highlight for all the 3 that has been the 3-year CAGR?
Sorry, volume growth for?
All the 3 segments.
Can I calculate and tell you.
Okay. What's the name, please?
Harshit Kapadia from Elara Capital.
Okay. So we'll get in touch offline on this. We need to come back.
Next question is from the line of Achal Lohade from JM Financial.
Just wanted to check in terms of the outlook. On one hand, we are seeing an element of slowdown on slack in demand. So how do we see next couple of years in terms of what is the growth outlook one could have. I'm not asking for specific guidance, but can we go back to that high teens kind of growth? Or you think that is still some time away for us? This is ex of Sunflame. Obviously, Sunflame will have the delta, but ex of Sunflame I would like to check.
So I think what we've been seeing is right from June onwards, we are witnessing slowness in the market, and that is coinciding with the increase in the rate hike. So whenever there is a high inflation environment, it does 2 things. One is it is the fear in the micro consumers to spend because their monthly also expenditure has gone up significantly, the petrol, food and whatever is it's gone up significantly.
And the second thing that happens is the increase in interest rate retailers, also of distributors. Banks are not lending like last year, people there were flushing, we trade with money today, maybe not be very easy to get financing. So I think we are entering a high interest rate cycle and last time of this player for some time until we start to see a reduction in the interest rate. So that's my answer to you. So the see reduction in oil prices, and we see a reduction in inflation, reduction in interest rate, I believe that demand will come back strongly. So I think, I think it's a cyclical thing, nothing much we can do about it now.
And with respect to counter that, obviously, the distribution side, if you could elaborate where are we in terms of the target? And how do you see that over next 2, 3 years in terms of non-South?
So we are going as planned. We would assume in this third quarter even on sort markets have done well, and that ensures that our expansion work is going on. We have -- we will continue to grow spend and all that. But we have to understand that we also have a where we have very high market share, and that's where we probably face some headwinds because we probably can't grow there without the market, it's still growing because additional opportunity to grow distribution on sites is limited for us. Of course, Sunflame can grow, but for V-Guard brand, maybe slightly challenging because most of our products, we have been a very high market share.
Understood. The second question I had was with respect to pumps business. Can you help us understand how further pumps in terms of the momentum has been? Are you seeing any improvement there or it's just languishing as it was earlier?
No, pump for business continues to be under pressure. We are not as badly impacted like the agricultural pumps. We are more residential pumps. But even the residential pumps demand has been impacted. I also think it's to do with the fact that we have had very good range, very good months on excess range in those places. So I think until we hit a pump replacement usually happens when there is a reduction in water table.
So what happens is pump let's largely replacement a new demand as well. So there, but it's likely replacement demand. So we've got a significantly high water table as the requirement of pump is there. So we are hoping that the summer is going to be strong and long one and that should kick start the demand for pumps. So as of now, it is continuing as it is. It's not -- it's nothing not doing too well. Margins are also slightly impacted, but that's as far as the pump is concerned. So it's not -- there is not much of a difference from what we have taken in the last quarter.
Right. Just a clarification there that we were told by another competitor is that there is an element of aggressive pricing for the pumps. So can you give some more sense on that? Are you seeing aggressive pricing by the peers or not yet?
Yes. I think so this is because of the other thing, right? So when there is lack of demand, you are going to have a pricing, right? So demand and supply thing, when there is more supply than there is demand, there are going to be competitors who are going to cut prices and because some of them have to repeat their inventory and so on and so forth.
So I think this is something that we've seen before also when the demand is strong, this happens. One more thing I'll tell you, during COVID, what happened is 1 year of COVID, first year of COVID, the pump demand was very strong because all the smaller pump companies in Coimbatore and V-Guard, they did not supply.
Now one of them have come back in full force as well. So there is obviously that also playing out. But I think we'll wait and see what happens. So yes. So obviously, with the lack of demand, pricing is also under pressure or other people are not taking up pricing. The increases have not been part.
The next question is the line of Ku from ICICI Prudential Life Insurance.
Sir, I just want to understand in the backdrop of the macro environment you mentioned about the inflation and demand slowdown. So now when we see our RM cost coming down under, I mean, cutting the price help improve the demand? Or it is better to get the margins and demand Basically, your thought in this context between, say, maintaining the margin or improving the margin versus keeping our margin to improve the demand?
So I am a firm believer in not cutting price to improve sales because that's a very short-term thing and that can be done by anyone. But all of my peers companies don't believe in the phase to a -- so some of them when we refer to this type of tactic, Ram, anything you want to supplement?
Yes, because I think I didn't see margins are stressed for all companies, okay? And I do believe that there is limited room for companies to cut prices on I think you will see price treating happening right here and there, 1% 2% will certainly happen with what I believe as we end up the season because most people have not been able to do much of the particularly after the February or March of last year, no price increase has happened.
And that commodity continue to increase it mid June and then it's now slowly. Also, I think even if the commodity price leasing is fully flowing into P&L. I think it will only help companies to get back to that long-term rate. I think -- so the business has normalized, right? Business spending is normalized, travel is still normal now. that slowly getting back to normal. So I think it's not going to be practical to expect that the company will reform by cutting prices and also I think 1% or 2% or 3% is not going to trigger consumer demand, right? [indiscernible] to choose that part or kind of product portfolio.
And I'm saying this season for -- So I would be very surprised they would resort to that. And I also think that it will have less scope to increase demand. I think demand increase will happen based on macros. I think as the confidence comes back and as you know, the inflation is across the consumption markets, right, is flattening.
So I think we would like to wait for that.
Okay. And just last question. So any divergence demand as far as rural versus urban or say, regions, north, south, east, west, any divergence are we seeing?
That is a bit of pressure on small town rural and entry-level segments. And so that is pretty much there and visible from somewhere around, I would say, in August of last year, right? So that is pretty much there, and it continues.
Geographically, I think it's, by and large, to my mind, this by and large fine geographically.
So basically -- okay. So now you're saying rural or.
Entry-level customers said in that segment should be very special.
The next question is from the line of Bhavin Vithlani from SBI Mutual Fund.
So the follow-up to the earlier that you mentioned about unorganized. Could you also highlight about besides the pumps, which are the other segments where you've seen an organize engines and that's kind of taking back some market share presenting it slow down?
Only category in our industry where we still have a large presence in [indiscernible] on are very strong. If you look at other product segment is largely consolidated into branded products, wires, water heaters. Of course, there is an organized event, but it's not like people who are buying the branded wire or cable very unlikely to buy a unbranded product because we're getting it cheaper. But pumpers not like that. Pumpers do not like a cottage industry. There are very strong local brands in a district and small and so and maybe the awareness of people is less, people rely more on the retailer or the plumber and so on and so forth. So -- only in the pump pricing, this issue is more present. I'm sure our organization is there in all the other categories, but I think over the years, they've all reduced their activity level.
Sure. The second is on the raw material, we've seen some amount of catch-up that has happened aluminum, copper prices have grown up. So for the below material index that you track internally, how -- what seen over the last quarter is like if you take Jan as an end then versus what we saw in September and what's the kind of increase that we have seen?
So difficult to say on a blended basis, but I think copper and copper has gone up significantly high and aluminum has also gone up. But there are certain opportunities that have not gone up like steel and all that. So I think steel, if we start to look at replacement, we should start to see some improvement there, and that's what is making us confident about our talking about improving margins before.
But we'll wait and see if things are not free at -- so we were the wait and see happen. But yes, there is also some price increases that has not happened, and we are going to -- as you're approaching summer, we are going to push through some pricing.
Just last question. While I understand you're not doing category-wise revenue numbers, but just to understand over some of the categories which were passed through last year, if you could give us a Y-o-Y growth number for the quarter for fans and water heaters.
We'll probably see us offline. Bhavin, right, from SBI Mutual Fund.
The next question is from the line of Khadija Mantri from Sharekhan.
Hello. Sir, my question is regarding Sunflame Enterprises. So in the budget, the basic custom duty on electric kitchen chimney have increased from 7.5% to 15% and the duty on heat coils has been reduced. So will it have any impact on Sunflame?
Yes. Ram, you want to take this?
Yes. So yes, I think Sunflame has a large chimney business. But having said that, Sunflame has started to manufacture chimneys and over the last 4, 5 months as slowly stabilizing also. It's quite possible that there may be some near-term impact on the chimney business because it's presently dependent on imports to some degree. But I think it's going to shift to fully to own manufacturing, can be done manufacturing ready soon because they are just month on month ramping up the production output.
Okay, sir. So currently, how much of it is imported, I mean the mix?
I wouldn't have that kind of sense. But I think that there is some maybe there is a smaller portion, which is domestically sourced and there is a larger portion, which is imported. And -- but I think it is just a matter of 3, 4 months because the plant is already up running, and they took pilot also about 4 to 5 months back. And they are scaling the throughput month on month. So I think even if there is an impact on Sunflame, it's going to be transitionary maybe whatever inventory is sitting in the system and whatever POs that are in pipeline. I think probably we will switch over to domestic manufacturing. All domestic sourcing pretty soon, except for maybe some premium models, which might mean that some -- I would say that 6 months on the line, maybe not more than 15% of the revenue may come from imported chimneys and the rest will manufacturing in the factory.
And my next question is regarding the capital employed number. So if I see the unallocated capital has gone up on Q-o-Q basis from INR 400 crores to about INR 700 crores.
Sudarshan, do you want to take this.
we'll come back later.
So we'll answer that later. We don't have the number with us right now.
The next question is from the line of Aksh Vora from Trash Financial.
Here, you mentioned that the manufacturing base contribution would go to around 65%, 70% or 75%. So there from a longer-term picture, what could be our blended EBITDA margin be, in say, 3 to 4 years, say?
So we obviously don't give out guidance on EBITDA margins, but our hope is that the manufacturing push will help us to improve gross margins and consequently EBITDA margin. But we have to get back to pre-COVID EBITDA margins before we talk about moving even higher than that. So that's our related focus to restore margins to above 10%, which was the pre-covid margin.
No, I understand. I'm not asking for any number, actually, but then just wanted an assessment in the past, you have been saying that we would move to how next 50, 50 and that well enough. From a longer-term picture, I was just assessing that the manufacturing base goes higher and we passed the margin level of the pre-COVID, say from 4- to 5-year picture, would it be around mid-teens levels, we can achieve that number or something like that.
I think we prefer not to make any comments on that. But I've always said that we would like to improve a 1% every 2 years. But that happens first I need to get back to my pre-COVID margins and then work on that. Of course, when Sunflame comes on board, the Sunflame margins are higher than we from impact of Sunflame will also show in our branded markets.
Just 1 point I want to make, right? So on the business environment is pretty verified, right? And I think -- it's even, for example, we now short term, we are suggesting sometimes there is revenues and inventory expense. So it's a bit hard, and the pricing on with some less of demand, right. So I think it would be sensible to say that we would like to see that these have normalized. I think once the business normalizing, I think we will be able to continue on our track of being able to improve it, right? But I think the foundational normalization of business has coped back. So business margins, right.
Ladies and gentlemen, that would be last question for today. I now hand the conference back to the management for their closing comments. Thank you, and over to you.
I would like to thank the entire team of Nirmal Bang for helping us to host this call, and thank you.
Thank you very much. Ladies and gentlemen, on behalf of Nirmal Bang Institutional Equities, that concludes today's call. Thank you all for joining us, and you may now disconnect your lines.