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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, good day. And welcome to Crompton Greaves Consumer Electricals Limited 1Q FY '23 Earnings Conference Call hosted by IIFL Securities Limited. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Ms. Renu Baid from IIFL Securities. Thank you. And over to you, ma'am.
Thank you, Aman. A very good morning, everyone. On behalf of IIFL Securities, I would like to welcome the management of Crompton consumer for their 1Q FY '23 Earnings Conference Call. Today from the management, we have with us Mr. Shantanu Khosla, Managing Director; Mr. Mathew Job, Executive Director and CEO; and Mr. Yeshwant Rege, Vice President, Strategy and Financial Planning.
Without taking much time, I'll now hand over the call to Shantanu for his opening comments, while this also was the first quarter where the entire results of Butterfly are consolidated with the financials of Crompton. So over to you, Shantanu. Thank you.
Thank you, Renu. And thank you, everyone, for dialing in for our quarter call. Firstly, of course, on health and safety. All our employees are safe and sound. I am pleased to report. We have essentially vaccinated all our employees and have initiated booster camps [ at all our plants and ] offices. We have conducted supporting sessions focusing on mental health and well-being, with the aim of cultivating a positive work environment, so our focus on, first and foremost, making sure in the challenging times that our employees and their families, plus our other stakeholders, stay safe and healthy continues. Consolidated revenue for the quarter was 1,863 crores, registering a growth of 77% year-on-year. EBITDA on a consolidated basis grew 76% at 220 crores. Stand-alone revenue for the quarter was INR 1,608 crores, registering a growth of 54 crores (sic) [ 54% ]. EBITDA was INR 194 crores, which was a growth of 58% year-on-year. Of course, it's important to note, as you are all aware, that the previous year base period was a COVID period and therefore was a low-base period. Today, I'd like to start with updating you briefly on the Butterfly acquisition. In the last quarter, we completed the open offer process with the acquisition of 26% stake, taking our total shareholding to 81%. The tendering period for the open offer commenced on 23rd May and concluded on 3rd of June. The new management has fully taken over and the business is transitioning smoothly. Synergies are identified as part of the integration plan around the implementation and obviously something which we review regularly through our [ PMO ], and the initial results are encouraging. Going forward, the focus will be to further expand the business into non-South markets, as it will be a key value creator for which we plan to initiate the work as we move forward. The overall performance of Butterfly was encouraging in the first quarter and quite strong. As communicated by the Butterfly management, Q1 witnessed strong growth across all categories and channels as well as a rebound in profitability. Business [ cropped a ] value of INR 253 crores, which was a growth of 86% versus a year ago, recording all-time-high sales for the first quarter. EBITDA stood at INR 26 crores, which grew 3.5x. And EBITDA margin was 10.2% versus [ 5.3% ] versus a year ago. The management believes that the growth in revenue and margins has been witnessed on lines that we had forecasted and expected, and we do see this level of margin as a going level which is sustainable. The second key event over the quarter was obviously the entry of Crompton into an entirely new segment. Working towards our long-term strategic goal, we entered the built-in kitchen appliances segment with a comprehensive range of chimneys, hobs, built-in ovens, built-in microwaves and dishwashers. The kitchen segment has always been an area of focus for the company. The entry into the built-in appliance segment will further consolidate our position in the kitchen space, in addition to driving growth and premiumization of the brand. We undertook extensive consumer research to identify unmet and underserved requirements of the consumer, and that was the starting point of the design of all our propositions. Based on these insights, we believe we are launching a truly differentiated product range which will be of high relevance to the consumer. We've already set up 17 premium exclusive brand outlets called Crompton Signature Studios till date and have a robust marketing plan and have established a strong aftersales network to ensure end-to-end superior experience for the buyers. Built-in kitchen segment is 2,200 crores approximately, which is growing at 10%. Our objective is to become a top 3 player in this segment in the coming 3 years. With the acquisition of Butterfly's Gandhimathi Appliances and entry into this built-in segment, we are significantly upping our play in the strategically important and high-potential kitchen space. Moving on to the CGCEL business. In terms of revenue, the growth momentum of March '22 continued in quarter 1 with strong growth across segments and channels. Revenue for the quarter was up 54% versus last year. ECD grew 52%. Net of pumps, ECD grew [ 62%]. Our pumps business continues to face some challenges, especially given the pricing that we have been taking to compensate for the inflation. Appliances exhibited industry-leading growth of [ 98% ]. The gross momentum across categories -- was across categories, especially on air coolers. If you recall, this was the first summer we had after 2 summers being wiped out due to COVID. And we have now put in a delayed program on air coolers into the market similar to what we had done on geysers a few years ago. And in this first season, it has responded extremely strongly, with air coolers demonstrating a volume growth of 209% and a value growth of 218%. Lighting revenue grew by 61%. The growth momentum continues in B2C LED business, which grew at 82%, driven by battens and panels. On battens, the volume growth was 19% and the volume growth [ 80% ]. Panels and downlighters, volume grew 64%, and value at 96%. B2B business grew by 48%, as the business is gradually recovering and picking up. On a rolling 12 months basis, we continue to improve our market share and have improved in fans by 2 percentage points. Over the last 2 years, Crompton is the only company to have gained market share quarter-on-quarter both in premium category and overall fans category. Just to repeat and remind everyone: When we report market share, we report market share based on third-party retail [ audit data ]. Moving on to profitability. After an unprecedented increase in Q4, the commodity prices started cooling off from the latter half of May. However, we expect the main benefit of this to begin to flow in, in Q2 due to the existing inventory levels which were already with commodities purchased at higher prices. We have been focusing our efforts as we always have on quarter-on-quarter in improving margins through accelerated cost savings through our Unnati program, premiumization and pricing actions. The structural margin actually improved by about 100 basis points. EBITDA -- versus the previous quarter. EBITDA margin -- sorry, versus a year ago. EBITDA margins came in at strong 12% despite aggressively continuing our investments. For example, we doubled our ad spends this quarter to 40 crores. Additionally, we [ committed ] costs towards the initial successful launch of our built-in kitchen appliances segment. We continue to invest in people and process capability in our innovation team and strengthening investments in our alternative channels. During the quarter, we also completed the open offer process for Butterfly Gandhimathi; and associated costs pertaining to the process have also been accounted for. Exit margin coming out of the quarter was back at FY '22 levels, and we expect to sustain this as commodities gradually ease moving forward. We continue our focus on our key strategic investments. We doubled our ad expense in advertising, where we executed several campaigns, TV ads, et cetera. In Q1, we incurred an all-time-high INR 45 crores on A&P expenses. In -- on working capital, we invested and maintained high levels of working capital to the tune of 112 crores on account of business seasonality and also, as we've talked before, advances for [ securing ] materials at favorable rates. We do expect this working capital to return to normal levels in Q2. Our cash position stands at 605 crores for the period ended 30th June. 673 crores was utilized for the open offer process -- NCD payment of 150 crores and repayment of short-term borrowing [ of ] 125 crores. Our balance sheet continues to be strong and our ratios continue to be healthy. As mentioned earlier, we are continuing sustainably and consistently to invest in our key strategic choices. On brand excellence, we have made consistent efforts to reach closer to consumers through our wide-ranging activities across various touch points, with the aim to strengthen the brand awareness and conversion. Given the importance of the digital platform, our structured digital strategy is helping us to drive more and more traffic and discoverability of our brands. In Q1, we executed a [ strong ] campaign on SilentPro fans and air coolers with the aim of ensuring presence across different high-impact mediums in order to drive an integrated marketing campaign. Also we collaborated with well-known influencers on YouTube to communicate the product benefits. In a -- one of its kind, we set up the Crompton cooling pod offering #JaldiCooling to delivery agents, with the thought of working towards meaningful innovations that provide comfort and convenience to our Crompton families. We continue to invest in developing products driven by consumer insights and future technology, ensuring superior quality and performance. Our continued investments in R&D have contributed to increasing our market share. We are constantly investing in process, people add automated equipments to improve new product development. On go-to-market, our strong presence in alternate channels continues to pay dividends. Contribution of alternate channels to overall sales has increased to 12% versus 9% last year; rural and L&I business, exhibiting strong growth for consecutive quarters, a combined 166% growth versus a year ago. Improving reach is another key focus area for the company, and we continue to increase this across our categories. On a rolling 12-month basis, fans has improved its new reach [ to store ] by 2%, LED panels by 2% and water heaters by 3%. Of course, it is important to know that, while there has been some pickup in industrial activity, the challenge of inflation and demand remains. We are seeing that -- across the board that there is gradually a continuing impact of this inflation, and we need to watch it closely. So commodity prices are beginning to ease off. We judge that it will take some time before this actually translates into inflation easing off and getting a positive impact on demand. The government's CapEx push will be a positive for the infrastructure and construction goods sector going ahead. Healthy growth in bank credit and improvement in capacity utilization levels also point towards gradual improvement in the overall investment scenario. As we move forward and as we see commodities begin to gradually ease, if they do that on a sustained basis, we will continue to evaluate and pass on benefits of this commodity costs reduction to the consumer to ensure the demand recovers and stays robust. Now quickly taking you through the numbers. The Board of Directors in its meeting held on 22nd May 2022 approved the quarterly results of the company for the quarter ended 30th June '22. Total revenue for the quarter was INR 1,608 crores, consolidated 1,863 crores. ECD revenue stood at 1,347 crores. Material margins stood at [ 13.7% ], consolidated 31.4%. I would like to stop here and address any questions that you may have. Thank you.
[Operator Instructions] Our first question is from the line of Naval from Emkay Global.
I have a first question on built-in kitchen appliances. So if you can share some target addressable market, if I would have missed on your -- in your opening remarks. Then second, in terms of distribution, if you can explain how distribution of sales happened for competition in this segment through EBOs, through online and through offline. And what is our strategy in terms of in next 2 to 3 years, how distribution could be different? So basically I'm trying to understand what is the right to win for Crompton over here in terms of product, distribution and other aspects.
Okay, let me take the first one. And I had mentioned it in my opening remarks. Currently the market size for chimneys and hobs is 2,200 crores. That's only for chimneys and hobs. This market is growing at 10%, and our objective is to get to at least the #3 position in this market within 3 years. On your second question, let me take one part first and then we'll get to the distribution. The key differentiating factor, and that's what we call our right to win, is based on meaningful consumer differentiation, so every one of our products have a meaningful consumer benefit which competition does not offer. So they are not off-the-shelf products. They have been designed based on work we've done in the consumer and in our R&D center and designed on those specs. For example, just to give you an example, and this covers across all products, if we look at our built-in oven: Built-in oven has got an air curtain in the front, so when you open the door and there is hot -- something hot and steaming, the steam doesn't come out and burn your hands. It is protected and held inside. Our stoves -- for example, our stoves have a specific feature which is an automatic cutoff for safety. So these differentiations have all been tested to be consumer meaningful. In concept tests, they test significantly better than like-to-like competition, and they have been designed into each and every one of our offerings. So that's right to win, number one. On the go-to-market, I'll just let Mathew take that.
Yes, yes. On go-to market, obviously it's there is going to be a variety of channels. Obviously the EBOs are experience centers where we are able to showcase our full range of products. That's obviously -- in each of the top 10 cities, that's going to be the critical part, but we also have, for example, other channels. One is, I mean, the kitchen dealers. Then there is retail chains and online. And we have a clear strategy for all these different channel types. We -- so we expect that all the channel types, the 4 that I mentioned, EBOs; kitchen dealers, which also have been MBOs which is multi-brand outlets; and e-comm -- all will play a significant role as we scale up. And we have a [ differentials ] strategy for each of these channels which allow us to reach our ambition of getting to the top 3 in the next 3 years. [indiscernible] Shantanu mentioned, the combination -- that every one of our products offers a significant consumer [indiscernible] [ differentiation ] versus the competition and the fact that we have a -- we have worked out a strong channel plan, we are very confident that the combination of these, [ and now with ] marketing campaigns and so on and so forth, will help us get to the top 3 position in the next 3 years.
Sure. And follow-up on this is for industry, if you can share the channel distribution, how it happens right now in terms of...
[indiscernible][indiscernible][indiscernible]
I'm sorry, but that's [indiscernible] you -- just to give everyone a chance, we'll move on. If you have further questions, either we can cover them at the end if we have time. Or please feel free to contact us after the call, and we're happy to share whatever we can.
The next question is from the line of Rahul Gajare from Haitong Securities.
I've got 2 questions. One, you've seen a sharp jump in the employee cost. That is the first. I just want to understand what has really gone in over there. And second thing is with respect to the new built-in kitchen appliances. Given our traditional business has a margin of -- in a range of 13%, 14%, what is your expectation on profitability of this new [indiscernible]?
Okay, let me address them. The first one is there are certain, if you will, onetime nonrecurring expenses which have come this quarter in the people costs. One of the costs is based on the fact that our variable payout is decided by the Board based on our performance versus competition. This tends to be done, obviously, after competition results come out and therefore in the end of June sometime. So there was a certain amount of -- we have provided less than what the Board actually provided. So that is a onetime cost which has come in. The second thing on people costs you just need to remember is, in the COVID period, and last year was a COVID period, we had delayed our increments. And we gave increments in July. This year, we went back obviously to our normal, giving them in April. So if you want to look at a steady state what it would be for the rest of the year, a number of somewhere between 100 crores and 105 crores would be the run rate which we would be operating on. The second question which you had was margins, our expectations on margins on the new appliances business. We would expect gross margins to be in line with our other businesses. And obviously, in the initial years, there will be some investments to build awareness, trial and distribution, but as they settle down, that would lead to EBITDA margins also in line with the rest of the business and not being dilutive.
[Operator Instructions] The next question is from the line of Charanjit Singh from DSP Mutual Funds.
Sir, my first question is regarding the pump segment. We have seen that the weakness in this market has been for a pretty long time. And we are also facing these headwinds in terms of pricing, [ yes, versus the ] competition. So if you can touch upon the outlook for the pumps market, how our market share has changed. And any particular specific SKUs we plan to launch so that we can compete with the maybe unorganized segment? That's my first question. And secondly, also on the lighting, you have talked about B2B, B2G remaining weak, so how is the outlook turning out to be there? And what steps we are taking for the lighting overall revival in terms of the growth. And if you look at -- the profitability also taking a hit in this quarter. If you can touch upon that also, yes. Those are my 2 questions.
Yes, yes. On pump, you are right. I think there has been a normal -- a longer-than-normal [indiscernible] because, in even the past, you have seen pumps has -- as a business has always had a period of slowdown months in -- 2 to 3 months in 3 years, but this time, the differences obviously have been compounded by the fact that there has been significant price increase over the past period. I think, if I look at pumps, the prices have increased nearly 20% to 25% in the last 18 months or so, but definitely that has created a stress. And that is not just for Crompton but for the entire industry. And if we look at the results that most of the pump players have been projecting, there has been slowdown for everyone, okay? That's one. Our take on this is -- and you also know that the government has recently increased the GST rate on pumps from 12% to 18%, so obviously that's going to put a little more stress in terms of prices going forward. Our way forward on this is there are certain categories, very important categories, where after considerable market research we have decided that certain portfolio actions will need to be taken in terms of -- one, it could be in terms of pricing but also in terms of introduction of some newer SKUs to be able to manage the price pressure in the market. So the combination of those actions, we feel that will allow us to get back on the growth path in pumps in the next few quarters. That's one. In lighting, B2B trade business has started to pick up. In the earlier years, we used to have significant contribution of EESL. We do not expect that to come back. Our way forward in terms of the lighting growth is, one, obviously to get the proportionate growth from B2C. We have been taking a lot of actions in terms of driving our -- or slightly modifying our lighting go-to-market. And we are happy to actually say that in the last 2 quarters maybe our reach numbers have started to look up again. That was not the case for almost 2 years before that, so we see that, in the short term in the next couple of quarters, that will start translating to market share gain also on lighting. In terms of margins, I think the lighting structural margins are fairly intact. In quarter 1, you will have seen the lighting EBIT itself has come down. It will be because of stepped-up advertisement. We [ nearly ] spent 1 percentage points incrementally on advertising in the first quarter. And there have been some provisions in terms of EESL provisions primarily because of some slowdown in payments from EESL and so on and so forth. So I'm very confident that, in terms of lighting structural margins, they're pretty much intact. Obviously, like I spoke for pumps, there's also -- in lighting, the GST rates have been increased from 12% to 18%. So there is some new element which we have -- which we have to manage, but going forward, I think B2C is going to be the growth engine at least for the next few quarters. Thereafter, we expect the B2B demand also to revive, based on also what Shantanu mentioned in terms of the government infrastructure and CapEx investments in highways and so on and so forth, but we think that, at least in the near term, lighting growth will be driven by B2C. And there our margins are pretty strong.
The next question is from the line of Mayur Patel from IIFL AMC.
Most of the questions have been answered, but just is it fair to assume margin outlook from here looks relatively more benign given the 20%, 25% correction in most of the commodities which we have seen? And also, after that, if you can comment on the volume side: Till date, for the industry, the price hikes have been driving the revenue growth despite flattish to negative volumes in most of the categories. What is the volume trajectory looking like currently? And how do you see that panning out with some commodity correction? Is it more elastic on volumes?
If -- even if I look within the quarter, within quarter Q1, the margins have improved. In fact, in March -- where we were in March and where we have been in June, I think the structural margins have improved month-on-month, so obviously some of the benefits of commodities starting to ease off have started to come in maybe towards the later part of the quarter. Of course, now we are making certain assumptions in terms of how the commodity costs will fare going forward. And the commodity costs do remain benign. Obviously we think that part of the -- or we [ owe ] that -- part of that to the consumer, but we do believe that, in such a case, the structural margins that have been there for some time we -- should [ start to ease ] going forward.
Yes. [indiscernible]...
[indiscernible], yes, yes. See, even in the quarter, let's look at -- if I look at the businesses that we have, barring pumps, okay, all the other 3 businesses have had even on a 3-year CAGR basis -- I am not comparing with last year because, last year, there was a COVID-hit quarter. For example, fans, even if I look at a 3-year CAGR of roughly 10%, half of which is volume -- so I think volume growth is there in fans. Most of the growth in both pumps -- sorry, in both lighting and appliances have been volume led. So the volume was extremely strong both on lighting and appliances. The only area that I feel volume would been impacted is on pumps, and I already answered what we plan to do to get that back on track.
The next question is from the line of Siddharth Bera from Nomura.
Sir, my first question, on the new category of kitchen appliances again which we have recently entered. Can you, sir, just highlight in terms of ramp-up, probably citywide, which region probably you will look to ramp up? And how gradual should we expect it to be? Will it be more back ended? Or we will start seeing sort of some benefits coming from next [ 1, 2 quarters only ]. And second will be on the market share, if you can highlight in terms of where we are currently in terms of [indiscernible].
Yes. On the new kitchen -- built-in kitchen segments, we have -- currently the plan is, during the next couple of months, to completely roll out into 10 city clusters, which is primarily all the key metros and areas around that. Our estimate is that potentially 60% of the potential of the market, which is 2,200 crores, 60%, is actually in these 10 city clusters. That's we've already done 7 out of these 10 already in terms of getting into those areas, but we plan, in year 1, which is -- we just launched, starting May, so by May, June next year, we will have a presence in the top 300 cities in the country, which will pretty much cover more than 90% of all the potential that's there. Obviously this is a journey. We're getting in. We are getting distribution. We are activating the marketing campaigns. We're getting -- we are putting campaigns in place which will drive consumers towards to the stores, so obviously it's going to ramp up over time, but we are very confident, based on the research we have done and the initial response we have received, that we should be able to have a strong performance going forward. Obviously this is not a onetime activity. This is the first set of products we have brought to market. There is wave two, wave three, all which is going to build our market shares going forward, yes.
Got it, got it. And in terms of the priority -- so we have a target [indiscernible] top 3 player in this segment. So just to understand: How do you look at in terms of achieving the market share target versus profitability? Will you prefer to have a slightly stronger push in market share at broadly or slightly below-average margins? Or do you think margin focus will also be very high [ when we place in growth ]?
The focus is on making sure that the gross margins are at target levels. Obviously, as we are launching this, we will continue to invest below gross margin, but we will not, if you will, sacrifice gross margin because that needs to be at target levels. The investments in marketing, the investments in distribution will be as what is required. Once we get to a going level as we hit our objective of becoming #3, then we will begin focusing on getting the EBITDA margins also to target levels but not in this investment phase.
The way we have launched our products, we have priced competitively with respect [ to the leaders ]. Competitively, it doesn't mean it is lower, but it is priced, in most cases, on par, but remember that these are products which are having superior features versus price with -- the biggest competitors. So I think they're well priced. And even at those prices, margins are in the target levels, so we see no reason to price them any lower. And we would rather invest these, the margins that we are making, to actually drive consumer traffic into our stores and so on and so forth, yes.
Got it. Sir, last question, on this market share in fans and the air coolers and geysers, if you can share.
Yes. Market share in fans is it's close to 28%, which is an all-time high. I think, as Shantanu mentioned in his opening remarks, we are probably the only brands who have gained market share in every quarter in the last 4 years. So I think it's been all-time high. In fact, we have gained market share faster in this difficult period than everybody else, yes. And on air coolers, we don't have third-party data because it's not measured by any third party, but we are very confident, from whatever information that we have, that we have delivered industry-leading growth in air coolers in this season.
Mr. Bera, I request you to join the queue for any follow-up. [Operator Instructions] We take the next question from the line of Keyur from ICICI Prudential Life Insurance.
Sir, question is on the -- so growth for each of the categories. I think in the presentation also you have highlighted that there is some slowdown in -- at the end of June. And similar commentary has been heard from many of the consumer-facing companies, so any outlook on how the demand is shaping up for each of the segments like ECD or Butterfly, kitchen appliances? So if you can throw some light on the outlook or how the exit run rates were.
One, as we look at the impact, what -- the back end of June, it's obviously important to remember that, in the base period, June had begun to come back to normal. In the base period, it was really April and May which was, for us at least and the industry, severely impacted. So obviously, [ on a straight index ] versus year ago, there is a big difference as we come into June. The only other way to look at it is if you look at now a 3-year CAGR because we have to go back 3 years to get a pre-COVID base. And if you look at a 3-year CAGR, on a consolidated basis, we are showing about a 10% to 11% growth; and on a stand-alone basis about 7-ish, 7% to 8% growth across it. So there is some impact which we are seeing in terms of demand slowdown as we move into this [ path ], but it's a little difficult to read because of the base period impacts, et cetera. Suffice to say inflation is having an impact, I think, especially on volumes. And as I've mentioned before, this inflation has had an impact on volumes almost through the last 3 to 4 quarters at least. Now hopefully, as this inflation begins to settle down and commodity costs -- hopefully, if they begin to ease, then we fully intend to pass on some of those benefits back to the consumer to keep the volume demand coming back, but we have not yet seen, if you will, a sharp uptick in volume demand once I ignore this base period. Personally I think that that's still a couple of quarters away because it takes some time for it to come back. So it's not getting worse. If anything, it's getting slightly better trend-wise, but is it the kind of volume growth which we have traditionally had? Not yet.
The next question is from the line of Sujit Jain from ASK's.
I hope I'm audible.
Yes.
Yes.
One quick question on how we'll integrate Butterfly Gandhimathi. So where does the -- 2 brands overlap currently? Will the 2 companies completely integrated [ even ] sourcing and distribution channel? How related party transactions lay out. And how will you use manufacturing facilities of Butterfly to actually produce some of the [ competent lines as them ]?
Okay, as we've gone into Butterfly and as we've taken control, if you will, of Butterfly, we've been very clear in the phases of our approach. You see, Butterfly was not a business in trouble. Butterfly was actually proceeding quite healthily, so our first objective in the first quarter has really been to ensure that we understand the business and we maintain the continuity of the business growth and the organization development. Based on the results of the first quarter, we do believe we've been pretty successful with that. Now as we're moving forward over the next few quarters, we're beginning to work the details of where are all the possible synergies, which address some of the areas which you mentioned. Once we are clear on that plan in detail, and we expect to do that over this coming quarter, we will then identify what is the right, if you will, legal structure to support and enable this plan. We and the Boards of the 2 companies have not yet taken any decision on that matter. In the meantime, obviously, there are 2 independent public listed companies, so with 2 independent Boards, so we continue to work certain related party transactions as per required on arm's length basis as and when needed. So everything is -- which you mentioned is possible and everything is under consideration. The good thing right now is actually there is not too much direct overlap. The only area actually from a -- product segment-wise where there is overlap between the current Butterfly business and the current Crompton business is mixers. And in mixers, our Crompton business is actually quite small. All the other areas of gas stoves, pressure cookers, other kitchen appliances, there is no overlap, so we are not seeing any big risks or issues with overlap. We are continuing to identify clear opportunities, yes. We've identified opportunities in purchase synergies. We've identified opportunities as we moved on in various cost reductions, so we've initiated a program called -- just like the Crompton Unnati program, where we have already identified a reasonable amount of potential cost savings on -- in Butterfly, all of which will lead to helping us, a, improve margin; b, even more importantly, generate funds for investing behind further expansion and growth.
The next question is from the line of Amit Bhinde from Morgan Stanley.
Can you hear me?
Yes, sure.
Yes. Sir, I wanted to understand. When you say that you want to be in the top 3 in the new category, what would be the market share number that you would like to give? Or in other ways, if you can tell us as to how much would be the share of revenue that this new category would make in the next 3 years. That is question one. And on the lighting part, when you said, in Q1, that there's a recovery in B2C -- B2B and B2G segment: So if you have to compare this with the pre-COVID level, can you just give us a broad idea as to how much was the portion of lighting revenue that was coming from this segment in pre-COVID period? And what will be the outlook? Like 2 quarters, 3 quarters, 4 quarters. How -- what is the visibility that we have for recovery to that extent in the segment?
Yes. If I look at -- for the kitchen appliances, the built-in kitchen appliances, I think top 3 would mean that -- market share of [indiscernible] 10%. Shantanu mentioned this business is 2,200 crores, the market size, growing 10%, so you, we can imagine a 10% share on that will get us to top 3 in 2 to 3 years, in 3 years from now. That's one. I think, yes, in terms of the lighting question, definitely. I will say -- on B2B, especially the trade which is nongovernment, I will say the demand is more or less back to the level which we had pre COVID, but on the government side, because the EESL business is a large part of the total B2B government business -- and that has completely vanished, so that's -- so B2B as a whole, I would think, will come back to pre-COVID levels if everything stays okay maybe another couple of quarters, but B2C has been strong even compared to pre-COVID period, if I look at B2B LED alone. I mean there has been a volume growth. And then that's why I said most of the growth that we have had also has been primarily volume led, so yes, but of course, going forward, one needs to factor in the fact that the GST increased and so on and so forth. So how that plays out, we'll have to wait and watch.
The next question is from the line of [ Chinmay Gandre ] from the line of Nippon Life Insurance.
Yes. My questions have been answered. Thank you.
The next question is from the line of Akshen from Fidelity.
Sir, 2 questions. On air coolers, could you please help us understand? What's the scale of the business today? And you mentioned growth, but last [ 3 ] years, the base has been really low, so hard to understand how you scale that business. And on the built-in kitchen business, could you just repeat? What's the kind of gross margin targets that you are working with on that business?
Yes. So air cooler, if I look at a 3-year period -- okay, let's forget the last 2 seasons. Which have been impacted by COVID. We have had 45% 3-year CAGR, okay? So the CAGR for air coolers versus the last normal season we had [ just ] 3 years ago is 45%, so I would think the air cooler numbers, by looking [ 200% ] over last year, is still a strong 45% CAGR over 3 years ago. That's been -- that's pretty solid. In terms of the kitchen built-in appliance, as Shantanu mentioned, the gross margins will be on par with our best categories, so that is also pretty strong.
[indiscernible]...
Sorry, Mathew, just to follow up...
Yes. [ In one of the seasons, we ] had nearly close to 100 crores of business, so 45% CAGR over 3 years ago.
The next question is from the line of Latika Chopra from JPMorgan.
Just 2 clarifications. 1 was on Butterfly. You have talked about adding new channel partners. I just wanted to ask or check whether it's all incremental. Or are we seeing a churn or replacement of existing dealers? Any more color of -- on what is the quantum of number of outlets where these products reach today? And if you could also share the [ salience ] of online channel in the quarter for revenue. And the second was a small clarification on the built-in kitchen side. We've talked about EBOs. Any color you want to share on the target number of EBOs you want to have over the next 3 years? And are these all franchisee led, or are these company operated?
Yes. In terms of Butterfly, I think a lot of the growth in the previous year or maybe 18 months have come from e-commerce. I think Butterfly actually is over-indexed actually on e-commerce versus, yes, industry average, so our position there is to keep our business on e-comm while we aggressively scale up the retail business which is, yes -- I mean this is an area which has not grown so well in the past. If I look at quarter 1, we have added almost 1,000 new outlets in terms of retailers and about 100 direct channel partners in Butterfly [ to us ]. We don't see any significant churn. In fact, like I mentioned, we are trying to have a much better -- a combination of sales growth coming from e-comm versus general trade, so we actually think that the chances of any significant churn in, say, the general trade distribution or -- is quite low. And the numbers you see in Q1, 100 direct channel partners, 1,000 retailers coming in -- I think it's been pretty strong, so I don't see any issues there at all, yes. In terms of your question on kitchen appliances. I think EBOs are going to be pretty big in the top 10 cities. Our target in the short term is [ roughly ] to have about 40 to 50 EBOs in the next 3 months or so. And then as -- in the next [ run of ] towns, I think we have to see what kind of formats these EBOs are going to take if they're going to be there. And all the EBOs we are putting together are all franchise operated, nothing that the company runs, but we are working in a way that they're sustainable in the short term, so we are focusing our efforts to make sure that they can survive on their own without need of company support. And we're very confident, the way we have configured those economics, that will happen in a very short period of time. And we have also looked specifically for partners who have that mindset that it doesn't have to be from day 0. So they are also willing to invest. And especially after they have seen the offering that we have on the table, we have a lot of people asking us for investing in EBOs, so we're very confident that this will work well going forward.
The next question is from the line of Bhavin Vithlani from SBI Mutual Funds.
A couple of questions from my side. The sharp increase in the employee costs, [ I mean ], could you help us understand the reason behind it? And if you could just break between what's incremental to the KMP versus the others; and if you could just help us understand the reason why the CFO left, why he sold shares just before his resignation announcement came. These are my 2 questions.
[ Okay, I'll go ahead ].
Yes.
First, in terms of the employee costs. As I mentioned earlier, the employee cost has 2 elements to it which sort of help put it in perspective. One is that there was the variable pay factor which is decided by our Board, especially the factor related to our performance versus competition which accounts for 50% weightage in the variable pay across the company on the company factor. That gets declared and decided after the year-end because it is done by the Board once we have published results of competition. There was a certain amount of underprovision on that. i.e., basically the Board judged our performance to be better than what we have judged it ourselves. The second thing, the second factor, is that in the base period we had given -- due to COVID, we had given our annual increments in...
July.
July.
July. This year, obviously, we went back to our normal cycle and gave them in April. So if you want to look at what is kind of a run rate for coming quarters, probably somewhere between 100 crores and 105 crores would be the right run rate to take. That is the first question. Second, none of this was due to any incremental weighting, I will assure you, to KMP. Our typical process is that invariably, myself, for example, I, we -- the Board typically gives an -- and approves an increment which is a few points below the company average increment. So we never weight this towards KMP. I can assure you. It is -- because it is the employees who do deserve the reward for their performance. Your last question...
Sandeep.
I can give you Sandeep's telephone number; and you can speak to him and ask him what he did, why for, right, because he is the right person to speak to about that. Obviously he has gone back to his home company, if you will, right, but beyond that, it's really nothing for me to comment on. But I'm happy to give you Sandeep's contacts.
The only other thing which we mentioned [indiscernible], your share sale. Obviously the shares lapse if the person [ free leaves ] the company, so it is natural that [indiscernible] options. It is natural and nothing beyond that, yes.
The next question is from the line of Gaurav Birmiwal from Crédit Suisse.
Sir, can you detail what kind of CapEx and working capital [ that you foresee ] in your kitchen portfolio...
In the kitchen portfolio, you said.
Yes.
See, I mean because the -- most of the investments, as we mentioned, in these -- in all these stores are -- [ it's only franchise ] operated, so we don't see any significant CapEx that we will have to bring to play. Those are all done by franchisees. At the moment, our business is on 100% sourced from outside, so at the moment, no CapEx even on the back end, at least in the foreseeable future.
So at some point in the future, when this business reaches a [ growing ] stage, obviously at that point we will look at beginning to localize and make ourselves the ones -- or the items which make sense [ toward ourselves ], but right now in this period it is completely sourced, so there's no significant capital involvement.
We take the next question from the line of Aditya Ahluwalia from Invesco.
Yes...
Aditya, may I request you to please come a little more closer to the mic?
Yes. I'm sorry about this. I'll just try to speak louder. Just one small question: So assuming no pricing actions and the current commodity prices, are the margins back to 4Q level or FY '20 average levels already, assuming no price decline or nothing?
In -- as I have mentioned and, I think, as well Mathew mentioned, our exit margins this quarter were pretty much in line with going margins. So obviously the margin has improved from March to April, April to May and May to June. So exit is in line with going margin levels.
Okay. And I -- and if I can squeeze in one more. You said the fans volume CAGR has been 5% over the past 3 years.
Yes. That is correct.
And do you think it is fair to assume a similar trajectory going forward given the penetration and given that you have already a very high market share?
No. I think it's again a function of the combination of volume and value because, if you go back pre COVID, most of the growth was volume led, right? So as right now there is a combination. Over this period, there has been a combination. Growth has been a combination of volume and value, so as we look forward, as inflation, et cetera, et cetera all eases off and the macro situation normalize, we again -- once again expect, like it's traditionally been the case in fans, that all the growth will be volume led. So we definitely expect a couple of points uptick in volume growth over time moving forward.
Thank you. Ladies and gentlemen, due to time constraints, that will be our last question for today. I now hand the conference over to Ms. Renu Baid for closing comments. Thank you. And over to you, ma'am.
Thank you, Aman. On behalf of IIFL Securities, I would like to thank the participants and the management for an interactive call. I will also now request Shantanu for any closing comments before we close this call. Thank you. And over to you, sir.
Thank you, Renu. Thank you, everyone. As always, we appreciate the fact that you took the time to join the call. Our objective is always to try and give you as much information, clarity as we can. As always, if due to time we've not been able to cover all the questions, please contact us. We're more than happy to spend as much time as you would like discussing our business. Thank you so much.
Thank you very much.
Thank you.
Thank you. Ladies and gentlemen, on behalf of IIFL Securities Limited, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines. Thank you.