Havells India Ltd
NSE:HAVELLS
Earnings Call Analysis
Q2-2024 Analysis
Havells India Ltd
The industrial segment of the company in question exhibited a powerful pickup, outshining other areas. However, there was a noted slowdown in both the residential and consumer segments during the second quarter, signaling a mixed performance across different parts of the business.
The company's preparations for the festive season include a focus on products like small domestic appliances, washing machines, refrigerators, and lighting. Despite acknowledging modest market share in appliances, the executive highlighted their omni-channel presence which spans traditional dealer-distributor channels to modern retail and online platforms. Alongside new product launches, consumer offers rather than trade incentives are expected to bolster sales growth during the season.
After a flat first-half performance in the Electrical Consumer Durables (ECD) segment with about INR 1,600 crores in sales, the management avoided specific guidance but expressed expectations for a positive second half. This optimism is not quantified but suggests an anticipated improvement over the prior year's similar second-half performance.
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Ladies and gentlemen, good day, and welcome to the Havells India Q2 FY '24 Earnings Conference Call hosted by ICICI Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Aniruddha Joshi from ICICI Securities. Thank you, and over to you, sir.
Yes. Thanks, Rio. At ICICI Securities, it is our pleasure to host Q2 FY '24 earnings conference call of Havells India Limited. We have with us senior management represented by Mr. Anil Rai Gupta, Chairman and Managing Director; Mr. Rajesh Kumar Gupta, Whole-Time Director, Finance and Group CFO; Mr. Ameet Kumar Gupta, Whole-Time Director; and Mr. Rajiv Goel, Executive Director. We congratulate the management for a strong set of numbers in tough macro environment and remain positive on the company due to its established sub-segmentation strategy and moats like brands and distribution. Now I hand over the call to the management for initial comments on the quarterly performance, and then we will open the floor for question-and-answer session. Thanks, and over to you, sir.
Thank you, Aniruddha. Good morning, everybody, and thank you for attending the call today. Hope you would have reviewed the results by now. The second quarter witnessed softness in the consumer demand. However, infrastructure and housing demand led to a healthy growth in B2B categories like industrial switchgears, professional lighting and power cables. Lloyd continues to maintain its growth momentum.
Lighting business delivered decent volume growth. However, price deflation in LED impacted their revenues. Festival calendar shift has led to a spillover of some consumer demand from Q2 to Q3 in relevant categories. We remain quite positive about the upcoming festive season in the second half. Contribution margins improved across segments year-on-year. Commodity price normalization and product cost-led initiatives will drive further margin improvement. Despite consumer demand headwinds, we continue to invest in our manufacturing, product portfolio and talent pool for a sustainable growth trajectory. We can now move to Q&A, Aniruddha.
[Operator Instructions] The first question is from the line of Natasha Jain from Nirmal Bang.
Sir, my first question is in the Wires and Cables segment. While I understand that last year, we had some high cost inventory and therefore, probably this quarter, the margin has been a catch-up rather, we were expecting slight strong double-digit growth in this segment given the strong infra and real estate development. Sir, can you throw some light there? And also give us a sense on the volume growth on a Y-o-Y basis?
So as far as Wires and Cables are concerned, the big impact or the big offtake has been on the underground cable side, which is a smaller business in this category for us where we are also constrained by capacity till next year, till our new facility comes up. Domestic wire business has done better. And despite the fact that the consumer demand has been weak, it should even do better in the coming times. As far as the value growth -- volume growth is concerned, is about 10% as compared to [indiscernible] growth [indiscernible].
Understood, sir. And my second question is on the Lloyd division. Again, here, while last year was a high cost inventory for Lloyd, too, sir, our losses have actually expanded the most, if I compare it to any other quarter since FY '22 first quarter. And this is given the fact that this was an unseasonal quarter for RAC. So sir, just wanted to understand that is it because we continue to do aggressive marketing and so -- and that's why there is a strain on margins? And how do we see this margin moving forward in the midterm?
In fact, as far as Lloyd is concerned, we are seeing margin improvements. And this is despite the fact that AC sales are -- which is the major business for us, AC sales are the lowest in this quarter where we have grown actually better than the average growth of Lloyd in this quarter. But also there's a -- the fact is that we also have the second facility now at Sri City which gives us double the capacity. So there has been under absorption of manufacturing overheads in a low season. But in the coming season, where the stocks start going into the distributor's shelves in the third quarter and the summer season starts in the fourth quarter, this should start improving. So we will see further margin expansion in Lloyd.
Understood. And sir, lastly, any light on how the premium fan segment did?
Premium Fan segment, Havells has been the leader in that segment and it is doing well. Overall, fans demand has been weak over the last 6 months since the energy rating change. But I think going forward, this should improve because there was enough stocks in the market, but I think overall, it would improve. Our focus on premium play continues to be strong.
The next question is from the line of Ravi Swaminathan from Spark Capital.
My first question is in terms of overall consumer demand, especially growth in Lighting and Fans. The flattish growth is because of overall market itself growing slowly? Or are you seeing increased competition there also? So if you can throw some light? And next 12 months, how do you -- do you see a recovery in the overall market to double-digit kind of growth?
Yes. I think a combination of things. I don't see increased competitive intensity. It has always been there in lighting, and it will continue to remain, but there will be consolidation towards more branded products in the coming times as well. In fact, the major reason for the lighting growth not happening is also the fact that the volume growth has been double digits, but the value growth has been quite -- so price erosion has been quite aggressive. Also in...
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Participants, please stay connected. We seem to have lost the line for the management. Please stay connected while we reconnect the line for the management. Thank you.
[Technical Difficulty] Participants, thank you for patiently holding your lines. The line for the management is reconnected. Over to you, sir.
Yes. So sorry for the disconnection. So I was talking about fans. Overall, the demand has been weak over the last 6 to 9 months. And we believe that with the season coming in, in the next half, we should start seeing a better pickup in the Fans business as well.
Got it. And in terms of growth in volumes in the Cables business, you had mentioned that you had grown by around 10%. Wanted to understand how much would the cable portfolio would have grown? How much would your Wires portfolio would have grown in terms of volume? How much dependence is there in terms of the infra-led growth? And also some of the competitors, larger competitor in the cable and wire space had reported 30% growth during this quarter in terms of volume. Hadn't there been for a capacity constraint, would we have grown at similar pace?
Yes. So I think we can say that around 40% of our sales come from underground cables where we have capacity constraint. So yes, of course, if the capacity constraints would have -- would not have been there, we would have done better, also depends upon the capacity that we are putting up. But as far as wires is concerned, we do not have capacity constraints in wires. And there, the growth has been tepid as compared to the industrial products -- industrial cables.
Okay. And in switchgear also, how the bifurcation be towards industrial, real estate, commercial real estate, motor, I mean and product-wise also if you can give a bifurcation it would be great, sir.
We actually don't give this kind of bifurcation in terms of products because there are too many product categories. We have switches, we have domestic switchgear, we have industrial switchgear. And it will be difficult for us to give this kind of generalization on this call.
Okay. Sure sir. But in terms of industrial...
Industrial segment, industrial pickup is better, stronger. Both residential and consumer segment demand pickup was slow in the second quarter.
The next question is from the line of Rahul Agarwal from Incred Capital.
Sir, first question on second half being better just to understand because the products which are festival dependent and is Havells approaching the season differently in terms of anything you've done differently in terms of go-to-market, channel incentives for you to get better growth in the market?
I think, overall, the kind of products that are depending upon the festive season are small domestic appliances, washing machines and refrigerators to some extent, but we are not very strong in that segment. The market share is very small.
Lighting.
And of course, lighting. So these 3 segments are dependent upon the festive season. I think one of the main things what Havells has been able to achieve in the last couple of years is to be omni present across channels. Our -- we have been traditionally a more dealer-distributor-oriented company. But over the last couple of years, we have expanded our presence in modern format retail, regional retailers, online. So that -- I would say that gives us a complete presence. And of course, new product launches and not so much on the trade incentives, but consumer offers continue to come at this time so which helps sales growth in these categories.
Got it, sir. Secondly, on ECD, I think if I look at the first half sales, about INR 1,600 crores, it's flat Y-o-Y. I understand the reason. Second half last year was also similar, about INR 1,700 crores give and take INR 50 crores. Would you expect 10% to 15% Y-o-Y growth in second half?
Without giving any numbers, we do expect a positive second half.
Okay. And lastly, on Lloyd, just wanted to know the full year cash burn. My sense is, given we have EBIT numbers, and I think that also includes depreciation impact. If I remove that, it should be about INR 200 crores. If you could just help us on that, please.
No, you've made an estimate. I would rather leave you to that. So our focus in Lloyd in the next half will continue to be on increasing sales, in increasing our reach, market share gains in air conditioners, especially, and of course, continue to spend on brand-building efforts, R&D and manufacturing.
So here, we are looking at a very long-term play because we do believe that we are a much smaller player as compared to the competition in terms of the overall consumer durable category. And we do believe this is a huge opportunity for us to be a good player amongst the top 2 or 3 players in this category.
So we will continue to invest in this. I have said it earlier that with the new manufacturing facilities and the sales growth, our margins will continue to expand in these categories, especially in air conditioners, which is the major category for us. So that should help cover up -- overall margins should expand.
Sir, I understand that. Just if you could help me with first half number, that should also be fine.
First half number is already reported in the thing.
I was looking for cash burn, excluding depreciation.
Yes, I think we have given EBIT, Rahul. I think let's stick to that.
Okay, sir, no problem.
The next question is from the line of Siddhartha Bera from Nomura.
Sir, continuing with the Lloyd question on that is that, I mean, the current drop in the margin sequentially, is it only to do with the new plants coming up? Or has there been any pricing action or any sort of...
No, no, it's a much lower sale as compared to the first quarter, right? So the margins would get lower because of the under absorption of manufacturing overheads.
And if you see Y-o-Y, it's hard, that's why there's an improvement there. So I don't think in this you should compare really the Q-o-Q.
Yes. But sir, if I look at over a year, for the whole year, if I look at the trends in terms of the improvement over the next few years, apart from the capacity ramping up and probably you getting a better scale, any other factors you think will be supporting us in the margin expansion?
See, as we have said that Lloyd is a long-term play. Brand building efforts will continue, which will definitely improve our consumer perception over a longer period of time. And there will be -- as the plants mature, there will be cost rationalizations also. So overall, all these actions put together should help in margin expansion.
Okay. Sir, the second question is on the consumer portfolio. You have mentioned that we expect the margin improvement led by weaker commodity prices. So given the growth you are seeing in the multiple segments, do you think you may be required to spend higher on incentives or add, and the margin recovery can be slower than what we expect? Or do you think that should not be an issue?
No, I don't think pricing will play a huge role in trade incentives increase because of the -- because of lower prices or anything. But our brand building efforts will continue at the same pace. We've maintained even when the growth was lower. So that should not stop.
Got it. And sir lastly, on the cable and wires, so in wire we don't have any capacity constraints. So in terms of the channel inventory levels, how is it? And should we expect a pickup in the second half? Or these are the growth trends which we should expect even in the second half?
No, that should go with the consumer demand offtake and the residential demand offtake. The channel inventory in -- at the present moment is normalized. It's not low or anything. It's normalized levels.
The next question is from the line of Renu Baid from IIFL Securities.
Sir, my first question is, can you elaborate a bit more on the export strategy? While in switchgears, we had tie up with foreign OEM for white labeling? What are we planning for the RAC segment? And any other category where we are looking to step up exports?
No. I think, Renu, on the international business, we believe they are fairly macro tailwinds as everybody is aware. So I think we are taking sort of additional steps whether in terms of the market or in terms of product, I think we are getting more and more sort of focused on the same. So I think getting wider and deeper. So RAC definitely, we believe is a strong opportunity both in our own brand and OEM. But these things, as you are aware, will take time because we need also a lot certification for specific markets. So I think this endeavor has already started. I think with the time, I think you will see sort of fructification of the same.
So what time line should we look? Are we looking at a 3 to 4 year from today or...?
Yes, I think -- probably, I think the green shoots should start, I will say, in the next sort of 12 to 18 months, but the scaling up will require this much of a time horizon, what you mentioned.
Got it. Secondly, within the Lloyd portfolio, how is the non-RAC portfolio performing? And any inputs you can share on the ref business? How is the scale up versus our internal expectations? And what are the challenges that you're facing there?
Still slow. And second quarter was slow as compared to last year because the festive demand, which comes in the second quarter, has been shifted to third quarter. But right now, I would say that the air conditioner demand in the -- air conditioner sales were faster growth as compared to the refs and washing machine's growth.
The buildup in refrigerators is it per expectations? We actually -- not only sales is a constraint, but also manufacturing is a constraint for us as of now because we are dependent upon outsourcing for this product. So over a longer period of time, we are taking baby steps in this in terms of building network but it is a longer duration play.
Got it. And when you look at the ECB portfolio, channel interaction suggests that broad-based schemes and discounting are back in the market, which had discontinued during the pandemic. So how do we view the impact of this on the margins given the segment is already facing hypercompetitive intensity and challenges to take price hikes? So what has been the view here? And how is the ground consumer offtake with respect to acceptance of price hikes in this segment?
Well, one of the reasons for the low growth in the first half for the industry has been the price hikes due to the raw material prices. So hopefully, if the discounting of pricing happens, that will be in line with the raw materials coming down. So I do see, especially for a company like Havells, to be participating in a -- in something like what trade discounting or anything of that matter because that's not really a long-term solution for a company like Havells.
Okay. And lastly, if I can add one thing within the switches, it's a part of the Switchgear portfolio, are we seeing -- because this market had consolidated over the last 5, 7 years. Of late, last 12, 18 months, quite a few domestic brands are trying to step up into the segment. While they might be very small, are you seeing pockets where competitive intensity or price pressures have inched up, maybe for the standard and the Rio brands in the economy segment or some lower end of the premium market?
I think it's a very dynamic market. And as you rightly said, there are more and more players coming, but there are players weakening also. So -- but it's also a huge market. So yes, there are various consumer segments. There are various positionings that are possible to achieve. The good thing about Havells is that we operate at different brands at different battering positions, and we are able to cater to different consumer segments in this. So I think this is a very, very important piece of business for us. So we operate from very premium consumers to affordable housing as well. So that way, I think we are well covered.
And if I can one more. On a very broad basis, if we take a 3- to 4-year view, do you see the core profitability of our portfolio ex of Lloyd? Are those margins improving back closer to mid-teen levels because of premiumization portfolio, et cetera? Or you think there are constraints towards that?
No, I think as an overall ex Lloyd Havells had been operating between 13.5%, 13% to 14%. And we are now back to those levels, except a couple of years where they were unusually higher during the COVID period. But otherwise, we are now back to those levels. And we'll continue to strive towards making it better. Despite the market competitiveness, we will continue to strive to make it better, but through internal efficiencies and market reach. So yes, that will be a strive over the next 3 or 4 years.
The next question is from the line of Praveen Sahay from Prabhudas Lilladher.
Sir, the first question related to the Lighting business. Sir, when do you think this -- that this deflationary trend in the LED lighting to reverse?
I think it's pretty much bottomed out.
Okay. So as you had highlighted double-digit of volume growth you had seen in the lighting, so the way forward we can see such kind of volume to replicate in the revenue?
Yes, we would expect to see that kind of a growth.
Okay. And the next question is related to the ECD and especially in the fan, premium fan segment. You don't see any price competitiveness in the premium fan segment as a whole?
That's a continuous thing. Some of the brands take to newer channels, for example, online in a very aggressive way. But these are, again, I would say, short-term niggles, but that's not something which we are too concerned about.
Okay. Okay. So you believe the second half with the festive to0 coming in, these reflect in the numbers as well?
Hopefully, we are looking at a better consumer offtake in the second half and a better summer season in the later part of the second half.
Great. And the last question, sir, related to the Lloyd and it's a bit long term. Do you see in the next 2 to 3 years, your mix of portfolio -- product portfolio to change significantly from the current level?
I don't think so because whilst we are expanding the product portfolio to be a complete consumer-durable player with washing machines, refrigerators and LEDs, because of the focus on the air conditioners where we see a huge opportunity for growth in the coming years, we don't see a much big shift in this overall category because, again, the market shares are very low in the other product categories. So when your market shares are actually strong, it gives you a better opportunity for growth as well. So if you are talking about the next 2 to 3 years, I don't see a significant change in the product mix.
Great. Sir, lastly, can you give the CapEx number for this year and the next year?
INR 600 crores.
INR 600 crores for this year. We will announce the next year CapEx at a later date.
The next question is from the line of Mr. Achal Lohade from JM Financial.
Sir, my first question is the ECD segment minus 5% Y-o-Y in terms of [indiscernible] I presume many -- much could be attributed to...
Mr. Lohade, we can't really hear you very clearly. If you're on a headset, request you to use the handset.
Hello? Hello?
Yes, sir, go ahead.
Sorry for that. Sir, my question is pertaining to ECD business, minus 5% Y-o-Y for 2Q, flattish on first half basis. How much of that do you think is attributable to the delay in festivals? Would that be a [indiscernible] or could that be much more than that?
Actually you were still breaking, Achal, but I think your question was how much is attributable to festival. I think it's comprising of fans and appliances. Clearly, fans, I think, we -- you are aware that industry has gone through a shift because of change in the -- introduction of, rather, ratings. And I think in Q1, that impact was pretty visible. And Q2, in any case, you see because of the summer season sort of fading, I think that impact lingered on. I think the -- for the festive season has more profound on the small appliances and all, which I think should recover in Q3 and Q4. So I think we have to segregate Q1 and Q2. Q2 is largely -- could be because of festival in appliances. But on the fan side, I think it has been a structural issue, which we believe is now sort of getting pretty washed out. And hopefully, in Q3, Q4, you will see organic traction in that segment.
Okay. The second question I had was with respect to pricing. If you could help us understand if there was any price cuts, or discounting, which played out in the 2Q? And if anything is announced for 3Q?
No, there has not been any price discounting, you see there isn't any purpose...
So the pricing -- prices is the realization are stable across categories.
That's right.
Including ACs, is that right, sir?
Yes.
Yes. And just one more question. CapEx, INR 600 crores, can you help us understand the beta, which segment it is growing how much? And what kind of revenue can we see from this CapEx in terms of asset turn?
I think that actually we have clarified earlier also, maybe you can connect with the IR separately, and we can give you that.
No problem. And just last question, if I may, sir. With respect to fixed cost, given the scale we have seen in fridge I thought we will have a benefit of the operating leverage kicking in, but we see if we look at the employee cost and other cable expenses it continues to rise. I understand you continue to invest. But from a next couple of year perspective, how much operating leverage can we see in terms of the margins? Would this be 200 basis points if the revenue growth isn't that pretty good?
Look, a quantification may be difficult. But clearly, I think operating leverage will kick in. I think we do expect at a time we are not building organization for 8%, 10% growth. So hopefully, I think these things will kick in. But look, investment in manpower, infrastructure, IT, I think these are for fairly long term. So I think sometimes there's lots to go on the quarters and try to sort of, you see, extrapolate that. So I think this will definitely kick in, give it some time.
The next question is from the line of Bhavin Vithlani from SBI Mutual Fund.
See, the first question is a continuation to what the previous participant was asking. So on a 6% revenue growth, we have seen 22% growth in the employee cost in this quarter. So if you could just help us understand your thought process? I mean, how much of this is new addition and the kind of growth that you're anticipating? And how much of this was repricing because COVID had actually suppressed some of this and you're bringing it up to speed on the market levels?
So I think it will be mix of sort of everything, what you said. I don't know COVID is still there I think. But definitely from the COVID times, things have gone. You are also aware how cost, how inflation is built into everything. And then you see employee cost it also includes costs related to travel and all, and everybody is aware you see how things have really spiraled up at least in -- over last year. So I think these are all baked in there. And look, Havells is also simultaneously working on a lot of new initiatives as well which do not get reflected. You see if you are a start-up, you can show you're developing something and that gets reflected in your losses/investment. But that's something we keep sort of doing on a regular basis. So we think we have a lot of investment into our research and development, you see into the -- and digitization, into IT infrastructure.
So these things I think it makes sense to put them into the P&L, but one could argue these are really maybe capital investments for a longer period. And these are the conscious choices that management has made. And we all believe that, as I said to the earlier participant, the organization is not built for 6% to 10% growth. So when the growth, I think which we are very hopeful as a country and as a company, we both believe in the -- you see the potential. So I think we continue to sort of trust in that and continue to invest behind that. As I said, don't pick up a quarter and then sort of start sort of you see ruminating about that.
Sure. The second question is, you highlighted capacity constraints in cables, which is 40% of the cables and wires. Is there -- are there capacity constraints also in the switchgear portfolio because there also, given the way we are seeing real estate launches and the growth by real estate players, a 9% growth seems subpar to us. So if you could just help us understand a bit more on the switchgear piece? Is there capacity constrain? Are there competitive dynamics, which has resulted in loss in share? It will be helpful to understand.
No, there is no capacity constraint. But I think when you say the real estate launches, a lot of things are announced, but I think it takes time for them to come on the ground. And so if you look at the industrial switchgear the growth has been good, on the residential side, growth has been slightly muted. So these things -- again, we are expecting them you see to -- going forward to get better. But as far as the capacity is also concerned at least you see we do not have any constraint. The only constraint as of now, we speak is on the cables side.
Okay. So -- and when I look at the past 5 years, I think you've done a little over INR 2,000 crores of CapEx, and Lloyd has taken the lion's share of almost 55% of that. Is it that maybe the attention has got diverted too much towards Lloyd that we've kind of neglected the existing business because a good company like yours is supposed to anticipate growth better and plan better and not have capacity constraint as letting go of growth as a reason.
Look, sometimes what happens, you make choices. If you -- I don't know how long you have been connected with Havells, but in the past, we have said that we are gravitating more towards B2C. So I think one takes those calls. So when -- and these cycles will continue to happen. So yes, I think we of course have been -- we could have taken it 2 years back. But I don't think it's fair to assume that it's happening at the expense of Lloyd or because of Lloyd.
I think that would make everybody should have a capacity constraint. Sometimes, yes, you do get caught, you see offguard on that. But we have been progressing on B2C, and that has been the trend in Havells. So these things, look, do happen. You learn from that and you move on. That's how some companies operate over a longer period of time.
Sure. Just a last question from my side. In the ECD, I think quarter 1 being the largest quarter, there were unseasonal rains, and also channel was loaded up with the earlier energy rating inventory. If you could just help us understand. Has that been cleaned up now? And are we now seeing the growth pick up a little bit more forward to the cover?
Consumer demand has been muted. I'm sure you guys follow FMCG today at this time we were -- results also came. So everybody knows the consumer has been sort of -- there has been stress there. So there -- the -- definitely on the channel side, destock -- they are destocking because they are also realizing there is not too much demand. The fresh pickup is not there, which is healthy. So maybe it could have taken 1 quarter. It could -- it has now taken 2 quarters. So definitely, I think the destocking will help us in the quarters going forward.
[Operator Instructions] We'll take the next question from the line of Ashish Jain from Macquarie.
Sir, my first question is on the Lloyd business. So I understand the growth focus and that it could be a drag on margins. But even on the contribution margin side, like last year, we were talking about touching closer to 10% margins and all, we are far from that. So any sense on contribution margins, that should we think will improve from here with commodities coming off and all? Or that also will remain in this mid-single-digit kind of range?
You see we -- the endeavor is definitely towards that. And I think that number was more when the season is there. So let's say, Q4, I think you will see somewhere around that. But I think -- and this is something, I think, which will -- as we also -- see the new facilities also come up, these things take time to fill up.
So I think that's something, I think, which will continue to grow. And then I think as the RM we are seeing the softening. That effect will also be there. So yes, I think our sort of goalpost hasn't moved. It continues to be there. And I think that's something, as you said, we see the gradual improvement there, and that's something I think we expect to achieve.
Right, sir. And sir secondly, apart from cables and wires, can you comment if you have gained or lost market share in switches, lighting, all these, let's say, in the last 12 months or so? Any distinct trend, which is there in terms of market share?
No, no, no, Ashish. We have not witnessed any -- if at all, I think we would have -- and I think we would have gained market share. But let's say, I think to answer your question, no, we have not lost.
Okay. Okay. And none of the categories, great. Okay, great.
The next question is from the line of Atul Tiwari from Citigroup.
Yes. Sir, could you give some color on the revenue composition of Lloyd business? What percentage is from AC and the other key [indiscernible]?
Yes, so this quarter, Atul, it will be ACs 50% and other 50%.
And which are the key items in other?
So other, we have largely washing machine and refrigerators.
And roughly in like 50% or one dominates the other this thing washing machine and refrigerator?
So I think what we have, let's say, stick to AC 50%, other 50%.
The next question is from the line of [ Shubham Agarwal from Axis Capital ].
[indiscernible].
Shubham, we can't hear you very clearly. If you are on a hands-free, request you to use the handset?
Yes. Am I audible now?
Yes, much better. Please go ahead.
Okay. Great. Just wanted to -- so this first question is on the ECD segment. Sir, the margins in the ECD segment are some 12% right now. FY '20, the margins were somewhere close to 14%. I just wanted to check, is 12% to 13% a new normal because of the increase in competition? Or do we think that the margins will impact up to 14% in Q and now going ahead into H2 also, the margins will improve for the ECD segment?
Yes. So I think if you recall earlier it was asked about the Havells ex Lloyd margins. And we said, we are now sort of coming back to our earlier numbers. Somebody said you could be mid-teens also. So I think we said that, that's the sort of endeavor for Havells. So I think ECD is an important piece of Havells business. So we believe, I think those margins, which we had done in 2020, I think is something that we are inching towards. And it should be possible because there's been a lot of volatility since then. You see [Foreign Language] it was COVID. Then you see post COVID recovery, there was a huge flare up in the commodity costs and things like that. So we believe as the things get much more cleaner going forward in a fresh base. I think we are inching towards our margins. You see Havells as a whole I'm saying ex Lloyd.
Okay. Sir, great. Second question on the Lighting segment. First, just wanted to congratulate that you have maintained margins despite the price erosion in this segment the margins have been strong, congrats on that. And the question was sir, what percentage of the lighting portfolio would be professional lighting and if you could give a trend that how was it 2020 and how is it now, let's say, 4 to 5 years back and how is it now?
60% will be consumer and 40 -- but these also get led by the consumer has been slightly muted and professional there has been tailwind basically. So -- but par I think it will be like 70-30.
65-35.
65-35. You see, so I think that has improved in favor of p lum, professional luminaire.
The next question is from the line of Isha from VT Capital.
Sir, I wanted to understand your strategy on the ad spend. Like for this particular quarter, we have seen a significant decrease. And last year same quarter again we saw the decline compared to Q1. Sir, can you please help me understand what it is the strategy behind this?
The strategy is very simple. It goes with -- over a period of time. So there is -- one is impact advertising, the other is frequency. Impact advertising happens more during the season time. So we have 2 major seasons. One is in the first quarter, which is the summer season, and then the festive season. So this -- so there, we see a higher gain of advertising spend in the first quarter and the third quarter. And the second quarter and fourth quarter are usually lower. Overall, we maintain that we will be around 2.5% to 3% of revenues in terms of advertising spend.
Okay. And sir the other question is on the price revision , sir just wanted your idea that in further quarters what are our processes and the price revision, are we going to see any price cut given commodity price settling so any thought processes?
So there are certain adjustments which happen for certain products categories like lighting, if the price erosion is there, we adjust the prices. Cables and wires definitely go along with the commodity prices. But we are quite dynamic in terms of pricing as far as the cost of the product is concerned.
The next question is from the line of Alok Deshpande from Nuvama.
So first question is on the capacity expansion that's happening on the Cables business. Sir, could you give us a sense on what would be the quantum of this capacity expansion compared to what we have currently?
Yes, almost I think 35% there will be expansion.
25%.
25%, cables expansion.
Okay. And currently, cables would be about -- how much would be the cables in the current sales?
Almost 40%.
Okay. So this 40% will get enhanced by 25% is what you are saying?
Yes. And something will be in domestic wires as well so...
Okay. Okay. Understood, sir. And similarly, sir, when you think about the Lloyd business, I mean, currently, last year, we had INR 3,500 crores of business, let's say probably INR 4,000 crores. I mean from a capacity perspective, currently, the under utilization that's happening in off season, et cetera, what would be the capacity -- I mean, what would be the revenue sort of level this capacity is built for currently, whatever we have? Any ballpark number or whatever...
Yes, I think we should serve us up to maybe almost double of this turnover.
Double of Lloyd's turnover that is?
Yes.
The next question is from the line of Amit Mahawar from UBS.
This question is to Anil-ji. Sir, the first question is you've been talking about talent acquisition and you've done a lot of that in the last couple of years as the business expands in multiple of deals. How relevant is it Havells to have a professional CEO? And how soon should we see that? That's my first question.
Amit, I think that's a very profound question. I think -- and I don't think it can be get discussed on a quarterly call. And the pace of professionalism is only sort of enhanced. And I think just because a promoter is there, see I don't think one should assume that professional is not there. So I think that journey is something which is only rapidly expanding in Havells. I don't think anybody can claim that Havells is not a professional organization. So to that extent, I'm not sure where your question is coming from.
Okay. No, I was just trying to understand. I think in the past discussions, we've spoken about the ultimate journey of how the talents have been coming to Havells. And so I was just trying to understand if that's the thought in the near to medium term?
Every person, Amit, in this company is a CEO. That's how this company is run. That's how the empowerment works in this company. He is not the only one who is the Chairman. You see every business head in this company, every person in the factory, every person in the functions, every sales person in this company is CEO. Every person is [ ARG ] here.
Fair point, sir. Then second and last question is, you've seen in kitchen and small appliances, which is a very big market, but a tough one. Organic expansions have been very hard to come by. You've seen some of the peers like Thompson or Bajaj, et cetera, going for inorganic route there. So where are we on that thought in the kitchen portfolio, sir? That's my last question.
No, kitchen portfolio is expanding. And I think when we introduce them to the market, I think we will inform them. But I think that portfolio is sort of expanding the -- see, on a rapidly basis because we believe kitchen is a very important segment of the homes going forward.
The next question is from the line of Keyur Pandya from ICICI Prudential Life Insurance.
Sir, first question is on Lloyd. So as you talked about margin expansion led by higher sales or operating leverage. Just on the margin front, so what are the other levers either the cost optimization or the gross profit side or price increases or the normalization of channel margins? Do you see other than operating leverage, what are the levers for margin expansion? And [indiscernible] and I mean just to add to that, washing machine and ref as a category are higher margin product than AC?
No, so I think we -- I've already answered this question in the past, that the levers are raw material prices abating, higher operating leverage in manufacturing, brand positioning and hence, price improvement in the market. So these are all medium-term players.
Okay. Okay. And just last question. The press release also mentioned about the incorporation of subsidiary in U.S.A. for any specific product or if you can just throw more light on the [ incorporation ] of the subsidiary?
Look, these are enabling provisions. Again, somebody asked this question about our international strategy. And we said we are looking at some strong macro tailwinds. I think we need to be prepared for the actions on that. So I think this is enabling resolution and approval we have sought from the Board since we had a Board meeting. And I think as we sort of operationalize it, I think we'll keep you informed.
The next question is from the line of Latika Chopra from JPMorgan.
The first question is, you have commented quite a few times that you're hopeful that B2C demand is going to revise in the second half. Are there any reasons or any signs which are alluding you to have this kind of confidence? When you exited the September quarter, did you see any pockets which promised you some sort of recovery or some change in consumer behavior? And more importantly, as a company, what would, in your view, actually drive the consumer to come out and spend on electrical goods? That's the first question.
So I would say 2 things. One, to your question, whether we saw some green shoots in the second half of the second quarter. Yes, we did see something. It's difficult to say. It's difficult to say whether it's permanent or is it temporary. But more importantly, to your second part of the question, what will help the consumer pick up more is definitely the residential demand picking up, residential construction picking up in reality. And second, and most importantly, with this inflation coming down to normalized levels, I think that will propel the consumer to come out and buy more.
So we -- that's why we are a bit more hopeful of the second half because the commodity prices have stabilized over last 6 months or so. And in this electrical industry, the first half, the kind of growth that we've seen in the first half is also something which has not been normal. And also is related to some of the product categories like fans, not having a great summer, going through its own challenges of the industry. So overall, many reasons for us being positive for the second half.
Sure, sir. The second bit was around the fact that you mentioned somewhere during the call that you chose to be more B2C focused, and I completely understand that. But is there now a change in thought that probably you need to have a more balanced exposure towards B2B and B2C and given the kind of capacity addition plans that you have, that is one?
And the second bit, I was actually thinking when you're commenting on competition and pricing in category like air conditioners, we did see the market leader's margins actually coming down meaningfully. Do you see that risk at any point as you find more challenges in your B2C categories in small appliances or ECD? Just any broad thoughts there.
Right. So as far as the industrial -- the B2B side is concerned, I think where we've seen the strength is on the cable side. We have grown well on the industrial Switchgear side, though our market share is smaller. Professional Luminaires, we are doing extremely well despite having a quite good position amongst the top 3 positions in this industry.
So it's not that see the focus has completely changed towards B2C, it's always been there. It's as Mr. Rajiv Goel mentioned, that there are certain times you take certain decisions, maybe certain could be delayed decisions as well. So the fact is that we will continue to strive towards being a good balance between B2C and B2B. As far as -- sorry, the second question...?
Second question on the...
So on -- like you mentioned, the market leader in air conditioner, I think one of the reasons in the past 1 year has also been unprecedented increase in the cost of the product as well. So we do believe with that coming down. And Havells has proven over the last 10, 15 years that our margins have been stable, except the last 1 or 2 years of COVID and volatility in commodities. Otherwise, we have been able to maintain our margins. And that, hopefully, we should continue in the future as well.
The next question is from the line of Natasha Jain from Nirmal Bang.
I just have one question upon -- a follow-up question rather that one [ other ] participant asked. Sir, in the switches and Switchgear, now all these ancillary products seem to not be doing so well compared to how the real estate or the housing market is doing. Sir, specifically to switchgears and switches, do you think this market is still dominated by local or unorganized players because some of our channel checks do suggest that, that these unorganized players have been getting a good growth. So how do you see this, sir?
Well, I think if you divide Switchgears into 2 parts, one is the residential and industrial switchgears. And within residential switchgear, there is residential circuit protection and switches and sockets. So I would say that the unorganized sector is now only in the switches and sockets, not in the residential switchgear and the industrial switchgear. So that is reflecting the actual offtake of the real estate position in the market. The switches and sockets, definitely, there is a lot of unorganized competition as well. But that also, in the next few years, should start getting consolidated as more and more consumer are getting attracted towards brands. I think that is also a segment which will get more consolidated.
Understood. And lastly, sir, how has your growth been in your weaker markets like Eastern and Western India?
So I would not say Eastern is a weaker market for us. Our market shares are smaller in western part of India. There, the growth is definitely faster than the other strong markets that we have.
The next question is from the line of Rahul Agarwal from Incred Capital.
Rajiv-ji, one question was on insurance claim. The INR 59 crores received, where was that accounted?
We have created a claim when we filed the claim. So it has been adjusted against basically correct [indiscernible] that of the receivables.
Okay. So no -- it's not flowing through the P&L, right? And the same thing will happen from the balance INR 16 crores, right?
No, no. It's not going to the P&L. So the provision continues to remain for the balance INR 16 crore, INR 17 crore whatever it is.
Perfect, sir. Any thoughts on commercial AC?
Yes, I think everything is an offering with -- as you say, watch out for this space.
We'll have to take that as the last question. I would now like to hand the conference back to the management team for closing comments.
Thank you, everybody, for joining the call, and we wish you a very happy Diwali to everyone, and look forward to see to a great Q3 and Q4. Thank you.
Thank you very much. On behalf of ICICI Securities, that concludes the conference. Thank you for joining us. Ladies and gentlemen, you may now disconnect your lines.