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Ladies and gentlemen, good day, and welcome to Havells India Limited Q4 FY '21 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 Limited. Thank you, and over to you.
Thank you, Sanford. Good morning, everyone. On behalf of IIFL Securities, I would like to welcome you all to the 4Q FY '21 earnings call of Havells India. Today, we have with us the senior leadership team represented by Mr. Anil Rai Gupta, Chairman and Managing Director; Mr. Rajesh Kumar Gupta, Whole-Time Director, Finance and Group CFO; Mr. Amit Gupta, Whole-Time Director; Mr. Rajiv Goel, Executive Director; and the IR team. I would now like to hand over the call to Mr. Anil Rai Gupta for his opening remarks, there after start with the Q&A. Thank you, and over to you, sir.
Thank you very much, Renu. Good morning, everyone. I wish that you and your family members stay safe and healthy. The COVID wave, second wave continues to be ferocious, spreading wider and deeper, though ebbing in certain early infected geographies. The overall magnitude, however, remains worrisome, inducing elevated fear across the nation. We have been responding to the emerging scenario with sensitivity and caution, prioritizing health and safety of all our stakeholders. Q4 sustained momentum of Q3 with growth across categories. Margins were broadly maintained despite a rapid rise in commodity costs. We remain focused on business stability, liquidity and sustainability. We are confident of a recovery with progressively peaking of enhanced vaccination and consolidation in favor of organized sector. We may now proceed for Q&A, Renu.
[Operator Instructions] We take the first question from the line of Ravi Swaminathan from Spark Capital.
Congrats on a good set of numbers. My first question is with respect to the current demand environment, how the traction was vis-a-vis normal in the months of April and May, if you can give a broad view, it would be great, sir. And my second question is with respect to who -- we have largely preserved our gross margins. A bit of it has compressed year-on-year, but we have done much better than peers. What kind of price actions have we taken across products or segments? If you can give that clarity, it would be great.
Thank you, Ravi. On the first question, when we started off the quarter in the month of April, it started off very well in all product categories despite good March. Sometimes it happens that year-endings of March, April starts off a bit slow. But in all product categories, including fans and air conditioners, we actually saw a very good traction in the first 10 to 15 days, post which the entire fear of the COVID wave 2, the reality of COVID wave 2 started sinking in, lockdowns started happening. And after that, definitely the demand and pickup is far, far lower than normalized levels. It's not the same situation as last year because last year, it was a complete clampdown and complete lockdown. There are certain areas -- in fact, most of the states have lockdowns, but certain shops opened for a few hours, certain consumers are able to get some essential commodities. So there is some amount of sales trickling in, but it is, I would say, not at all at the normalized levels and far below the normalized levels. But the good thing is that at least we saw a decent start, especially for the seasonal products like air conditioners and fans, even in the other product categories, like project sales have started happening from the month of April itself. So things started well. But I think now we just have to wait out for this second wave to settle down. And once things start opening up, then things should start coming back. On the pricing actions, we saw third and fourth quarter unabated cost increases in commodities for copper, aluminum, steel, plastics, engineering plastics, everywhere, there was a sharp increase. And usually, we've always maintained that we would want to pass on the cost increases or decreases to the consumer at the right appropriate time. Certain times, it happens that it -- at a very fast pace of increase, it may become a bit difficult to pass on immediately. But with a certain lag, we are able to pass on the entire costs. So I think that was already under the process. In the fourth quarter, some costs have been passed on. It was already underway in the first quarter itself. So when the lockdowns opened up, I think very soon in the second and third quarter, we'll start seeing margins normalizing to our usual levels.
Okay. But like, if you can give a sense on the magnitude of price increase that we would have taken across, say, switches, fans, cables, at least the top 4, 5 products.
Yes, it's very waving. Copper, for example, buyers, I would not have the numbers. But overall, if you see from April of last year to now, the cost increase might have been in the range of anywhere between 40% to 45%. Fans, it would be close to about 10%. Switchgears, similar. So it would be very different across categories.
The next question is from the line of Arnab Mitra from Credit Suisse.
Congratulations on a strong quarter. My first question was on the B2B recovery. So obviously, the 4Q is a little tough to see on a Y-o-Y basis, given how bad last year turned out. But if you could just highlight sequentially, what are the kind of trends you're seeing in the B2B segments in Switchgears, Cables? And did you see strong traction there come back in projects and housing kind of segments?
Yes. So third and -- second, third, fourth quarter -- on the consumer and residential side, we started seeing traction even in the second and third quarter. But what was sluggish was the industrial and infra segment, which is professional luminaires, underground cables and industrial switchgears, where we saw actually a degrowth over second and third quarter in the previous years. But the fourth quarter, in the month of January, February, we started seeing growth even in these product categories. Obviously, March was a washout last year. So there was a huge growth. But In January, February also for the first time, we started seeing a turnaround in industrial and infra segments also, which we were hoping that it would have continued in the coming quarters because private CapEx, government infrastructure spendings were coming back in the fourth quarter.
Okay. And my last question was on the input cost side. So you mentioned some of the price increases like 10% plus in fans, switchgears. So just wanted to understand, in your experience, is there any elasticity of demand in these categories? Because what we see is that even in a very basic FMCG category, companies are a little wary of taking double-digit kind of price increases. Or are you seeing the industry broadly take similar price increases across competition and therefore, it may not really have any demand impact?
Yes. Generally speaking, as I said, it immediately gets passed on and when I say immediately, within a quarter or so, it gets passed on to the consumer. Again, even a reduction. So for example, if copper or steel starts coming down, then you will see a cost reduction or price reduction as well. So I would say that demand elasticity is not so high in our product categories. As I said, in case of cables and wires, we've seen unprecedented price increase in the last year, but demand continues to be there. Also, it could also be the fact that last year, we saw a major shift from unorganized to organized sector as well. But generally speaking, it is not so elastic.
The next question is from the line of Naval from Emkay Global.
Sir, just wanted to check. As you stated that this time around and as we know that spread of COVID is quite across villages and Tier 2, Tier 3 towns and last year, recovery started from rural. So any learning thoughts which you can share how wallet share shift last year we saw with strong growth coming back, can we see the same this year as well? Because significant spending has gone into medical expenses as we see for consumers.
That's true. In fact, what we saw last year was that there was a faster recovery in the rural towns and the Tier 2, Tier 3 towns. And it took more time for Tier 1 towns to come back. This time, it actually could be the reverse, where Tier 1 towns may actually come out of the COVID impact much faster. And Tier 2, Tier 3 towns and the rural areas might take a bit more time for normalizing to happen. So if you look at the rural segment in the electrical industry, we saw 100% growth for Havells last year. But it still constitutes only about 4% to 5% of the overall consumer and residential space for us. So it is still a small number. It has high growth potential. But yes, it could happen that the recovery in Tier 1 towns could be faster than the Tier 2, Tier 3 towns this time.
Understood. And second question is on share of voice/ad spend. Now that has been curtailed in a big way. So how -- is there a structural change how you have -- are spending in terms of change of medium, any savings? Will we bounce back now in FY '22 once the recovery starts? Or it would be significantly lower than the normalized levels going forward also?
No, I think if you see our third and fourth quarter spends, they came back to normalized levels. The major reductions happened in the first and second quarter because of, obviously, the situation at that point of time. So we were hoping to bring back to normalized absolute levels, if not percentage levels, because there have been certain shifts more towards digital marketing than just the traditional media spend. But it would have come back in a bigger way as compared to last year. So I would say the good costs which were taken out last year, probably, it was only advertising and promotions, which would have come back.
Understood. And lastly, if I can take as follow-up on my first question. Sir, on the O2O model, what you had started last year, any trend data you can share? How many dealer distributors of the total network would be on that now? Any sales trend there?
Yes. So it's increased quite considerably, but it's still a very small part of the overall online business. As you can very well understand, the supply chains of the online platforms are well -- it actually came back very strongly because initially post the lockdown, it was that localized sales was to be encouraged. But it has definitely given us a very strong robust system of O2O. We have more than 1,000 dealers. In fact, now more than 1,200 dealers already catering to that, but it's still a very small part. But overall, in the last year, online sales has done tremendously well, has grown more than 100%. In fact, one of the areas, as we have always maintained, Lloyd distribution strategy has completely changed in the last 3 or 4 years, but still online was not a big part of Lloyd's.This year starting January, we came back in a big way, we actually entered online also in a much bigger way. But that actually didn't happen because of the season. Otherwise, we are now present fully online for Lloyd as well. So the online did have very good growth last year.
The next question is from the line of Latika Chopra from JPMorgan.
I have 2 questions. The first one was on the Lloyd business. If you could share your thoughts on the competitive landscape in the air conditioner category, how your market shares are tracking? Are you witnessing a more aggressive pricing behavior by some players? And update on the recent launches that you've done there. And the second question was on the PLI scheme, which was announced. If you could share some thoughts on your approach on this front?
Okay. On the ACs, in fact, if you look at -- because there was unprecedented cost increases, so we can't really see quarter-on-quarter performance because in this industry, we've seen more tendency by the distribution to actually stock in advance of the season which is coming. And they stock even more when the prices are going up. So actually, third quarter, we saw a lot of prestocking happening for certain brands. But if you look at the entire year, probably Lloyd is the only industry -- the only, I would say, company in this category who would have actually grown despite April and May being washed out, which is the higher season.So we have actually seen significant market share gains, though we had lost certain market share in 2019, '20 because of the distribution revamp. But we have significantly gained market share in 2021, which actually made us grow in a tough year with, as I said, with 10.5 months of sales. And this is definitely a very positive step for Lloyd. There is -- a lot of things happened during the year in the AC industry. China imports -- or import of air conditioners was banned. PLI scheme was supposed to be coming in, which has now finally come in. And the cost pressures were there throughout. So I think generally speaking, there was maybe a bit of a delay in passing on the entire price increase to the market because of the impending season and people were waiting for the season. I think generally, once the lockdowns open up, the entire cost structures would have been passed on to the market because there was a significant cost increase in air conditioners also. But the coming season, I think, coming times, there is very positive steps towards the AC industry. As I said, now it is purely dependent upon India production. It is not based on cheap imports. And secondly, the PLI scheme should also help, if not entire landscape as we were expecting, it was supposed to be coming for finished goods. But even if it is coming for the components, it should help improve the competitiveness for components and hence, maybe some amount of cost reduction in the overall product.
Sure. And would you want to participate on -- in the PLI scheme on the components?
We are still evaluating since we are more of a final product player, finished goods player. And we have a very well-integrated manufacturing unit. But in certain components, we may participate or we may not participate because it's -- we still buy those components like compressors and products from outside. And it all depends upon we have to still see the final scheme. But we will do it only if it makes sense for us to put in that kind of capacity. If we find that it is better to actually buy from outside people who have participated in PLI, then we will do that.
The next question is from the line of Siddhartha Bera from Nomura.
Sir, my first question again is on the Lloyd business. So generally, in the fourth quarter, we have seen like good stocking up happens Q-o-Q across companies. This time this has been missing in case of Lloyd. So is it that, I mean, we have decided to have a slightly lower type of inventory or if you can throw some light on that. And we plan to -- or we have recently launched the entire portfolio of refrigerators and washing machines also under Lloyd. So if you can just throw some light on how the ramp-up in that will take place over the next 1 year?
Yes. So I think on the first part of your question, as I said earlier also, it might not be right for us to just look at a quarter because a lot of times, it happens that certain distributors prepone their sales because of impending price increases. So maybe you could look at the half -- the second half growth or the entire year growth. As I said, in the industry, we could grow the business even despite losing April and May of last year as against many players in the industry. So I think it's a positive move. We can't just look at just the March performance. In fact, if you see March, we had started seeing slowdown happening even in Maharashtra and Gujarat. So that was something which was affecting and some sort of a fear has started coming in for delaying the stocking of the products in the fourth quarter. So I don't think this March was also a usual March for the AC industry.
Understood. Sir, my second question was on the refrigerator and washing machine portfolio and the ramp-up.
Yes. So that is still growing very good. The entire new range for washing machine has been launched. We should be starting production in-house very soon, in the next 2 or 3 months. And refrigerator lineup is also available. It's now present in the distribution chain. So that's going well. That should give a good decent growth in the coming times for the Lloyd business.
Understood, sir. Sir, lastly, on this unorganized share gains, like you mentioned that we have seen a good amount of increase from that part. And ECD segment, specifically, if I see, it has grown very well over the last 2 years at strong double digits. So just some more thoughts here. I mean, do you expect such strong trend? I mean, there are further levers in terms of unorganized or new products which can drive good double-digit growth momentum in the segment going ahead?
I think there are various growth levers in -- not only in just the ECD business, but many businesses. So as you said, product categories, features, innovation, distribution reach, rural enhancement. So a lot of areas there could be possibilities of getting good growth in the coming years as well.
The next question is from the line of Nitin Arora from Axis Mutual Fund.
Sir, just first question...
This is the operator. I'm sorry to interrupt, Mr. Arora, your voice is not clearly audible. May we request you to come a little...
Can you hear me now?
Yes, perfect.
Great. Sir, my first question is that we put a lot of emphasis last year also the way market shares of all the big brands, including us, saw the market share increase from the unorganized sector. Does that still you believe can continue in the next, once everything opens up, hopefully, things normalizes, do you think that can further help you outperform the industry? I'm asking more from a perspective that is it largely done? Or you still see in some pockets of your segments you see that happen? That's my first question.
Yes. I think in every disruption, whether it was demonetization or GST regime coming in, the first COVID wave, we've always seen that post that, initially, there is a market share gain, shift from unorganized to organized sector. And once the supply chains do get settled, some amount of unorganized market shares, maybe not be the entire thing, they also start coming back. So definitely, we do believe that post this lockdown and post this wave also, we would see some structural shift happening because -- just because of the strength of the distribution supply chain for the organized brands. Also because of change in consumer behavior also after certain times. Just like last year, we were generally talking about people downgrading, but people were upgrading because they wanted better quality and trusted brands in their homes. So I think with every such disruption, those consumer behavioral changes also start happening.
And the second question is more to do with the cash flow position today. So if you can highlight what are the reason for receivables going up sharply. This deterioration we have not seen till Q3, what is the reason for it? Is it more of any accounting change you have done with respect to bill discounting? Is it because of that? And even on the higher inventory, which is leading to your -- optically looking your gross margin better? That's my last question.
So on the cash flow front, receivables, there is no significant change in that. You see, if you recall last year, March was disrupted, and that's why I think it may not be strictly comparable. And there was no significant change either on the policy or the execution of the receivable policy in the company. Sometimes what happens, the last days, see, you may -- we may get discounted or we may get into the bank. That is the only change, but there is no significant change in the policy or the execution of the debtors policy.As for the inventory, I think you raised the question on inventory. I don't know how you're optical linking it to the gross margin and relate to that. But on the enhancement in inventory, yes, I think it has been built up, as you are aware, on the AC side because of the impending season. The season is right now not panning out the way it should be, but we believe that there will be extended summer, and I think the gains will accrue to the strong manufacturing companies like Lloyd. So I think we continue to be fairly positive on the trajectory going forward. So we are not unduly worried on the inventory holdings we have as of now.
The next question is from the line of Bhavin Vithlani from SBI Mutual Fund.
So a couple of questions. First is on the ad spend, if you could give us guidance how should one think about on a sustainable basis? You highlighted that you're looking at an absolute spend. So I think normalized year FY '19, it was somewhere around INR 375 crores. That will be useful.
I could not hear you.
Your question was not clear, Bhavin. Can you please repeat and you are breaking in between?
Okay. So the question is on the ad spend. You mentioned we are expecting normalization, but you also highlighted that you're looking at an absolute spend. So it will be useful to get a view on the [ advertising spend ].
No, I think it's not the right time for -- first of all, we generally don't give guidance on figures, neither in revenues or expenses. So if you're trying to allude me to give you a figure of advertising, I don't think I'll be doing that in this call. And secondly, it is still very early because right now, we are coming out of the second COVID wave. And then we will further be evaluating how the next 9 months look like. So that's how we'll be evaluating our advertising spend. As I -- I just mentioned generally that last year was definitely an aberration because the first 6 months, practically there were no spends in advertising because neither the markets were fully open nor the media spends were happening. So it's only practically the second half where we came back to normalized levels.
Sure. The second question is on a 2-year basis, if you could give us what is the kind of annualized CapEx that you are budgeting for? And what are the areas that the CapEx will be incurred for?
Yes. So we were looking at about INR 500 crores of CapEx this year. Again, this will be further reviewed because of the lockdown situation. But generally speaking, for the next couple of years, we are looking at overall about INR 1,000 crores in total CapEx. And primarily, it is mainly capacity addition in most of the product categories.
Sure. Any specific areas where a larger proportion of this CapEx because there was a mention about a new AC factory in South India.
Yes. Sure. This again is under evaluation right now because of -- as we said, because of the import ban as well as the PLI schemes, which we still are evaluating. And definitely, this seasonal disruption which has happened in this year would also force us to review the entire timing of this CapEx.
Sure. Just the last, which is a follow-up on this. There is a tax benefit of 17% income tax on the new facilities. Are we also looking at new subsidiary? And any view on a 2-, 3-year basis tax rate that we could expect because of these benefits?
No, we are not looking at a new manufacturing subsidiary for a new plant because we do believe that all our expansions would happen in the existing businesses that we have.
The next question is from the line of Sonali Salgaonkar from Jefferies.
Congratulations on a great set of numbers. My first question is regarding the distribution. Where do we stand in terms of our current pan-India distribution? And also, we have been focusing more on expanding in the rural. So what proportion of our distribution is accounted by rural currently?
Okay. In terms of -- first of all, overall expansion and outreach of our channel is a continuous process. We now have more than 10,000 direct billing points. But we have touch points which are in our system of more than 125,000, 130,000 outlets, which either are catered directly by our distributors or indirectly by our wholesalers. So that's a number that we already have in our system. There might be many more, but this is what is tracked. And as far as the distribution in the rural area goes, we already have covered more than -- and when we talk about rural, unlike the FMCG, we are talking about 10,000 to 50,000 population. So we've covered more than almost 80% of the population, which is about 3,000 towns. We've already reached about 2,300, 2,400 towns. There's a distribution channel under them. And that's catering to almost about 30,000 outlets. So in terms of numbers of outlets, we are about 20%. But in terms of sales in rural, it's about 4% to 5% of our consumer and residential business.
Understand, sir. Sir, second question is regarding the product mix in Lloyd. With the new variants being launched and the new categories and as they ramp up, over the next 3 to 5 years, what kind of a product mix shift do you expect in Lloyd?
Well, I think we continue to believe right now, it's almost 70% air conditioners. And we have -- we will be putting more focus on washing machines and refrigerators, which will be a growth category. But we also do believe that air conditioners will continue to have a very good opportunity for growth in the coming times, more because of, again, the government's push for Indian manufacturing in this segment, plus also export opportunities in the coming times. So I believe it's difficult to predict right now a number, but we will be looking at very fast growth opportunities in all the 3 major categories of Lloyd.
Understand, sir. And lastly, if I may, what has been the growth of our rural sales over the past 1 year, sir.
It's been more than 100%.
The next question is from the line of Rahul Agarwal from InCred Capital.
Congratulations to the team to deliver such set of results even in a difficult year. I had 2 questions. Firstly, in terms of planning and budgeting, right, I mean, last year, whatever we have done, obviously, COVID disrupted. And fiscal '21 was a very different year than what was thought about early January 2020. Similarly, this year, Jan '21, we would have planned for fiscal '21 -- fiscal '22, sorry. So what I wanted to check was, in terms of your 5 large segments in terms of top line and margins, could you help us qualitatively understand what you plan for? And how do you expect the demand trends to actually come out of this in the next 12 months purely in terms of -- if you can exclude the COVID impact and just generally in terms of how do you see the market performing in India, the demand, rural, urban, that's fine. But regionally, anything you can add color qualitatively would really help, across all your 5 segments. That's my first question.
I think your first question alludes to the fact that if you take out the COVID impact, so that's something which, if we do that, then obviously, we were quite positively looking at the FY '22, given the fact that you were coming with very good growth in FY '21 in second, third and fourth quarter, and those are the kind of demand scenarios that we were expecting and we were focusing towards. And as I said, April also started off on a good note. So I believe that because last year first quarter was a 0 base or low base, I don't think we should be looking at growth. But we were definitely looking at continuing the momentum, both in terms of our -- increasing our reach, capacity enhancements as well as expectations of sales. And this was all across India, all across categories. And I would say all across even customer segments. As I said, even in the fourth quarter, the industrial and infrastructure segment also started showing growth, which clearly indicated that the private CapEx and government infrastructure spending was also starting to come back. So that's why, we were quite positive about the entire demand scenario.
[Operator Instructions] Next question is from the line of Abhisek Banerjee from UBS.
Sir, if you just give us some clarity on what kind of cost savings you have done in the Cables business, which has helped you maintain gross margins?
Well, actually, the Cable gross margins are also seemingly a bit more expanded. It's not the usual margins because, generally, when you pass on a certain cost increase, some benefits you also get over stocks already lying in the organization and then gets passed on at a high price to the trade. So I would say that these are -- these may be a bit more expanded than usual. But you've also seen some contraction in other businesses. And I've already maintained that going forward in the coming quarters, most of the businesses will start seeing normalized margin levels once this settles down.
Understood. Understood. Sir, now if I come to the balance sheet, the long-term debt has gone up. Now after hearing your CapEx guidance, it sounds like you were preparing for a high level of CapEx. Is that why LTD has gone up? Or is there something else being planned?
Sorry, what has gone up? I think your voice...
Sir, I was talking about the long-term debt.
Long-term debt, this is the debt for the CapEx which we have taken. If you recall, last year, we've taken 2 type of debt just to strengthen the liquidity at the time of the pandemic. There was a INR 1,000 crores short-term debt and INR 500 crores are long term. These are the CapEx debt which is normally for a period of 5 years. The INR 1,000 crores debt, since our position has strengthened over the period, you see, and we have performed pretty well during the year, we have completely repaid before March 31. That's why you'll not find that in the balance sheet for March 31. The INR 500 crores is a normal debt which will continue. It's a very minor debt in the whole scheme of things. On a net cash basis, we still have around INR 1,400 crores cash on the balance sheet.
Understood. And sir, just one last question on the inventory front. That is -- so if I look at the adjustments which are being made to the stock in the P&L and if I add them up, then I have a number of close to INR 500 crores reduction. But when I look at inventory, it has gone up. So have you stocked up raw materials to kind of hedge your impact there?
No.
No.
We won't -- we don't do any hedging. I think this has been a well-established tactic at Havells. So we believe market is the only hedge available to you and this has been reflected over the years. As Anil has explained as well, there could be lag effect, both in terms of price, commodity costs go up or go down. But we normally pass it out into the market. So we -- there are no hedging tactics that we have.
We take the next question from the line of Ashish Jain from Macquarie.
So my first question was on ad spend. So you -- I know you will not give guidance and all, but historically, we had a stance that ad spend will be between 3% to -- 3% of revenues. And today, you spoke more about the absolute debt number. And also, how should we look at that number more structurally, not asking for fiscal '22, but in general? Will you go back to the 3% revenue kind of a number?
Yes, generally, it's around 3% of the consumer and residential business, yes. So it should be around that.
Okay. Okay. And sir, secondly, just on the margins ex of cables and wires, so cables and wires you said that you will normalize, what kind of incremental price hike we need to offset the commodity prices given where they stand today? Just to understand what the cap rate in the other pass-through?
No. I think in cables and wires, generally, it is faster pass-through as compared to other product categories. But most of the cost increases or price increases have been taken in the fourth quarter, some of which, which in certain categories because raw materials have moved further in the first quarter as well, those will be taken up when the lockdowns open up. But that is minor. So the major thing has happened already in the third and fourth quarter.
Okay. But that is not reflected in 4Q, so whatever you may have taken in 4Q and that's...
They're not fully reflected because there is always a time lag, and the costs were not fully reflected, but it will be reflected in the coming quarters.
The next question is from the line of Rahul from Haitong.
Yes. I have a question around the manufacturing. Could you give us a sense on your manufacturing currently? At what capacities are your factory running? Is there a particular product category where you'd start factories or have to curtail production in a big way? And also along with this, if you can also add, the industry was facing a good amount of supply side constraint last year. How is the situation now? That's all from my side.
No, I think this would not be the right time to actually look at the capacity utilization during the COVID time because this is right now very flexible because, as in many of the product categories, we have built up inventory for the season. Those productions have come down. Overall, because of the lockdown situation, anyway sales will have to be -- have come down. So the capacity utilizations get adjusted and suddenly after the lockdown opens up, we believe that the capacity utilization will come back to the normalized levels, which it was there in FY '20, '21. So this would not be the right time to be talking about capacity utilization. And generally speaking, last year, what we saw in supply chain constraints post lockdown, it could be possible that from the unorganized sector, we could see a similar issue. But this was not really a complete lockdown as last year. The factories still are generally running. So I don't think there will be huge supply chain constraints in this year. Last year, there was initially raw material shortages also and all that. This year, this may not happen.
The next question is from the line of Aditya Bhartia from Investec.
I just wanted to understand how you're thinking about participation in the PLI scheme for lights. And in the lighting space, generally, how are you seeing the competitive intensity? Some of the smaller players who had entered and who were spoiling pricing, are you seeing them exiting the market? I'm not speaking about the current month or so, but the trends that you've seen in the last 6 months?
Yes. I think generally since last year or so, the competitive intensity has gone to bigger brands and trusted brands rather than just brands which are just importing low-quality products from China and selling. So there is some amount of shift which has happened in the lighting industry. As far as the PLI is concerned, again, just like in ACs, the PLI has come on components rather than on finished products. So our participation will be very limited in this because it could be certain components, but certain components that we manufacture in-house we may participate. So we -- it is still under evaluation.
Understood, sir. And sir, in Wires & Cables business, given that the market is incrementally moving more towards organized, do you think pricing power will structurally improve in the segment and even the pass-through, of course, will start happening on a much quicker basis?
Well, I think generally, wire and cable industry is one industry where there is a clear distinction between organized and unorganized. And organized play a certain price segment because of the quality of the product, and unorganized plays at a very different level. So in fact, I would argue that cable and wire industry is actually the fastest in passing through a reduction or an increase in raw material to the consumer. So I would argue that it will continue to remain in a similar manner.
The next question is from the line of Charanjit Singh from DSP Mutual Fund.
Sir, 2 questions from my side. One is on Lloyd along brand acceptance. From when we acquired through right now, how would you have seen the change in that? Plus, in the washing machine space [indiscernible] capacity coming in the next 2 to 3 months. So what's the kind of capacity which you are seeing there? And any market share expectations in refs and washing machines? That's from me.
No. So as far as air conditioners are concerned, I think I've maintained in the past as well. So it's a journey which is happening and the acceptance for Lloyd brand for air conditioners, firstly, among the trade and then amongst the consumers is increasing day by day. And that is a very positive sign. And it's a journey which is continuing. So that will happen. And not only our presence in the wider channel but also acceptance from the consumer side, because of the quality of the product, is going -- continuing to increase. Our market share in washing machines is still at a very lower level, low single-digits level. So we have huge opportunity to grow there once we're really capitalizing the distribution channel and the brand that we've created for this.
Okay. And sir, just on the project business now, maybe B2C could get impacted in the near term as -- because of these lockdown restrictions, but do you see that the project-related business is still continuing? And what percentage of our revenue is coming from the project side?
So projects, when I say -- within consumer and residential also, there are projects and within industrial and infra, there are projects. I would say that there is a better sales for project sales as compared to pure consumer sales. But it is -- because of the lockdown, there are so many areas which are completely shut down, the construction has also stopped. Certain projects, which are private CapEx happening, government spending is -- government infrastructure is happening, there it is continuing, but everything is at a much lower level than normal level.
We'll take the next question from the line of Pulkit Patni from Goldman Sachs.
Sure. The first question is in continuation with somebody else asked, maybe you didn't word it properly. Basically, your capital employed in cables and wires has doubled compared to last year. Now this could be because of 2 reasons. One is because commodity prices have risen so much. The second could be that we are just keeping more copper as a hedge for our future production. So the question is, which of those 2 are true. Is it that we are keeping more volumes? Or is it just the mark-to-market impact on the inventory?
So Pulkit, probably there will be some impact of the inventory value because the commodity cost has gone up. I think that's definitely will be there. But the other third scenario could be and which is where your creditors have gone down, which is we had a lot of cash. And sometimes, we just decide if we can just pay them in cash where they'll keep the credit. Because you're looking at working capital, the reduction in creditors also add to the working capital. So this could be the third scenario also, while you just pointed out 2 scenarios.So this is what has happened in this. Let me just clarify, we do not keep too much inventory just in anticipation, to see that the prices will go up because I think we are very poor anticipating what the cost of the commodity will be next [ quarter ]. That's not our forte, and we don't delve into something which is not our forte.
Sir, very clear. Sir, my second question is, this classification of water purifiers and others. Any specific reason because water heaters and everything is still part consumer durables. Why water purifier is -- should be others?
This was something which was done 4 quarters back, not this quarter.
No, no. Yes. Just to understand the reason, sir. I know.
The reason was that we have a buddying businesses. There are businesses which are buddying. So what we have done, we have clubbed. A lot of people ask, what are the investments which goes in it, how the business is. That's why we -- we did that 4 quarters back for more clarity. I think it is on the demand of lot of investors only, that they want to know what are you doing in these products. And that's why all these nascent businesses which were allocated to the sort of other category. The other thing is it's a bit...
It's also a bit different than the normal consumer-durable business because the channel here goes from the electrical consumer durables to the Lloyd kind of distribution channel also. So it's a different sales team, different distribution channel. Also, the installation is very different. It also depends upon AMC revenues. So it's actually very different than the ECD business. So hence, it would not have been appropriate to put it in the ECD business.
The next question is from the line of Bhoomika from DAM Capital.
Congratulations on a good set of numbers. Sir, I just wanted to get a sense on the channel inventory for the AC segment. And if I remember correctly, last year, we had, relative to the market, much lower inventory. And this year, there has been probably a slightly higher inventory plus the raw material prices are inching up. So how quickly will we be able to take price hikes to kind of pass on this impact? And my second question, if I can squeeze in, is given the spread of COVID into the smaller towns, do we think that in the last year when markets opened up, there was huge pent-up demand and -- which came back into Q2, Q3 and Q4, will that happen again this year? Or do you think that will be a challenge now?
So as far as inventory is concerned, yes, there is -- again, the lockdowns happened just before the season started building up. So usually for season products like ACs and fans, we do build up inventory because during the season, it becomes difficult for the production capacity to take care of the demand. So there is high levels of inventory, both in fans as well as air conditioners, which will get even over the next few months. It will not happen immediately because definitely the most peak season of April and May, we would have lost. So it will even out over a period of time. And the second question was, yes, you're right. I have already said this that this time, the recovery of pent-up demand could be initially more from the Tier 1 cities and then move on to Tier 2, Tier 3 towns because probably the wave started more in the Tier 1 cities this time. So it could be actually the reverse rather than what happened last year.
Right. Sir, if I may just -- just to follow up on the inventory on Lloyd perspective specifically. This year, with the raw material prices going up and the competitive intensity, last year, we did see improvement in Lloyd margins. Does that come into some bit of a challenge into the current year?
Other than the fact that we've lost the season, and hence, there will be some unabsorbed manufacturing expenses, otherwise, from a pricing positional point of view, I don't think we should be in a -- over a longer period of time, we should be in a worry of the margins. And these would be -- we would continue to gain margins when the volumes start coming back.
We'll take the next question from the line of Ashutosh Garud from Ocean Dial Asset Management.
Yes. So my question is that last year, once the lockdown kind of a scenario came in, there was, I mean, a lot of volume growth which happened through market share gains. So since we are into a similar kind of a situation even this year, so do you think that we would be in a position to further improve our market share gains, which would eventually compensate for -- I mean, eventually get into a volume growth kind of a scenario? Or since you mentioned that near-term pressures are there from a demand perspective, so -- or do you think that the demand itself has gone down dramatically in the near term?
Sorry, your question is not very clear. I mean, you're saying...
I'm saying last year -- so I'm saying last year, we saw a lot of demand coming in from Q2 onwards, even though there was a kind of a lockdown scenario. And now that in Q1, we are facing a lockdown scenario, do you think that the demand has actually gone down significantly as compared to what we saw Q2, Q3 last year? That was my question.
How can we predict the demand in the Q1 when there is a lockdown situation, right? Today, the shops are closed. How do we know that what do consumers -- whether consumer demand has gone down. Yes, because if the consumer is not lifting from the shops, if the shops are closed, then the demand is definitely down just like last year. So we do believe that the demand will come back to normalized levels. Whether it happens in June or July or August, it's difficult to say right now. You talked about this question of market share gains. I've also said that in the past, we've seen that when a disruption happens and when we come out of a disruption, definitely organized brands do gain market share because of strength of supply chain, distribution, reach. All those things contribute to market share gains. And so hopefully, yes, we should be seeing market share gains, not only from the unorganized sector, but there will be certain shifts within the organized sector as well. So we should be aiming for that kind of market share gains when the lockdowns open up. And I didn't say that the demand will look weak in the coming months. In fact, it could be the other way around, but we don't know right now yet how things will pan out. And this is something we'll know only when the markets open up. In fact, I would argue that the reason I'm saying that the Tier 1 would be a better turnaround this time initially as compared to Tier 2, Tier 3 because last year, there was a problem of complete construction sites closing down, migrant labor going away and then it took a lot of time for them to come back and start of construction activity. This year, you'll find that it has not happened in the same intensity. So things are running normal even today, maybe at a much lower level. So it should not be the same problem in Tier 1 cities as compared to as what we saw last year.
We take the next question from the line of Mayur Patel from IIFL Asset Management.
Congrats for a good set of numbers. Sorry, I missed out some of your comments on the price hike. Can you just guide us that what the extent of price hikes required out, excluding the Cables and Wire segment, in the other segments? Any range can you guide that to fully pass on the commodity pressure, how much is the price hike required?
It's varying between product categories. We have like 25 product categories. So it ranges for industrial switchgears maybe around -- anywhere between 12% to 15%. For products like fans and appliances, it could be any anywhere between 8% to 12%. So it all varies from product to product. But as I said, as and when things start changing in the raw material side, product costing starts getting passed on to the consumer, both upwards and downwards. So a lot of it happened in the third and fourth quarter. And some of it, which was -- which has happened in April and May, will happen just right after lockdown also.
Sure. And just, sir, one more question on the same question. On -- in the white goods segment, especially the Lloyd segment, there, how much price hike will be required? And what would be your strategy because a good part of the season would be behind us. Would we wait for the next season to come in? Or what will be your strategy to pass on the commodity price hike?
No. In fact, most of the price hike, which was supposed to happen has already happened in third and fourth quarter because, again, in cables and wires and air conditioners, where there are -- margins are lower as compared to electrical consumer durables or switchgears, the price increases or reductions happen faster than the other product categories. So it actually happened in the third and fourth quarter already. So we hope if the raw materials continue to remain at this level, so this will sustain over the coming months. We can only hope that the raw materials do come down to normalized level so that it does get passed on to the consumers also downwards if possible.
Ladies and gentlemen, we'll take the last question from the line of Ashish Poddar from Anand Rathi.
Sir, I have 2 questions. One is on the AC business. So like you mentioned that there was some prebuying during Q3, perhaps that also impacted our Q4 performance. And after this lockdown, retail sales have impacted while inventory in the system has been quite high. So do you think that the current inventory in the channel and to plant, especially from your business perspective, from primary sales perspective, it will take much longer to replenish those inventories, and perhaps you will be looking in the upcoming festive season for refilling the channel in that sense. So this is one. Second is on the Cable business. We saw a large expansion in your margins, which you alluded that it may not continue. But on the Lloyd business, we see very strong operating leverage in Q4 when your sales is high. This time also, we saw Q-on-Q expansion in your revenues despite the margins were depressed. So any outlook on margins in the Lloyd business?
So on the question of inventories of air conditioners, yes, the inventory levels are high in the system, both on the company's level and if the lockdowns open after season passed away, so it will take definitely longer than other product categories for the inventories to come down to normalized level. So it all depends upon how demand pans out, what time -- at what time the lockdowns open up, what kind of pent-up demand comes from the air conditioning segment. And secondly, as far as air conditioners are concerned, again, it would be a very short period to look at the margins because as I said, the -- sometimes it happens with the cost increases, cost increase pressures are there, and it takes a little bit more time. And it happens in ACs faster, but it took some time for the cost to get passed on completely. So there could be a little bit of margin pressure. But as I said, if the cost increases by 5%, usually in the industry, it would get passed on to the consumer by 5%.
Ladies and gentlemen, that was the last question. I now hand the conference over to Ms. Renu Baid for closing comments.
Thank you, everyone. On behalf of IIFL, I would like to thank the management and investors for participating. Sir, would you like to make any closing comments, Anil, sir?
No, thank you very much, Renu. I just hope everyone remains safe and healthy during these times, and we come out of this COVID crisis very soon.
Sure. Thank you so much, and thank you, everybody, for participating.
Thank you. Thank you. Bye-bye.
Thank you very much. Ladies and gentlemen, on behalf of IIFL Securities Limited, that concludes this conference. We thank you all for joining us, and you may now disconnect your lines.