ORIENTELECNSEQ4FY22May 16, 2022

Orient Electric Limited

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17analyst exchanges

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Management on call

Rakesh Khanna

MANAGING DIRECTOR & CEO, ORIENT ELECTRIC LIMITED

Saibal Sengupta

CHIEF FINANCIAL OFFICER, ORIENT ELECTRIC LIMITED

Dhruv Jain

AMBIT CAPITAL

Key numbers — 24 extracted

21%

ompany delivered an overall resilient performance for the FY22 and posted an aggregate revenue of 21% year-on-year, under challenging demand and operational conditions. As lockdowns receded and vacci

rs,

ienced encouraging revival for the demand for electrical durables. For Q4FY22 our channel partners, traditional stock filling of fans and coolers for ongoing summer season fell short of expectations

28%

aintained the overall gross margin of the company and a steady state quarter-on-quarter at around 28%. While currently raw material prices are holding due to global demand supply situation, inflation

19%

years. The revenue from our Electrical Consumer Durables segment grew overall by an impressive 19% year-on-year for the full Financial Year ‘22 period even though it dropped by 11% year- on-year in

11%

y an impressive 19% year-on-year for the full Financial Year ‘22 period even though it dropped by 11% year- on-year in the 4th Quarter of Financial Year ’22. The negative sentiment surrounding the O

27%

ny's total revenue. For FY22 I am pleased to inform that its share in total revenue now stands at 27%. FY22 for the Lighting and Switchgear business grew impressively. For the quarter this segment de

15%

nd Switchgear business grew impressively. For the quarter this segment delivered strong growth of 15% YoY. The B2C segment continued to display encouraging traction, led by consumer lamps and luminai

10%

increasing. So, our direct reach is continuously increasing. And we are adding in the range of 10% to 20% in every state in terms of the number of direct reach to the retailers. Moderato

20%

easing. So, our direct reach is continuously increasing. And we are adding in the range of 10% to 20% in every state in terms of the number of direct reach to the retailers. Moderator: Th

18%

and the year? Rakesh Khanna: So, the price hike during the year has been in the range of 15% to 18% with a cost increase, which has been in the range of 18% to 20% and that actually tells the diffe

Rs. 3,500

ll not with a single definition of premium. Because most of the industry talks about premium from Rs. 3,500 onward fans or Rs. 3,000 onwards fans, whereas as the prices keep on increasing, the categories th

Rs. 3,000

nition of premium. Because most of the industry talks about premium from Rs. 3,500 onward fans or Rs. 3,000 onwards fans, whereas as the prices keep on increasing, the categories that start moving into pric

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Guidance — 20 items

Rakesh Khanna

opening

“The company transitioned its distribution approach for its fan segment in the target markets of Orissa and Bihar, with the direct to dealer approach from its traditional approach of selling via master distributors.”

Rakesh Khanna

opening

“While currently raw material prices are holding due to global demand supply situation, inflation is expected to continue over the medium term.”

Rakesh Khanna

opening

“We expect the overall working capital requirements to continue reducing gradually over the years.”

Rakesh Khanna

opening

“Going forward the change in product mix, channel mix, gradual price hikes, easing of commodity prices and new product launches should allow us to improve our margins from present levels in the medium term.”

Rakesh Khanna

opening

“We are initiating the project of Greenfield plant in Hyderabad, which is expected to be commissioned towards the end of Financial Year ‘23.”

Rakesh Khanna

“Going forward, I will not like to make any clear statement about it, but I can assure you that wherever the penetration is low, we will take a view on that and if required, we will make a complete change in the go-to-market strategy in that state.”

Renu Baid

“Also, if you could give us some flavor in terms of overall in the fan segment where there has been under recovery on the cost side, what has been the kind of price actions and by when do we expect to recoup our margins in this portfolio?”

Rakesh Khanna

“We believe going forward in Quarter 1, this pressure will ease out and overall price increases will happen in the industry.”

Rakesh Khanna

“The premium fans is again, it's a moving target as to what we decide as a premium and industry still not with a single definition of premium.”

Nitin Arora

“So, the external environment in Q1 would not be indifferent, right, I mean, in the medium term, the competitive intensity would be there.”

Risks & concerns — 14 flagged

The main area of concern for FY22 and Q4 was relentless inflation in commodity prices.

— Rakesh Khanna

As you all know, the increase in commodity prices has kept margins under pressure since Q1FY22 and continued until year end.

— Rakesh Khanna

Readiness of stocks in anticipation of seasonal demand, coupled with negative sentiments of price increase and high challenge inventory resulted in higher yearend inventory.

— Rakesh Khanna

We believe going forward in Quarter 1, this pressure will ease out and overall price increases will happen in the industry.

— Rakesh Khanna

So, currently, we see a traction building up April/May and the price increases should happen and also the commodity should start easing, some of the commodities we are also seeing has started easing but it's still volatile.

— Rakesh Khanna

And therefore that's one area where we are trying to bring in more models, although we are being very cautious about slowly bringing in new models and ensuring that they get established well.

— Rakesh Khanna

But it's a matter of time and difficult to predict how fast that swing will be.

— Rakesh Khanna

See slowly, we are seeing that the cost gap between the unorganized and organized is reducing, and that's one of the reasons why organized, unorganized are finding it difficult to stay in the market.

— Rakesh Khanna

But now since we are already in May, it looks very difficult that July will happen.

— Rakesh Khanna

5,000 of top-line is not a difficult task for us.

— Naushad Chaudhary

Last two years because of COVID, yes, there has been a very strong headwind.

— Rakesh Khanna

Just one question in terms of the air coolers, how are you seeing the demand and in terms of the inventory, which was a challenge in the kind of channel last year.

— Harsh Dhanuka

And also given that the headroom to gain market share from unorganized players has now kind of gone down, would it be fair to assume that even margins could be under pressure given increasing competition?

— Nikhil Kale

There is a competitive pressure, but it has never been at the cost of margins.

— Rakesh Khanna

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Q&A — 17 exchanges

My first question is on Orissa and Bihar we have adopted this direct dealer approach. So, is it possible to sort of elaborate a bit in terms of key positive trends that we are seeing here and whether this model is replicable in other states?

Rakesh Khanna

We have taken up these two markets for going direct. As I have always maintained that we have a very strong base of master distributors who bring phenomenal strength to us in the states, where they have been, the presence has been since even generations and the kinds of relationships that they enjoy is phenomenal. However, there are states where we have seen that there is underpenetration for various reasons. And in these states we have decided that we will go direct to the to the market. Both the states are showing very encouraging results. And it's a little early to make a statement about ho

My first question is to understand broadly, if we see the headline performance of ACD seems to be much softer than the other players who have reported results and your comments also on the March uptake from channel has not been too encouraging. So, if you can give us some inputs in terms of how has the demand panned out in the last 45 days of the summer period, especially April/May? And is the channel inventory as well as the inventory which the company has been stocking has that been eased out? Also, if you could give us some flavor in terms of overall in the fan segment where there has been

Rakesh Khanna

Let me answer it in two parts, first is the margin and second is the volume. If you would have noticed, we have been able to implement price increases significantly more than the competition during this particular quarter. And we believe that it's important to finally be able to pass on the cost increase to the consumer, because from the consumer side, I don't think there is much reluctance considering the fact that it has a small share of the consumer’s wallet and the consumer’s total domestic spend. However, there are competitive pressures which will influence our decision and timing on the

So, I will just follow on the last participant question. Can you able to quantify the price hike in the fan, and as well as contribution of a premium fan, for a quarter and the year?

Rakesh Khanna

So, the price hike during the year has been in the range of 15% to 18% with a cost increase, which has been in the range of 18% to 20% and that actually tells the difference in the gross margin that has happened. As of now, we need to increase, if we have to go back to our margins, it is very simple that you understand how much of percentage increase we should get to regain the desired margins that has historically been the Orient’s and the industry margins. And the premium fan. The premium fans is again, it's a moving target as to what we decide as a premium and industry still not with a sing

I am sorry, I am just trying to add up things here. So, what we took a call, what I have been able to understand from your opening remarks, is we took a call of not sacrificing gross margin at different product levels, and you increased prices rather than chasing for growth, at least at the primary level. Secondary, as you said the growth was still taking place, which led to the lower inventory in the channel, is that correct?

Rakesh Khanna

Yes, Nitin. So, the external environment in Q1 would not be indifferent, right, I mean, in the medium term, the competitive intensity would be there. And again, if our call is maintaining the gross margin, then you would go for price hike and reduce the inventory part, or let's say, look for a lower volume growth. So, I just wanted to understand, is industry growing very significantly higher, that's where the confidence is coming that things will eventually fall in place from Q1 onwards. If you can help us on the industry growth wise, even category wise, like you mentioned about a switchgear o

I just have one question, could you discuss your capacity utilization in the fans, and the capacity that you will add at your new Hyderabad facility, and which and other products that you have planned at this new facility?

Rakesh Khanna

Rahul, currently our capacity utilization is of course more than 100%, and we are really stretching on our capacity. We are forced to go outsource some of the fans as of now. The capacity in the new Hyderabad factory will start with at the average level of around 4 lakh fans per month, which will steadily increase. We will also move the capacities between different factories to ensure that there is a right balance between all the three factories. And it will also be catering to the increased demand. We are going to be looking at new models, new lines, a lot of automation, lot of improvement in

In terms of, I mean, the distributor arrangement that we mentioned of how we have changed in Orissa and Bihar. I think we had similar issues with Gujarat probably one or two years back. So, just trying to understand what is the overall thought process between having a master distributor and doing a go-to market?

Rakesh Khanna

Devansh, I am not sure which issues you are talking about in Gujarat. Gujarat has been very stable. It has been performing well for us. We have a very strong distributor over there. And during the sad demise of one of our distributors, the switchover was very smooth to one of earlier distributors. And it continues to have a very strong relation in the market. So, I am not really sure on which particular aspect you are talking about. But let me tell you one thing that whichever market we find that the current distributor is not able to deliver the results that we want, we are open to make a cha

In your opening remarks you mentioned about expanding your BLDC range of fans. And using the previous participants answer you mentioned that one big segment for you would be power efficient fans. So, my question was it, do you see the fan market turning entirely to BLDC in the coming years? And the follow-up question to that would be how has the cost of technology evolved over the last few years for fan?

Rakesh Khanna

So, Aakash, we all know that BEE rating is likely to become mandatory in some time, although government started aggressively, but for some reason they have been little slow. But since the main circular has already come, it's a matter of time that it will happen. As the awareness in consumers starts going up and we also know that consumers are very quickly becoming aware about the environment, about power efficiency, green world etc., etc. So, the swing is happening and happening at a very fast pace. Therefore it's important that we expand quickly in this particular segment. How much will shift

So, as you informed that BEE ratings are expected to be applicable in the country very soon. So, according to you, what is the significant benefit which can come to the organized players at the cost of unorganized ones. So, do you foresee a scenario where in the unorganized market which is mainly operating on the price and lower price bracket that will be hit hard or how do you see this rating change impact on the unorganized peers or especially this smaller and local ones.

Rakesh Khanna

See slowly, we are seeing that the cost gap between the unorganized and organized is reducing, and that's one of the reasons why organized, unorganized are finding it difficult to stay in the market. The consumer also is becoming more involved in this particular category. There was a time when consumer was not involved in this category and it was just a product right up in the ceiling and not able to be seen, but now the consumer is more careful, the ceiling heights are coming down, the fans are more visible, they want right brands, they want right quality, they are careful about the power con

I had a question on lighting. So, you mentioned in your Investor Presentation that lighting business grew by about 10% this quarter. So, I just wanted to understand what would be the price hikes that you would have taken? And if you could just break that up into the mix change that would have happened in also the raw materials things like price hikes.

Rakesh Khanna

So, Dhruv, in lighting the price hikes have been fairly nominal, not much of price hike has happened because while the commodity price went up, there were good work done by the team in terms of the circuits. And the new technology that comes in, helps us to really bring down the cost in the circuits, and not much of a price hike had to be taken in lighting.

My question pertains to the BLDC answers which you have said earlier. Just one clarification, the earlier timeline of July ‘22 for BEE rating, does that mean that that is not there anymore? And there will be a new timeline which will be coming in, that is one. And secondly, so just wanted to understand from the BLDC perspective, how do you see the markets panning out in terms of, do you see that replacement demand will come in this segment significantly, because what I understand, please correct me if I am wrong, the fan is not a serious energy guzzler. So, the incentive for people who are alr

Rakesh Khanna

Amber, the first thing is on the government deadline of July, not likely to happen because government has to give technically around six months notice. But now since we are already in May, it looks very difficult that July will happen. However, we are still waiting to hear from the government. Most likely a new timeline will come, that's my personal understanding. The second is fan power guzzler, actually speaking in domestic area fans is the second biggest power guzzler in houses. We used to feel that it’s air conditioners but air conditioners, heaters are not as much power guzzlers because f

In terms of market share, you are gaining market share from existing players in terms of market growth?

Rakesh Khanna

Yes of course, when we say we are gaining market share, this is from existing players. The market is spread out, we have a lot number of existing players in the market. And while you would see that some of the players are becoming stronger and emerging stronger and some of the players have kind of lost out. So, yes, we are gaining at the cost of existing players. Some of them are unorganized, some of them are organized. It's a mix of all. In price hike you have mentioned 15% to 18% across the products, how you are related with your peers, how much you like your peers have implemented price hik

So, just a small question with respect to the exports. Could you just comment how is the exports been this year in FY22? And given that you are already operating at 100% capacity or more than that, should we expect exports to broadly be stable for FY23 as well at the same level?

Rakesh Khanna

So, you have two questions, one is about the capacity and second about the exports. About the capacity as Saibal clarify, the capacity when I see 100% plus utilization, it is during the peak time. There are times when the capacity utilization is not 100%. The second is about the export. We continue to be the largest exporter. There are markets which are doing well for us, and there are markets which have faced headwinds, markets like Sudan, markets like Sri Lanka, they have had geopolitical issues and we are all aware and those are the headwinds. There are markets which are disturbed because o

Just wanted to understand in terms of our long term growth journey, if I see in last two years from Rs. 1,600 crores of top-line we have reached around Rs. 2,500 crores. And from the current base to take it to Rs. 4,500 crores or Rs 5,000 crores of business, what kind of steps the company would need to take, in terms of new category, new geography? What do you think how long will it take to, you know, to reach to those kinds of numbers to us?

Rakesh Khanna

Naushad, yes, you are right, we are as excited about the future growth and we have huge plans. Unfortunately, I will not be able to share all the plans with you, they remain confidential because of the various reasons. But I can tell you we are very excited about the journey. And we are very positive that the future is very good for Orient Electric. I will tell you a few things which I have always said. In fans, we are not the number one and there is no reason why we should not be the best in the market because we have the best manufacturing facility, we are the largest exporter which means th

Just one question in terms of the air coolers, how are you seeing the demand and in terms of the inventory, which was a challenge in the kind of channel last year. Has those inventory been out? And do you see a normal year for FY22/FY23 in terms of booking for the next year?

Rakesh Khanna

I am hopeful Harsh. The entire trade has actually gone into kind of a shell, because after nearly three years, the summers did not happen well. But this year, as the summer continues to be promising, I expect the shift in the trade to return back and the entire booking process to be full during the period July onwards for the whole year.

I also have a question connected to air coolers. Could you give us a sense on the size of the market? How shift from unorganized to organized has picked up? Which are the brands which have you know gained market share? And specifically for your company in ECD, how much is the sales of air cooler contributing? And what is your market share in the air cooler market?

Rakesh Khanna

First thing I don’t think I would want to talk about the competition and which player is doing what in this call. But we all are aware that the cooler market is highly polarized in favor of one or two top leaders who garner a significant share. The rest of the players have not, had started their journey around three years back, but since that time COVID has been hitting, and the entire cooler trade has not really gained traction. We expect the market to start opening up now and given one, two good summers the whole landscape can shift significantly, in favor of the new players also. As far as

My question was, we understand that the organized, unorganized market in fans is now maybe 15% to 20%. So, larger organized players now have kind of gathered quite a bit of market share. So, growth going forward would be largely driven by premiumization and ESP increases, is that understanding correct? And also given that the headroom to gain market share from unorganized players has now kind of gone down, would it be fair to assume that even margins could be under pressure given increasing competition?

Rakesh Khanna

First thing, the growth is not going to come at the cost of unorganized play. I think the excitement that I talked about in this space is that the growth will come from the consumers themselves, the reason being the very strong shift in consumer preference, awareness and involvement in the product category. The replacement cycle, which at one time used to be 25 years or so, today, people are willing to replace the fan every time they are refurbishing the house. It’s a huge shift. The kind of the growth in the decorative segment, in the BLDC segment, in the premium segment is disproportionately

Thank you so much. Thank you Ambit team for organizing this. And I would like to thank all the participants for continuing to show your interest in Orient Electric. I can assure you on behalf of the entire senior leadership of Orient Electric that we remain very excited and committed towards this business. And we all see a very beautiful future ahead of us. It's an exciting space. The space is evolving very fast. It's growing fast, and it poses great and tremendous opportunities in front of us. Thank you once again for keeping faith in us. See you next quarter. Thank you very much.

Management

Speaking time

Rakesh Khanna

Moderator

Devansh Nagotia

Bhargav Buddhadev

Rahul Gajare

Amber Singhania

Naushad Chaudhary

Dhruv Jain

Praveen Sahay

Nitin Arora

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Opening remarks

Dhruv Jain

Good morning everyone. Welcome to Orient Electric’s 4QFY22 Earnings Call. From the Management side today we have with us Mr. Rakesh Khanna - Managing Director & CEO and Mr. Saibal Sengupta - Chief Financial Officer. Thank you. And over to you sir, for your opening remarks.

Rakesh Khanna

Good morning, everyone. This is Rakesh Khanna. Thank you all for joining us for our full year end and quarter results discussion. I hope everyone is keeping in good health. We are not letting our guards down and all precautions are taken to ensure employee well-being. FY22 posed several challenges to the business intermittently due to Covid disruptions and geopolitical disturbances. Despite that, we have managed to navigate through these upheavals. The company delivered an overall resilient performance for the FY22 and posted an aggregate revenue of 21% year-on-year, under challenging demand and operational conditions. As lockdowns receded and vaccinations permuted, people's lives started to return to normal gradually. As a result, customer sentiments improved and we experienced encouraging revival for the demand for electrical durables. For Q4FY22 our channel partners, traditional stock filling of fans and coolers for ongoing summer season fell short of expectations. Negative sentimen

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