ORIENTELECNSEfinancial year 2023August 01, 2022

Orient Electric Limited

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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 — 37 extracted

47%

e challenges faced by the industry. For 1QFY23, OEL continued strong revenue momentum, growing by 47% year-on-year. The year started with early summer with record heat waves across the country, resul

Rs. 622 crore

the trade which made to lower primary sales. Despite these lags, OEL was able to post revenue of Rs. 622 crores for 1QFY23, growth of 47% over last year and CAGR of 14% over last 5 years in Quarter 1. Follo

14%

L was able to post revenue of Rs. 622 crores for 1QFY23, growth of 47% over last year and CAGR of 14% over last 5 years in Quarter 1. Following on from financial year 2022, our concern for protecting

270 bps

ons and efficient cost-control measures. Our gross margin witnessing severe pressure of more than 270 bps over the last few years due to severe commodity inflation. We arrested a potentially much sharper

170 bps

commodity inflation. We arrested a potentially much sharper fall in EBITDA margins limiting it to 170 bps in Quarter 1 since pre-COVID levels. The company has been evenly focused on qualitative growth

45 crore

ands at 33 days at par with pre-COVID levels and our cash flows from operations remain healthy at 45 crores for the same period. In terms of liquidity, our net cash position improved during the quarter du

37%

t cash positions further. Despite experiencing huge trends during 1QFY23, the ECD segment grew by 37% year-on-year in revenue. The reported heat wave in the first half of the quarter helped liquidate

s the close of the quarter. Despite the headwinds, OEL was able to marginally grow ECD revenue by 4% compared to pre- pandemic levels. Thanks to smart marketing, distribution strategies and price man

80%

the seasonality factors that have typically impacted OEL. This segment reported revenue growth of 80% for 1QFY23 year-on-year displaying great buoyancy and resilience against the macro headwinds I re

79%

restigious orders in façade lighting. The lighting business continues to deliver strong growth at 79% year-on-year in 1QFY23 led by consumer lamps and luminaires which are enjoying strong demand from

25%

delivering innovative products to enhance consumer delight. Our NPI score continues to be about 25%. We have also made a clear roadmap along with external consulting partners to speed up our progre

rs,

rom the line of Nitin Arora from Axis Mutual Fund. Nitin Arora: If I look at the last six quarters, your gross margins are in the range of 27% to 28%. If I look at the competition assuming that head

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Guidance — 20 items

Rakesh Khanna

opening

“622 crores for 1QFY23, growth of 47% over last year and CAGR of 14% over last 5 years in Quarter 1.”

Rakesh Khanna

opening

“Looking ahead at 2QFY23, we hope to Orient Electric Limited July 26, 2022 improve our net cash positions further.”

Rakesh Khanna

opening

“OEL has been making good progress in building a base for its lighting and switchgear segment which should start reaping material benefits in the medium term.”

Rahul Agarwal

“Could you please help us understand this over the next nine months what should we expect?”

Rakesh Khanna

“But the fact that commodity costs are easing out, we expect that it will help with demand to again kick back and help the industry to cover up the lost sale.”

Rakesh Khanna

“Should we look at the pre-COVID gross margins, our efforts will be there and as I said we are hopeful that industry will provide the space for the gross margins to go to pre-COVID levels.”

Saibal Sengupta

“It will not be appropriate to expect it immediately in the given context and situation.”

Rahul Gajare

“Do you intend to go pan India and if yes is it going to be restricted to a particular product or across the product and what’s the kind of timeline that you have internally for this entire transition of your distribution network?”

Rakesh Khanna

“As you said it has put a pressure on our total numbers during Quarter 1 but we are very hopeful and looking at the results from the first two states that we will be able to make up good market share in these states also.”

Rakesh Khanna

“So, that will expand to all categories in due course of time.”

Risks & concerns — 14 flagged

Following on from financial year 2022, our concern for protecting our gross margin continues unabated.

— Rakesh Khanna

We have been able to contain commodity price pressure on our margins through strategic price corrections and efficient cost-control measures.

— Rakesh Khanna

Our gross margin witnessing severe pressure of more than 270 bps over the last few years due to severe commodity inflation.

— Rakesh Khanna

After some slowdown in B2B business in FY2022, 1QFY23 has been witnessing an uptick on the back of higher reach and portfolio expansion including some prestigious orders in façade lighting.

— Rakesh Khanna

With much success in this approach becoming evident, in 1QFY23, we decided to further expand this distribution model to other states UP, Karnataka, AP, and Telangana where master distributor itself has been weak.

— Rakesh Khanna

Everything else did pick well but the sudden slowdown in the month of May and June for fans especially has been below the expectation and below our plan.

— Rakesh Khanna

It is difficult to say how it will pan on in future but we do see that there is going to be a double whammy.

— Rakesh Khanna

As you said it has put a pressure on our total numbers during Quarter 1 but we are very hopeful and looking at the results from the first two states that we will be able to make up good market share in these states also.

— Rakesh Khanna

It remains anywhere between 18% to 20%, difficult to have any kind of a syndicated data to say but that's our estimate.

— Rakesh Khanna

Some believe that people will actually not take that risk and start buying the star rated.

— Rakesh Khanna

Related to the fan, as you had mentioned second half there is a slowdown in the demand.

— Praveen Sahay

For the ECD segment we are having roughly flattish revenues on a 3-year basis and that follows and already kind of a weak fourth quarter when inventory in the system for Orient was on the lower side.

— Aditya Bhartiya

So, there is the challenge how do we navigate this particular kind, I do see that the pressure will last during this particular quarter for the industry but towards the end of the quarter we will possibly start seeing favorable traction and start taking the advantage of the commodity price directions.

— Rakesh Khanna

Actually, this a very difficult question because you have to see some parts, they come in form of components but they are also steel, aluminum and copper.

— Rakesh Khanna

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Q&A — 14 exchanges

Hi Good morning Rakesh Ji and Saibal ji. Two questions, firstly in your own assessment, was first squatter in line or below your internal expectations? If you could help us understand some kind of outlook for fiscal ‘23 because the way we understand base is higher for last year going into the next nine months, whatever you can talk about for ECD and lighting and switches, do we really grow in double digits this year? Could you please help us understand this over the next nine months what should we expect?

Rakesh Khanna

First of all, I must tell you I'm not a future teller. Yes, the Quarter 1 performance has been below our expectations especially in the fans portion. Everything else did pick well but the sudden slowdown in the month of May and June for fans especially has been below the expectation and below our plan. It is difficult to say how it will pan on in future but we do see that there is going to be a double whammy. There are inventories at high cost and if the trade will start making correction in the inventory the Quarter 2 may see a certain level of inventory correction. But the fact that commodit

If I look at the last six quarters, your gross margins are in the range of 27% to 28%. If I look at the competition assuming that headwinds and the tailwinds of the industry in the last six quarters would be same for all of you, the other electrical companies almost achieved their pre-COVID levels in four quarters out of six and you are still about 27% to 28%. Just need your comment on it, how one should look at this kind of a performance and whether we should be going back to our own original pre-COVID gross margin where we were at (+32%)? That's my first question, need a comment on that. Sec

Rakesh Khanna

Nitin regarding the consumer demand, as you said we've seen the demand in lighting to be continuing well in the consumer side, in the government side, it has been little low but we are hopeful that as for government’s continues promise about investing in infrastructure that demand should also quickly coming in place. Façade is growing and growing at a very good pace and we are getting very well placed there. In terms of switches and switchgears, for us because we are very small, I don't know to what extent market growth will make a difference. But I understand that housing has shown some good

I've got a couple of questions. First on your distribution, the distribution revamp that you’ve started with fans business in Orissa, Bihar, now done that in Karnataka, UP. Could you give us a sense on your overall distribution revamp plan? Do you intend to go pan India and if yes is it going to be restricted to a particular product or across the product and what’s the kind of timeline that you have internally for this entire transition of your distribution network? That’s the first question.

Rakesh Khanna

We have taken up these states, the first two states Orissa and Bihar are already stable and they're doing very well. The next states are in the state of transition. As you said it has put a pressure on our total numbers during Quarter 1 but we are very hopeful and looking at the results from the first two states that we will be able to make up good market share in these states also. This step is being taken because some markets remained under-penetrated under our master distribution model for a long time and we have taken this action only in the markets which were under penetrated. Wherever we

Just extending the previous participant’s question, that out of the entire fan market how do you see this evolving in terms of the BLDC penetration over the next 3 to 5 years and would this technology be easily accessible to unorganized players or would organize players gain more market share over time?

Rakesh Khanna

Aakash, first of all, BLDC is a very simple technology. There is no great thing about it. It's a fairly simple technology. The transition is dependent on the cost difference between the normal induction fan and the BLDC fan. In any electronic product the cost continues to come down as the scale increases. We believe even in BLDC the cost will continue to come down with the increase in scale because a significant part of the cost lies in the PCB. My own estimate is that it will not be an immediate swing. There are pros and cons between both of them. The BLDC fan has all the advantages, there is

Related to the fan, as you had mentioned second half there is a slowdown in the demand. Can you give a color on the premium versus the economic, how is that?

Rakesh Khanna

Praveen no difference. It continued the same way; the mix is similar. There is no special shift that you're seeing. There is a consistent movement towards more of decorative and premium but at the same time as more and more is moving from unorganized to organized, all that movement is coming from the economy side. So, the economy is growing because there is a movement from unorganized sector and the premium and decorative is moving because customers are steadily moving towards premium and decorative. So, both of them are expanding. Second on the ECD price hike, so have you taken the entire wha

Two questions from my side; one is in the opening remarks you spoke about working with a consultant on your e-com initiative, cost reduction and distribution. So, you have touched upon a little on the distribution side but it would be great if you can talk a bit more on the initiatives in each of these identified areas? That is number one. Second is more of a bookkeeping question in terms of what was the revenue split for FY22 of each of the key categories of watercoolers, air coolers etc.?

Rakesh Khanna

So, what we're doing in each one of them, I have not fully understood your question but let me try and answer as much as I've understood. In e-commerce we have a very clear view that e- commerce is going to be very important going forward for us and it’s critical that we establish ourselves quickly in e-commerce. Therefore, there is a roadmap drawn for all our products, how we are going to increase our presence in all the platforms, be it our own Brand.com or be it all the marketplaces and the new coming platform, how do we improve the back-end system etc. and how do we improve digital presenc

If we look at the annual report and the Sanchay program, it says that we've saved about Rs. 45 crores in FY22. Now this is a big number. So, just wanted to know how sustainable is this saving and if you can elaborate on couple of areas where we have extracted such a huge saving?

Rakesh Khanna

So, few things. First of all, Rs. 45 crores, is not a very big figure that we consider that most of the good companies they aim to take off 2% to 3% every year from the cost. So, it's not a big- big figure and so we have to also work in the same direction. As I mentioned a little while back Bhargav, Sanchay is a completely end-to-end digitized platform. It's called an idea bridge where every single cost reduction idea is put in place, there is a proper team which works on it, follows it through, the cost reductions are measured, finance approves and recognizes these ideas. It’s a culture that

What is the strategy to expand distribution over next 2 years? I guess during COVID expansion of distribution was relatively tougher but now what is the strategy FY23 and ‘24 and lastly, we have seen some of the durable companies are doing special efforts to penetrate more in rural markets. So, what is our strategy on that also?

Rakesh Khanna

Aniruddha, the distribution expansion is in two parts as I always say one is the reach and one is the reach which we can influence. Today our reach is fairly high. We are available in more than a 1,00,000 outlets that we have the reports which are even 4 years back we were available at 1,25,000 outlets so reach is good. What is important is the quality of the reach and our ability to influence that reach. The programs that we have taken up with the implementation of DMS and SAP across the objective is to start gaining visibility and influence on our reach so that we can start extracting higher

You have started engaging with dealers in the last couple of quarters directly while we understand the long-term rationale of the move. Is it something that is creating some near-term disruption in the business as well? Orient Electric Limited July 26, 2022

Rakesh Khanna

Yes, it is in those markets as I said these are transition markets. If you're referring to the same markets, UP-Telangana-Karnataka. Of course, during the change over time for 2 to 3 months there is a disruption because the previous distributor is on his way out. The stocks have, to be adjusted, the accounts in the markets have to be reconciled. I am very happy that in the two markets where we completed the transition, there have been no bad debts, no loss of money, no loss of sale and we have very beautifully transitioned to the next model and we will aim to do the same thing of very smoothly

I just wanted to kind of take a slightly longer-term view or a medium-term view. We've seen a 5-year growth rate of mid-teens; there have been bad years and good years as you very rightly said but let's say going forward in the next 3 years, if I were to look at forward what is the aspiration level from our Company perspective in terms of growth rate and in terms of the operating margins? Where do you think can we kind of hit the mid-teens kind of margins or do you think we'll continue to be at the low teens?

Rakesh Khanna

Ashish once again, if I could have seen tomorrow, I would be doing many better things in life than my job here. I cannot see tomorrow. No, I agree with you sir absolutely true for all of us. I'm just saying from an ambition perspective? Our aspirations are definitely much higher; we want to do a lot more but at the same time we will always be prepared for how the market moves and therefore are we prepared for the downside and upside both. We stay grounded at all times. We will take decisions based on the best possible estimates while we keep our aspirations very high. All the actions that we'r

You have mentioned 18% to 20% market share in fans. Is it of the total market, is it of the organized and would it be possible to give some more color in terms of the décor and premium, how much would be our market share in that segment?

Rakesh Khanna

Achal, this is of the organized market and we continue to remain a higher player in the premium and decorative. We have never been aggressive in the lower end although with the growth in the lower ends, we feel it is important that we cannot be ignoring that lower end also and we have made significant efforts in the last few quarters to start improving our presence in the lower end also. As a brand positioning, we always remain towards the higher end. Our positioning has been there, our strength has been there, our market shares have been there. In the top end quadrant, which we call constantl

I just have two quick questions. First is Mr. Khanna, the share of fans with Rs. 2,000 and more range, what is the share that we have in our revenue and within that what is the Aero series contribution now vis-à-vis last year. The second question is on switch gears. How has our market share moved vis-à-vis last year in switch gears?

Rakesh Khanna

Amit both your questions are very tough. Maybe I will separately have to answer the questions you're asking specific numbers in (+2,000) and with asking share of Aero. I wouldn’t have them immediately at hand, maybe you can call me later I will try and or may be Saibal can later give you some details on that. In switch gears our market share is very-very small. We are still scratching the surface so I don't think we are seeing it in form of market share as of now. We are only seeing it our internally how much are we growing? Because in such a small base we should be growing very-very fast, ver

No problem. I will talk to him later.

Management

Thank you. Thank you everyone for joining. It's great to see your support towards Orient Electric and the kind of involvement that you have in our business. Many of your questions are thought provoking and they help us to work further on some of the points that are raised by you and they all help us to improve more and become better. Once again thanks to Ambit team, Dhruv, and everybody in Ambit for hosting this session and making it so well. I do hope all of you are keeping safe and I wish all of you and your families all the safety and good health. Thank you all.

Management

Speaking time

Rakesh Khanna

Moderator

Achal Lohade

Saibal Sengupta

Rahul Gajare

Aditya Bhartiya

Rahul Agarwal

Parth Gala

Ashish

Praveen Sahay

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Opening remarks

Dhruv Jain

Thank you. Hello everyone. Welcome to Orient Electric 1QFY23 earnings call. From the management side today, we have with us Mr. Rakesh Khanna – Managing Director and CEO and Mr. Saibal Sengupta – Chief Financial Officer. Thank you and over to you sir for your opening remarks.

Rakesh Khanna

Thank you, Dhruv. Good morning, everyone. Thank you all for joining us for our first quarter results discussion for the financial year 2023. I hope all of you and your families are staying safe and healthy. At Orient Electric (OEL) we continue to follow all COVID-related protocols while maintaining physical presence for all business activities. Coming to our overall performance, 1QFY23 saw an overall positive performance in the face of multiple challenges faced by the industry. For 1QFY23, OEL continued strong revenue momentum, growing by 47% year-on-year. The year started with early summer with record heat waves across the country, resulting in healthy demand for cooling products. But by the middle of May early days in several parts of the country, steep inflation dampened the consumer demand. At the same time correction in commodity costs indicated a likely price correction thereby leading to inventory correction by the trade which made to lower primary sales. Despite these lags, OEL

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