HAVELLSNSEOctober 20, 2022

Havells India Limited

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Management on call

Rajesh Kumar Gupta

DIRECTOR, FINANCE

Aniruddha Joshi

ICICI SECURITIES

Key numbers — 33 extracted

50%

lot focused also on the growth of revenues. So, if you would have seen that we've grown more than 50% in the first half and this momentum will continue to be there. We do see a huge opportunity for r

rs,

to be there. We do see a huge opportunity for revenue growth, market share gains in air conditioners, but also revenue growth because of the addition of new product categories, which are gaining str

INR 1,000 crore

loth. So overall, I think in this financial and next year put together should be anywhere between INR 1,000 crores to INR 1,200 crores. But most of it, which will come in this financial year and some of it will

INR 1,200 crore

think in this financial and next year put together should be anywhere between INR 1,000 crores to INR 1,200 crores. But most of it, which will come in this financial year and some of it will be carried off in th

INR 165 crore

of this INR 1,000 crores to INR 1,200 crores is already done in FY '23? Anil Rai Gupta: I think INR 165 crores was shown in the numbers which we have spent. It will be INR 700, 800 crores, around INR 700 cro

INR 700,

Anil Rai Gupta: I think INR 165 crores was shown in the numbers which we have spent. It will be INR 700, 800 crores, around INR 700 crores. Moderator: Thank you. The next question is from the line of

800 crore

i Gupta: I think INR 165 crores was shown in the numbers which we have spent. It will be INR 700, 800 crores, around INR 700 crores. Moderator: Thank you. The next question is from the line of Charanjit

INR 700 crore

R 165 crores was shown in the numbers which we have spent. It will be INR 700, 800 crores, around INR 700 crores. Moderator: Thank you. The next question is from the line of Charanjit Singh from DSP Mutual F

17%

margins, last two quarters have been severely impacted. This segment used to see somewhere around 17% kind of EBIT margin in a couple of quarters we have seen. So here, the recovery in the margin, ho

2.5%

lf and this year normalized ad spends. And we definitely believe that it will be anywhere between 2.5% to 3% of the non-cable sales. So that will continue to remain. Moderator: Our next question is

his year normalized ad spends. And we definitely believe that it will be anywhere between 2.5% to 3% of the non-cable sales. So that will continue to remain. Moderator: Our next question is from t

INR 1,800

l limited more on the B2C side, but the phenomenon should be different between fans price between INR 1,800 to let's say, INR 2,500 and then something above that, could you elaborate a bit like what is the

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Guidance — 20 items

Anil Rai Gupta

“So these are not old inventories, except in cases of ACs in Lloyd, which could not be sold completely, because of the lower season in the second quarter, which will be absorbed in the third quarter.”

Anil Rai Gupta

“But fourth quarter, we should expect in a normal level, it should be in the range of about low double digit contribution margins.”

Anil Rai Gupta

“However, there will be continued eye on the track how the competition continues to behave.”

Anil Rai Gupta

“And our first focus will be market share gains and revenue growth in Lloyd.”

Anil Rai Gupta

“But also at those levels, we do believe that we will be fairly positive on the profitability side also with good advertising inputs.”

Sonali Salgaonkar

“You did mention that by Q4, you expect low double- digit contribution margins in Lloyd.”

Anil Rai Gupta

“So both in case of fans and ACs, there will be a price hike coming in the third quarter and going into the fourth quarter.”

Sonali Salgaonkar

“And lastly, CapEx guidance, that is it from my side?”

Anil Rai Gupta

“So overall, I think in this financial and next year put together should be anywhere between INR 1,000 crores to INR 1,200 crores.”

Anil Rai Gupta

“But most of it, which will come in this financial year and some of it will be carried off in the next year as well.”

Risks & concerns — 15 flagged

I think let's -- maybe not even look at the quarter-on-quarter kind of revenue market share gains because it's also difficult in this industry to actually get the exact numbers.

— Anil Rai Gupta

I think when we started getting into the festival season, we saw some slowdown in the pickup, because I think the trade was actually a bit slow to pick up inventory.

— Anil Rai Gupta

So there will be a little bit of slowdown in fans even in the third quarter, but going forward in the fourth quarter, we definitely see market coming back.

— Anil Rai Gupta

We're still evaluating the entire impact of that, and that will be passed on.

— Anil Rai Gupta

So, any impact of the channel inventory buildup, which is there, if you can highlight and whether this growth is sustainable or we should look at a more normalized number?

— Siddhartha Bera

Because of the high level of focus in the government, now a new CapEx coming up because of the slowdown in CapEx in the COVID cycle.

— Anil Rai Gupta

I think the understanding is still limited more on the B2C side, but the phenomenon should be different between fans price between INR 1,800 to let's say, INR 2,500 and then something above that, could you elaborate a bit like what is the exact concern there?

— Rahul Agarwal

Like you obviously mentioned that 3Q should still be volatile and fourth quarter would see a lot of channel restocking with all the new stuff, new ratings.

— Rahul Agarwal

But just if you could elaborate between segments, between fans like what is exactly the concern there?

— Rahul Agarwal

So, we do see some sort of pressure on the margins in the lighting business.

— Anil Rai Gupta

Or are you seeing incremental impact of inflation affecting consumer spending?

— Latika Chopra

I think to your first question, I see this more as an inflationary pressure on the demand rather than slowing up of the pent-up demand, which happened in the past.

— Anil Rai Gupta

So why that phenomenon you don't expect to repeat in fans wherein fans like the challenge kind of destocking let say by the overall increase?

— Chinmay Gandre

And so I think that the reason we are cautious on how the reaction will be and then that's why we have mentioned both in Q3 and Q1, I think we need to see how the reaction would be from the channel.

— Rajiv Goel

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Q&A — 20 exchanges

Sir my first question is on the inventory level that we are seeing at the end of Q2. As compared to the historical levels, it appears to be still fairly high. If commodity products were to continue declining a little, does it mean that the benefit of raw material cost would not be entirely visible in Q3 either?

Anil Rai Gupta

Well overall, inventory levels are higher because of the buildup of the festival season. So primarily most of the business, the production has happened in the second quarter. So these are not old inventories, except in cases of ACs in Lloyd, which could not be sold completely, because of the lower season in the second quarter, which will be absorbed in the third quarter. And eventually, this is all the fresh inventory going into the third and fourth quarter. Understood, sir. And secondly, sir, how should we really be looking at Lloyd profitability from here on. When you say that high-cost inve

Sir, my first question is again on Lloyd. You did mention that by Q4, you expect low double- digit contribution margins in Lloyd. But sir, could you throw some light on the market share gains that we have had in Lloyd on a year-on-year basis, the boost you to work with the last because we have seen that consistently over the past three quarters. We have had a very good revenue growth, but the margins unfortunately are consistently falling?

Anil Rai Gupta

I think let's -- maybe not even look at the quarter-on-quarter kind of revenue market share gains because it's also difficult in this industry to actually get the exact numbers. But overall, we have seen that we have been able to garner market-leading growth in the last few quarters. So this does give us the impression, and we also believe that we are amongst now in the top three players in those AC categories. And hopefully, we would like to continue that position and continue to grow faster than the market. Sir, any price revisions that we have done or any material price revisions, which we

Sir, I just want to check first thing on the ECD segment, there, our growth has been muted and margins have also taken a significant hit. Sir, can you highlight especially from fans and the appliances segmental perspective. How has been the market scenario? And what's the outlook going forward from growth as well as the margin perspective in the ECD segment?

Anil Rai Gupta

I think specifically, if you look at the ECD segment in fans, we did see some slowdown primarily because there's some destocking happening because trade also wants to clear out their old energy efficiency norm products. So there will be a little bit of slowdown in fans even in the third quarter, but going forward in the fourth quarter, we definitely see market coming back. Third quarter is generally a high season for water heaters and appliances, which should take care of the growth in for ECD in the third quarter as well. Second and third quarter is anyway lower for fans. And sir, from a prof

Sir, my first question is on the price increase. You said we will be taking in third quarter in the AC and fans category...

Management

Okay. Is it better now or still weaker?

Management

Sure. So I just wanted to check on the price hikes, which you indicated that will take some in AC and fans in the third quarter. Possible to highlight of what will be the quantum for that? And...

Anil Rai Gupta

I could not follow your question, please. So you had stated that we'll be taking some price increase in the third quarter in the AC and fans, because of the higher costs, so possible to quantify how much will it be? And will that be sufficient enough to achieve the double-digit margins along with the contribution margins, along with the lower cost of those things? We're still evaluating the entire impact of that, and that will be passed on. Actually, it picks in the fourth quarter, but those raw material inventories will start coming in the third quarter. But yes, that will not impact the marg

And congratulations on continuing market share gains in wires. So, the question is exactly more on medium term. So obviously, in this industry, there are other players, MNCs are also present, Chinese and Japanese...

Management

Yes. The question is on Lloyd, so in the AC industry, obviously, the competitive intensity is high and with the certain large players present. So, if these payers decide to respond, are you okay to continue to operate at negative margins in Lloyd-lloyd for an extended period of time to realign and increase the market share?

Management

Yes. So sir, the question was on the lloyd . So, because obviously, the competitive intensity is quite high in AC industry. And obviously, other players also want to maintain or increase their market share. So, are you okay to operate at negative margins for, say, next few years in case other peers also decide to respond?

Anil Rai Gupta

But Atul you have also seen that the second quarter negative margins, we have enumerated the reasons for that. It's not the competitive intensity that we're talking about. So, I don't understand some of your questions. So sir basically obviously, second quarter of margins were very low because of one-off reasons. That I understand. But it was like fourth or fifth quarter when the Lloyd has operated at negative EBIT margin. So, it was not like the first quarter it was happening. Hence the question that, is the intent to kind of gain market share despite negative margins over extended period of

Again, sir, more medium term, we saw this period of COVID where demand went down. And then we saw last 12 to 18 months where there's an element of pent-up and a lot of things happening. Now from here, if you were to look at the next couple of years of demand, any sense you have given the capacity that you've built in with set of factories. What is the realistic sort of demand that I think as a country, some of your segments could deliver? Just some ballpark thoughts about how you are thinking about demand?

Anil Rai Gupta

I think within the last couple of years, we've seen post-COVID, let's pick at the industrial and project segment. Things have started actually post-COVID very nicely, and this continues to show good growth in there even till now. Because of the high level of focus in the government, now a new CapEx coming up because of the slowdown in CapEx in the COVID cycle. So, things are happening there on that side. We all know that post-COVID, suddenly the real estate demand started doing well. One of the only negative factors there could be the high interest rate but still, even today, the real estate c

Just two questions, sir. Firstly, on the fan side. I understand that the channel is not really comfortable with the changes. I think the understanding is still limited more on the B2C side, but the phenomenon should be different between fans price between INR 1,800 to let's say, INR 2,500 and then something above that, could you elaborate a bit like what is the exact concern there? Like you obviously mentioned that 3Q should still be volatile and fourth quarter would see a lot of channel restocking with all the new stuff, new ratings. But just if you could elaborate between segments, between f

Anil Rai Gupta

So, what do you mean by the concerns. So, the cost of the product will rise when you make the products with the new BEE models, right? So that will have to be passed on to the market. So, the channel would definitely destock because they can't sell the old products after the 1st of January. So, they would destock, they will try to clear off their inventory and then start buying the new products. So, this happens in all the segments of the fans business, not just the lower end of the cost market. So, my understanding was the production has to stop from 1st January and not the sales side. We can

Two questions from my end. Also, the switchgear business revenue growth appears bit soft, particularly given that you're highlighting that the real estate cycle itself seems to be an up cycle, there seems to be good infrastructure investment. So just wondering what is really happening that the growth is slightly slower than what it will achieve?

Anil Rai Gupta

I don't think there's nothing much to read there. Overall, quarter-on-quarter things can vary a little bit. But overall, if you look at the CAGR, this has probably been a good run for switchgear in the last few years. My second question, sir, you're guiding for a low double-digit contribution margin in Lloyd. Just wondering, does that presume a material fall in commodity prices from the current level or significant product price hikes in that industry as well as Lloyd? I think this thing is quite a moving thing right now because we're also going through a transition of the BEE norms. So, a lot

I just wanted to understand your comments on demand a little better. It seems that B2B demand is where you're more positive on. On the B2C side, you mentioned demand is a little sluggish, but stable. Just want to you understand this better in the terms of are you commenting this more from a fading of pent-up demand? Or are you seeing incremental impact of inflation affecting consumer spending? Any color on consumer behavior, particularly on the B2C side that you are witnessing even in terms of product mix, if you could elaborate a little better on this? And if you could also share the volume a

Anil Rai Gupta

I think to your first question, I see this more as an inflationary pressure on the demand rather than slowing up of the pent-up demand, which happened in the past. As a consumer trend, I would actually say, there is not a whole lot of difference, which was expected that the consumer will start down trading or downgrading towards lower quality and lower spec products. It's actually not happening. Havells is catering to different segments of the market through various brands. So we actually don't see a major shift happening in the various brands firstly. Mass premium or the premium category cont

Sir, my question is basically on fans. So are you going to clarify that channel will allow through some of the current rating fans 1st of January '23 also. So normally, historically we see when these kind of things will happen, normally you have seen that the channel kind of stock build because they are also cheaper and basically, they are allowed to sell. So why that phenomenon you don't expect to repeat in fans wherein fans like the challenge kind of destocking let say by the overall increase?

Rajiv Goel

So yes, channel will be allowed to sell, but while AC has seen these BEE changes very sort of regularly. For fans, it has happened after a long time. I think that business behavior has still to be seen. And so I think that the reason we are cautious on how the reaction will be and then that's why we have mentioned both in Q3 and Q1, I think we need to see how the reaction would be from the channel. Largely, the channel is inclined towards having the new category offering. Having said that, there could be some stocking at Q3 and what we are trying to say, please differentiate between fans and A

So firstly, you spoke about growth being 80% driven by volumes. Can you give some color on the segment wise breakup of volume and value growth?

Rajiv Goel

Actually, largely, it's consistent across. Like for instance we can say Lloyd, it will be almost 100% is volume growth. And you are aware that there has been normally much price revision during this quarter. And that's what we have articulated is a increasing sign that the volume growth which is coming back. In the last three years, volume growth has been lower because there is a lot of price hikes. Now this already this quarter, and that is one of the reason why margins could have somewhat been what it has because there has been no commodity cost continues to be headwind, pricing has not been

Sir, I have only one question here. So we are talking about taking some price hikes in Lloyd portfolio during 3Q. What gives you this confidence that the price hikes would be absorbed given that during March to May period where demand was very strong and even the RM prices were witnessing inflationary trend and at that point of time, the price hike...

Anil Rai Gupta

Just to cut through, in the product, the price increase will happen in the fourth quarter, when the industry norms were coming. So I just wanted to understand, in the period where the demand was very strong. The price hike taken by the industry and my view were very limited. And given that now overall, the consumer sentiments are relatively sluggish and demand is weak and the RM prices have also fallen. So what gives you confidence that this channel would be ready to take that incremental price hikes and it should be absorbed in the market. I think that the confidence is because of the continu

Sir, I have a couple of questions. First, when I look at the overall EBIT margin for the past maybe two or three years, there have been trending downwards. If I were to exclude Lloyd, even then, the trend has been pretty much similar. So there appears to be more broader weakness in profitability across verticals? So in this scenario, besides the price hike, given the BEE norm change, what are the other factors that you are having or looking for in order to add improvement in overall margins? And we are not talking about Lloyd's right now, the other business here? That's the first question.

Anil Rai Gupta

I think we don't see it like that because we definitely believe that there are product mix. There are certain products which are growing at a faster pace as compared to maybe the very high- margin products. Within the businesses also, there has been enough focus on getting into more channels and various kind of customers, maybe project customers, maybe rural markets where there are high investments in sales. So we are not deeply concerned by the fact that there is any sort of competitive intensity or positioning change which is happening in market. So, but we are trying to cater to a larger se

My question pertains to cables and wires. You mentioned that as a broader comment, 80% is the volume growth, as a percentage of revenue growth. But what I wanted to check if you look at the revenue growth of 18% average copper price is down about 10%. You're talking about 25% or in 20s kind of a volume growth, is that understanding right? And is it possible to get some more color in terms of, if the mix is changing in favor of cables given the B2B strength you're talking about?

Anil Rai Gupta

Sorry, I think, there were some break here. I can't really follow your entire question, could you please repeat it. Sir, my question pertains to cable and wire business. You did indicate the overall volume growth for the company, about 10%. Specifically on cables and wires business, given the fall in the copper price on a Y-o-Y basis, is it fair to say that the volume growth is more than 20% Y-o-Y. Is that a fair assessment? And if yes, also if there is any change in the mix in favor of cables? Yes. So you're absolutely right. So there was a little bit of dip in the prices here, but if you com

Sir, my first question is how are you seeing the overall B2B side pick-up considering last two years, we have seen this part of the business was under pressure, so in the context of improving the CapEx cycle and the overall recovery in the B2B side, any comment on the B2B side recovery? And how do we look at the coming quarters?

Anil Rai Gupta

Yes. I think generally, we are positive about B2B. Still a small portion about for Havells almost about 25%, but we're seeing recovery, cables has been doing okay, professional luminaires is growing. The other businesses like industrial switchgear is also at a decent growth level. So it's showing positive signs. So are we at in a B2B sort of revenue? Are we at ahead of the pre-COVID level now? Yes, definitely, we're at ahead of pre-COVID levels. Secondly, you mentioned about washing machine side, you are seeing a good traction. Are we in a position to share some volume number or market share n

Congratulations first of all on excellent growth set for first half on a three-year basis across categories. I hope everybody especially at the Neemrana facilities safe and healthy. I just have one question on the capital allocation. Generally, it's between cable and wire and electricals segment, we seem to have broadly have a presence across the basket , but in the Lloyd portfolio, we will have to gradually expand our presence pending ramp up our as scaling across whether it's washing machine or other ranges in the white goods basket. So, if my assessment correct, that in the next two years t

Anil Rai Gupta

Well, there is no doubt that if not 50%, 60%, there will be a higher level of capital allocation towards manufacturing on the Lloyd portfolio. Pretty much, we've completely allocated the air conditioner capacity increase, washing machine, is already on board. The only thing once the buildup happens for the next category, which is refrigerators that we can consider getting into the manufacturing in the next one year to two years. So that's something which we can consider, but we have actually taken the bulk of the heavy lifting has already been done, but it will continue in the coming times as

Speaking time

Anil Rai Gupta

Moderator

Rajiv Goel

Rahul Agarwal

Achal Lohade

Ashish Jain

Sonali Salgaonkar

Siddhartha Bera

Rahul Gajare

Sujit Jain

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Opening remarks

Aniruddha Joshi

Yes. Thanks, Aman. On behalf of ICICI Securities, we welcome you all to Q2 FY '23 results conference call of Havells India. We have with us entire senior management of Havells represented by Mr. Anil Rai Gupta: Chairman and Managing Director; Mr. Rajesh Kumar Gupta, Whole-Time Director of Finance and Group CFO; Mr. Amit Kumar Gupta, Whole-Time Director; and Mr. Rajiv Goel, Executive Director. Now I hand over the call to the management for their initial comments, and then we will open the floor for question and answer. Thanks, and over to you, sir.

Anil Rai Gupta

Thank you, Anirudh. Good morning to all of you and wishing you all a very happy Diwali. Hope you have reviewed the results by now. The second quarter saw a decent revenue growth considering the inflationary environment. It's encouraging that majority of the sales growth was led by volume. Margins in quarter two were impacted by a full absorption of high-cost inventories against falling raw materials and sales prices. The impact was more pronounced in cables and Lloyd, while high-cost cable inventory is now exhausted, Lloyd absorption would continue through Q3. We believe that margins have hit the trough and are expected to improve hereon. Real estate and infra presents a good opportunity. Overall, demand outlook remains positive. Aniruddha, we can now proceed to question and answer.

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