ORIENTELECNSEQ2 FY23November 09, 2022

Orient Electric Limited

7,837words
127turns
18analyst exchanges
3executives
Management on call
Rakesh Khanna
MANAGING DIRECTOR AND CEO
Saibal Sengupta
CHIEF FINANCIAL OFFICER
Deepak Agarwal
PHILLIPCAPITAL (INDIA) PVT. LTD.
Key numbers — 28 extracted
140%
ll with significant gains coming from these new markets. In H1, coolers have grown by more than 140%, and water heaters have grown by a modest of 14%. In Lighting and Switchgear segment, we continue
14%
rkets. In H1, coolers have grown by more than 140%, and water heaters have grown by a modest of 14%. In Lighting and Switchgear segment, we continue to outperform the industry average both in reven
15%
nue growth and margins. The Lighting and Switchgear segment reported a revenue growth of nearly 15% for Q2 Financial Year '23, and 38% for H1. We continue to expand our B2B registering a 40% growth
38%
ing and Switchgear segment reported a revenue growth of nearly 15% for Q2 Financial Year '23, and 38% for H1. We continue to expand our B2B registering a 40% growth in revenue during the quarter and
40%
arly 15% for Q2 Financial Year '23, and 38% for H1. We continue to expand our B2B registering a 40% growth in revenue during the quarter and H1. Revenue from consumer luminaires grew by nearly 17%
17%
40% growth in revenue during the quarter and H1. Revenue from consumer luminaires grew by nearly 17% and 45% in H1. OEL is fast emerging as a front runner in high growth facade and smart lighting
45%
wth in revenue during the quarter and H1. Revenue from consumer luminaires grew by nearly 17% and 45% in H1. OEL is fast emerging as a front runner in high growth facade and smart lighting space wi
rs,
ng as a front runner in high growth facade and smart lighting space with steady new influx of orders, and the company remains optimistic about its prospects going ahead with a healthy inquiry pipeline
10%
lighting and Switchgear segment, OEL continued to post exceptional growth with three-year CAGR of 10% for Q2 and 9% for H1. During the quarter, we have launched house wires
9%
itchgear segment, OEL continued to post exceptional growth with three-year CAGR of 10% for Q2 and 9% for H1. During the quarter, we have launched house wires with limited g
2.3%
y encouraging initial response from the trade. For Q2 Financial Year '23, our EBITDA dropped by 2.3% year-on-year. Lower volumes with high cost inventory and competitive pricing pressure posed stres
4%
Y on account of advertisement and brand building and consultancy expenses, which has an impact of 4% of revenue for Q2 and resulting in 34% growth of other expenses. After collecting these additiona
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Guidance — 20 items
Rakesh Khanna
opening
“We are confident that the other states will also stabilize well with good trend by the end of Q3, and good positive results will be visible by Q4.”
Rakesh Khanna
opening
“OEL won the contract for Srinagar's Smart Lights project under the Smart City program.”
Rakesh Khanna
opening
“In lighting and Switchgear segment, OEL continued to post exceptional growth with three-year CAGR of 10% for Q2 and 9% for H1.”
Rakesh Khanna
opening
“Our strategic Spark project is still ongoing to revamp our processes in GTM, cost excellence and digital business.”
Rahul Gajare
qa
“So, you expect large part of this to be covered in this particular year or you think it is going to be spread through this year and next year?”
Saibal Sengupta
qa
“So, these are the two major strategic investments although travel and others have obviously come back to normal on a Y-o-Y basis will be there, but we are not relevant to that.”
Rahul Gajare
qa
“This is something which one can expect to continue through the year, is it?”
Ankur
qa
“One, you know, on the fans side, you did highlight about this whole dealer destocking given the upcoming BEE transition and as dealers expect price cuts by companies to clear inventory.”
Rakesh Khanna
qa
“I believe this will be short lived, because the volumes will soon pick up, and restocking will happen and the volumes will come back.”
Manoj Gori
qa
“Should we expect the outperformance versus players, other players in the industry probably Q4 or probably in FY '24 from the first quarter itself that should be a significant outperformance?”
Risks & concerns — 13 flagged
The quarter under review has seen a decline in revenue and margins.
— Rakesh Khanna
To start with, the revenue decline is mainly in ECD segment.
— Rakesh Khanna
Lower volumes with high cost inventory and competitive pricing pressure posed stress on margins.
— Rakesh Khanna
However, the execution of long-term strategic plans continued unhindered and incremental investments were made in the quarter towards additional spends Y-on-Y on account of advertisement and brand building and consultancy expenses, which has an impact of 4% of revenue for Q2 and resulting in 34% growth of other expenses.
— Rakesh Khanna
Only in the weak states, we will take these calls.
— Rakesh Khanna
Ankur, it's a little difficult to exactly predict how it will go.
— Rakesh Khanna
From our side, our stock is fairly low, and we have very little pressure to sell the stock at any price.
— Rakesh Khanna
And the last question is, is there any risk that the upcoming summer season maybe a washout given higher inventory with the channel of zero-rated fans, and they may not want to fall short of stock, the new energy rating in Q4?
— Bhargav
No, I do not see any such challenge, because it is only till such time that the previous inventory gets over that people have a wait and watch.
— Rakesh Khanna
What I wanted to check is, is it fair to say that, you know, the states where you are weak in terms of the market share because of the current distribution structure, you are changing it to a direct dealer?
— Achal
Vinod, very difficult, because in case the channel picks up ahead of time and the whole restocking happens end of quarter 3, the channel will carry large inventory.
— Rakesh Khanna
Has industry taken any price cuts during the last quarter because of the decline in the raw material prices?
— Gopal Nawandhar
Difficult to say, because they vary a lot based on different categories, different fans.
— Rakesh Khanna
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Q&A — 18 exchanges
Q
Good morning gentlemen. I have got two specific questions, one on revenue, and one on profitability. On the revenue front, you know, you did indicate the three reasons why the revenue was impacted in this particular quarter. It's part of restructuring and the BEE transition. Typically, second quarter would be low on fans. I was just wondering, you know, do these reasons have such a large bearing on the entire ECD you see a 26% degrowth? That is the first part. And connected with this, you know, when you are talking about the distribution, we started the distribution for a quarter or so. So, ho
Rakesh Khanna
Rahul, can you please repeat only the question part of it? We understand your query on the redistribution. We just missed out on the question part. So, you know, the specific question over here was, you know, with respect to the distribution change that has happened and which has impacted the revenue, you have covered some states already. So, how much in terms of percentage of sales of fans is coming from the states that you have already covered in the distribution revamp? That's the question. So, the states that we have covered account for approximately 25% of the market potential. And that's
Q
Thanks for your time. Couple of questions. One, you know, on the fans side, you did highlight about this whole dealer destocking given the upcoming BEE transition and as dealers expect price cuts by companies to clear inventory. Just trying to understand a little more because this is pretty well-known, right, that starting January this whole BEE transition happens. I am assuming companies would have cut down their production already, right, and maybe moved over to the new rated fans. So, do we really see a big price cut in December to clear inventory? That's one. And when do you see the restoc
Rakesh Khanna
Yes. Ankur, it's a little difficult to exactly predict how it will go. You are right that all organizations are aware about the change, and all organizations must have been preparing. I can talk about us. We have prepared well for change over to the new star. Most of the production from November, December is one star. And however, because of the cost of one star is higher, till such time the zero star is selling. Many retailers would want to continue to buy and sell the zero star. The expectation during such time of changeover is that there would be some who may not plan well, etc. Will the pr
Q
Ankur, did I answer your question in complete or was it you couldn't hear?
Ankur
I think we lost you. We are talking about the zero star being cleared by dealers, and I think then we lost you after that. So, I'm sorry. If you could…… So, we are not really sure, will the restocking happen at the end of quarter 3 or the beginning of quarter 4. But it will definitely happen. We have to just see how the overall market trend happens. We are prepared from our side with the stocks. Should the restocking happen in quarter 3 end or quarter 4 beginning, we are prepared both ways. And secondly, you did also in your comments talk about higher competitive intensity in this segment. So,
Q
queue. Sure.
Management
Q
So, my first question is on this distribution region. Just wanted to know how many more states are under the consideration in terms of distribution in the region, and if you can also give some sense in terms of timing and how much these states contributing in terms of percentage of revenue for us?
Rakesh Khanna
In terms of distribution region, we have taken these states, and we would want to stabilize these states 100% before we pick up the next. There are definitely some more states where our market shares are low. We are definitely trying to improve the market share within the existing system as of now by implementing the good practices that we are placing in these new states, but should the market share not improve, we will pick up the new states. As of now, we have clear plans that till the end of this financial year, we will focus 100% to stabilize these states and gain significant market share
Q
So, my first question would be like in the opening remarks, if I am not wrong, you highlighted like we have gained market share across channels. At the (secondary 00:23:23) level, however, the primary sales were impacted. Is that correct?
Rakesh Khanna
Yes. So, I would just like to understand like if we look at like most of the peer companies have reported their numbers. So, why there was a lag when we were gaining market share, so obviously, others should have been impacted more with us. So, can you throw some light over there? So, as I said, in our numbers, first of all, there is a reduction because of some specific reasons. One, there is a negative sale that we had to recall because of shifting to the new states where we have to take back the stock from the trade. We had blackout period. So, these are the reasons why our revenue is less.
Q
Sir, first question was a clarification on the distribution rejig you mentioned. So, should I assume that the March 23 will be done with the states you mentioned which is UP, Karnataka, AP and Telangana, and then over time we will realize and we will figure out what really happens with other weaker states, and we will take it up sometime in first half of next year? Is that correct?
Rakesh Khanna
The first part of the question, yes, you are correct. By the quarter 4 end, we should be done with these states. We will evaluate the next step if required thereafter. Sir, could you give any indication like number of at least the number of weaker states less apart from these which you have already named? There could be like another five or there could be another two. I would hope that we do not have to go anywhere else if we are able to gain our significant market shares as targeted in the other weaker states also by then. And my last question is, sir, on the fan inventory. Total inventory ob
Q
Thanks for the opportunity again. Sir, given that you mentioned you have a very limited inventory of zero-rated fans. Is it fair to say that the discounting intensity will only reduce as we near December and bulk of the discounting has already been done?
Rakesh Khanna
Bhargav, yes, as far as we are concerned, it will depend on how the competition is well prepared and how much stock the overall industry is carrying. That will decide how much discounting happens. From our side, our stock is fairly low, and we have very little pressure to sell the stock at any price. And the last question is, is there any risk that the upcoming summer season maybe a washout given higher inventory with the channel of zero-rated fans, and they may not want to fall short of stock, the new energy rating in Q4? No, I do not see any such challenge, because it is only till such time
Q
You know, my first question was in terms of the manufacturing, is it fair to say that the non-star is almost negligible now, and all the fans what we are currently manufacturing have the star rating?
Rakesh Khanna
No, Achal. We are manufacturing significant amount of non-star still, because the trade wants it till the December period. But only very fast moving to the extent that the demand is there only to that extent is that being manufactured. A very rigorous planning process is in place so that we do not get stuck with any of the non-star as the transition happens. And you know, in terms of the cost impact, the non-BLDC fans will see a cost impact when they are converted into one, two, three, four stars. Can you help us understand what is the impact in terms of the cost? It depends on different fans.
Q
Sir, just want to ask when we implement this star rating, any thoughts or discussion with the authorities how strictly or how it will be monitored or implemented? And basically, just one fear is that if this is not implemented properly, then there will be a mustering of fake star rated fans, which are not compliant, but which would be lower in the price, and that may dent the organized players. So, just want to understand industry's efforts or your discussion with the authority, how this will be implemented?
Rakesh Khanna
Keyur, BEE star rating fortunately for fans is not being implemented for the first time. There are many other categories where the authorities have gone through the process of learning how to implement. The implementation challenges are there and will remain. However, there are strong processes, which the government has, in terms of ensuring regularly picking up the stocks from the market, checking reaching out to the manufacturer, and taking actions of the manufacturer where it is not as compliant. But yes, there would be challenges, but the government has done a very good job in ensuring tha
Q
Sir, I just need one clarification, like two comments which you made on the call. At one side we are saying there are already, you know, zero star inventory line with the leaders, and we also don't know how the competitions are positioned in terms of zero star, you know, inventory, and there can be a case of we might have to give some discount or the competition might have to give a discount. And in one of your other comment you mentioned you are still producing zero star fans. Just the dealers are asking for it. So, like my main question is, you know, like why are we producing even zero star
Rakesh Khanna
See, till December 31, we, all the manufacturers can sell the zero star. This no star fan, the prices is lower today. So, if some part of the trade wants to purchase the zero star and do not want to start with one star because that the price is higher, one has to continue to supply what the market requires. This will come to an end because if by the end of December we want to be exiting with zero inventory of zero star, and so would everybody else want to exit with that, most players would try to ensure that there is lesser of zero star produced. It's as I said, there is a strong process in pl
Q
And my question basically, sir, this change in the distribution model that we have kind of implemented, is it going to be for our entire portfolio of products and across the entire country or it was going to be like in pockets?
Rakesh Khanna
The distribution through a master distributor is only in fans. And therefore, it is only in fans that we are making this change. In rest of the products, we anyway do not have the master distributor concept. So, this, basically, it will be a same distribution model now for across our entire product portfolio or we will have different distribution models for different product categories? Like what? I have not understood your question. Sorry. No, I am just asking a simple question. Is our distribution model now uniform across the entire product range or it's going to be different for different p
Q
Thanks for the follow-up. Sir, one question on exports. You highlighted some issues there. My understanding is, you know, our best years have been about 100 crore plus sales in exports and largely fans, almost like 7, 8% of total fan sales. Which is the largest geography facing this issue right now? And how long does it take to recover? Or is it already done with and 3Q, 4Q should be normalized?
Rakesh Khanna
These are some states in the African markets where there is the political and economic turmoil, and from whatever we see, some part of the markets may take a little longer, but the larger part we are already started getting those orders back now. So, the reason is that fans is a very basic kind of a product. Even if there is an economic and political turmoil, the basic necessity will remain. And therefore, even if the demand goes down, it will not go abruptly down. It will tend to come back. And lastly, assuming that by March '23, which you alluded earlier, that we are done with most of the st
Q
Sir, you mentioned that the entire, all manufacturers will carry zero inventory of the zero-rated fans by December 31st. In your view, what is the likely channel inventory on December 31st? How many days do you think the channel would be carrying at that point of time?
Rakesh Khanna
Vinod, very difficult, because in case the channel picks up ahead of time and the whole restocking happens end of quarter 3, the channel will carry large inventory. And in case the restocking doesn't happen, and the restocking happens in initial quarter 4, then they will enter with a lot of vacuum. I do not have a clear visibility on that. We will see how the year ends. But I can only tell you, currently, the channel has a huge vacuum and channel will fill up before the season. It will either be end of the quarter 3 or the beginning of quarter 4.
Q
Sir, I have only one question. So, in the states where you are moving from Master distribution to direct distribution, what would be the impact on margins because of this change in that particular state if we want to understand?
Rakesh Khanna
Chirag, there would not be any major impact on the margins, because you understand that there will be increased cost of reaching out to the trade. We do not see any gain in margins. That is likely to be neutral, but we do see significant gain in market share in the areas where we were going, and we see a very strong increase in retailer recommendation rate, the service level increase. That is what is going to be the main differentiator. So, sir, just wanted to know if there is no material change in profitability eventually, and you see increased service levels and improvement in market share.
Q
Sir, just one thing I need to understand is with regards to the transitioning from your zero rating fans to one, two, three and other star ratings, sir, how do you actually envisage the demand moving probably? How was your production planning? How do you see the behavior of channel? And what should be the price differential within star ratings? And accordingly, on a blended basis, how do you expect the realizations to move up?
Rakesh Khanna
So, Manoj, I addressed this at length earlier. I just repeat it for you. First of all, we will stop manufacturing these fans, stop selling these fans from 31st December. We are aware that there has to be a transition, and there is a very strong process in place for planning and ensuring that the transition is smooth, and we are not stuck with any zero star rated. As far as the trade is concerned, the trade can continue to sell the non-star rated products till such time they have the stock. There is a cost advantage with the non-star fans, and that cost advantage is to the extent of anywhere be
Q
I am not sure whether you have talked about this. Has industry taken any price cuts during the last quarter because of the decline in the raw material prices?
Rakesh Khanna
Yes. There are continuously price corrections being given not exactly as a price change, but in terms of schemes etc., some benefits have been passed on, and there would be some price corrections which will come now as the commodity prices have come, and the earlier high-cost inventory is getting liquidated. There will be some price corrections, which will come. Gopal Nawandhar: Can you quantify? Difficult to say, because they vary a lot based on different categories, different fans. Gopal Nawandhar: And what kind of price increase one should expect because of the changes in the star rating? B
Q
Thanks everyone, and thanks management for giving us this opportunity to host this call. Management, any closing remarks that you want to make? Thanks.
Rakesh Khanna
No, thank you, Deepak. Thank you for hosting, and thanks to all the participants for joining and your continued interest. We are very bullish going forward. We believe that the season is going to be good. I want to wish all of you happy festive season and the coming year. Looking forward to a good quarter 3. Wish you all the best.
Speaking time
Rakesh Khanna
52
Moderator
21
Rahul Gajare
7
Ashish Kacholia
7
Ankur
6
Manoj Gori
6
Achal
6
Rahul Agarwal
5
Bhargav
4
Keyur
3
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Opening remarks
Deepak Agarwal
Thanks. Good morning everyone. On behalf of PhillipCapital (India) Pvt. Ltd., I welcome you all to Orient Electric Limited Q2 FY '23 Earning Call. Today we have with us Senior Management represented by Mr. Rakesh Khanna – Managing Director and CEO; and Mr. Saibal Sengupta – Chief Financial Officer. Without taking more time, I would like to hand over the floor to the management for their opening remarks post which we will open the floor for Q&A. Thanks, and over to you, sir. Thank you.
Rakesh Khanna
Thank you, Deepak. Good morning everyone. I am Rakesh Khanna. A very warm welcome to all of you and thank you for joining us for our second quarter results discussion for the financial year 2023. COVID now apparently behind us. Continued global tensions, volatility of commodities and currency, sporadic severity of monsoons and prevailing high inflation, the quarter has seen it all. The quarter under review has seen a decline in revenue and margins. However, a little deeper understanding of underlying reasons gives the confidence of a bright future ahead. To start with, the revenue decline is mainly in ECD segment. Even though we have continued to improve our share in fan segment in every channel, our primary sales took a beating due to following factors. Firstly, there was destocking by trade channel. This had an industry-wide impact, and the underlying reason was expectation of downward price correction by the trade, unpredictability of product mix after BEE Star Rating implementation
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