Bajaj Electricals Limited (500031) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to Bajaj Electricals Limited Q2 FY '20 Earnings Conference Call hosted by AMBIT Capital. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Dhruv Jain from AMBIT Capital. Thank you, and over to you, sir.

Thanks. Welcome to the 2Q FY '21 Earnings Conference Call of Bajaj Electricals. From the management today, we have with us Mr. Shekhar Bajaj, Chairman and Managing Director; Mr. Anuj Poddar, Executive Director; and Mr. Anant Purandare, President and CFO. Also, we have with us Ms. Pooja Bajaj. Over to you, sir, for your opening comments.

Good evening to you. Can I start?

Yes, sir, you may.

Okay. So welcome to this conference call. I'm sure that you must have seen the results, and it looks very exciting. We are also very excited that from a level of minus INR 29 crores, we are at plus INR 72 crores for the CP business, and it is something where from 4.7%, our EBIT has gone up to 10.7%, which is very, very exciting. But I must mention that this is not a sustainable number, so that you don't do a multiplication and add the next 2 quarters on this basis. So I thought that it's important to clarify that this is not a sustainable one because we knew there is a supply issue and all. So in the second quarter, we've cut down our publicity substantially, which from third quarter onwards, already October onwards, we have started up brand-building publicity. So there will be a major publicity cost. Many expenses which did not incur in the second quarter will be incurred in the third quarter. And therefore, we can still expect, compared to last year, improvement about 1% in spite of lockdown, but I don't think it's going to be anything around 10%. It's not likelihood. So that is very important to understand so that the expectations are more realistic. Coming to EPC business also, we are very fortunate that many of our old projects, which were incomplete, we completed many Bihar projects, not the UP projects, but Bihar projects which were earlier there. And therefore, lot of retention, which was there finally reversed, and therefore, it improved our bottom line. So therefore the profitability, which has been shown in the second quarter as far as EPC is concerned, also is something which may not be sustainable. So therefore, those 2 things you must note down. One thing is coming out very clear that we are playing very conservative, and that is why for the Bihar projects and all, because when we complete the project, we don't know whether we'll get the payment, whether we'll complete the project on time, so we always keep sufficient provision, and that got completed in the second quarter, and therefore, major reversal has taken place. So that becomes an important aspect to understand that you've got no additional liability that we should expect in the coming years. As far as -- even UP project, we've made sufficient provisions. So I think next 2 quarters, the market is very buoyant. It is going to be more of a supply situation. The demand is very strong. So if we are in a position to improve our supplies, I think we should be in a position to continue our double-digit growth should be very much there. There should be no problem for the next 6 months. There will be a double-digit growth, we'll be able to continue in the Consumer business. EPC business is something where -- as we said, that it depends on -- if we get good business and good margins, we'll take it. If we don't get it, we will not do it just to get the top line or to get a growth. So growth is not the objective as why EPC is concerned, it will be on the basis of margins, on the basis of payment terms, which is very critical, so that our cash flows improve. You must have also seen that our cash flows have substantially improved from a level of INR 2,000 crores last year, that is March of '19. It came down from INR 2,000 crores to INR 1,000 crores approximately in March 2020, and now it is down to INR 500-odd crores, INR 550 crores or so. So that's a substantial improvement, which is taking place. And therefore, our interest cost previous year has gone down to 50% of the previous year. In the first half also is -- again, this second quarter also against INR 47 crores, which has gone down to INR 22 crores. So in every respect, our balance sheet is much better. Outstanding is much better. And also we are continuously working to see that we get further collections from our pending outstanding. So once that gets cleared, then CP business is doing well, there's no financial problem there, margins are okay. There's also one other aspect which we have to just keep in mind which may get -- impact us the 0.5% to 1% is that the raw material prices have started to go up. And with that, maybe we will not be able to pass on all to the marketplace. So that can also impact our margins. So these were my opening remarks. Anuj, would you like to add something?

Yes, sure. So I'll just add a few points to what the Chairman has said, put it in the context of what we've been talking about earlier to all of you. This is -- I think I'm very pleased with our Q2 results. And this, frankly, is a continuation of the largest strategy that we've been following since last year, and that was both driven by balance sheet focus last year, but with an intent to then see the benefits in the P&L this year. So it's 5 or 6 headline points. I will not repeat the numbers as you all have the numbers. Number 1 is our focus on the consumer products business and growing that. We're seeing the benefits and results of that right now at about a 13% growth in Consumer business. I think the demand is clearly there as we are probably picking up in the market. But the real focus for us has to be -- has been to service that demand. The supplies has been the biggest constraint in the last few months and the companies that have managed to service that demand effectively are the ones benefiting on top line and bottom line, and that's been our current focus and continues to be a focus in Q3 also to take advantage of the marketplace. Point two, there is very sharp improvement in profitability or margins at all levels. The Chairman has already spoken about that. There's a couple of points there that this incidentally is the highest ever quarterly profits for our consumer business for our company. And that's in absolute terms. In margin terms, in percentage terms, also this is the highest margin for our Consumer business since 2010. So that's the good news. Having said that, as Mr. Bajaj has already shared, I think Q2 margins will not be extrapolated for the reasons that he mentioned. I'll be happy to dive further into that on a question if any of you have and give you little more color on that. EPC, we benefited by a onetime closure. Having said that, there will be a certain amount of drag and negative or losses on the EPC for another 3 or 4 quarters that we've been maintaining. But our focus remains to keep reducing that loss, while keep growing the Consumer business, so that net out, we are continuing to show growth and positive trends of the company. On the balance sheet, we've already seen the strong cash flow numbers. To break that up further into Q2. Q2 cash flow was INR 322 crores positive on cash flow operations. That's a strong performance. But that, again, is not extrapolated. And I'll be happy to take questions on that. Finally, on the debt figure of INR 559 crores. If you remember our last investor call, that was the guidance we have given for March '21. I'm happy to report that we achieved that in September '20. We will aim to continue to improve on that part. Through those comments, let me take a pause now and open it up for questions, please.

[Operator Instructions] The first question is from the line of Achal Lohade from JM Financial.

Can you hear me?

Yes, please.

My first question is if you could help us in terms of the growth in various categories of appliances, consumer product business.

Sure. So our Appliances have grown by about 14%. The Fans has grown by 20%. Morphy Richards has grown by 12%; and Lighting has been flat, let's say, 0.2%, which is like flat.

Right. And has the growth been fairly even throughout the quarter or you saw the exit being better? And how is the current quarter looking like in terms of the momentum? Has the momentum remained good? Or you're seeing some softness out there?

So July month was slightly negative, single digit negative Y-on-Y. But August and September, the growth has picked up. So we've exited at a good run rate. We've entered the current quarter also at a good run rate. Having said that, Diwali is now next week. So typically, primary sales in October have been very good. We want to see if the demand continues to hold up as strongly post Diwali to see how the quarter will turn out.

Right. You alluded to the supply constraints. So are you talking about supply constraints for us specifically or the industry in general? For us the -- was there any lost sales up for renewal for us in the quarter?

So I think supply issues are industry-wide. Most people and even we at an association level, et cetera, face that or rather talk about it. It has progressively improved every month. So I remember back in June, July or July, August when the sales were coming, we did have significant supply issue. We fixed that month-on-month. But having said that, even September, we did have certain stock-outs come at a SKU level, not necessarily at a category-wide level. But we've had supply constraints. Had there been no supply constraints, our sales would have been even higher. October also has reduced, but has been little. November, I can confidently tell you that we -- from what our current stocking level is, we think we should not have any stock-outs in November at all. So it has been progressively reducing every month. We could have done better in Q2 had it not been for supply constraints. Q3 should be better on that front.

Right. Just last question, if I may. With respect to the margins, you said the EPC margin specifically, there has been onetime reversals. Can you talk about the quantum of the reversal of the provision? And you also said the losses could be there for EPC segment for another 3, 4 quarters. So I was just curious, are we looking at this turnaround getting pushed further to September quarter next year?

So first on the onetime thing, our CFO can confirm. We had about 8 or 9 project closures. These are small projects and non-EP projects. And we've had a margin release of about INR 40 crores or INR 44 crores, if everyone understood that correct. In terms of the turnaround, we are -- irrespective of the margin releases, et cetera, we are continuing to focus on the EPC cost and reducing those losses while we continue to bear that. I think -- and I shared this at the last call, I remember. Initially, we had hoped that post March '21, we should not have losses in EPC. But at that point, I'd shared in the last call that, that will probably go into 2 quarters of the next financial year, particularly because of COVID effect, set us back by a couple of quarters and EPC execution. And unlike consumer demand, EPC execution takes its time. You cannot catch up for that at a faster pace. So to that extent, which is why we believe around September is when we should be able to get out of that. But that's in absolute terms, it should continue to reduce. And we -- if we keep growing consumer, then the net effect should remain in the positive trade side. Purandare, can you just confirm the margin release figure that I spoke about?

Yes, they are around INR 40 crores.

[Operator Instructions] The next question is from the line of Ashutosh Garud from Ocean Dial Asset Management.

Congrats on a good set of numbers. I wanted to understand the growth which we have seen in -- across these appliances, fans. How has the aggregate growth for the market been? And is this purely from market share gains? And if that is the case, when do you expect the unorganized guys come back to normalcy and maybe the normal trajectory coming back on a competitive level and aggregate growth level for consumer durables?

To the first question, aggregate growth at an industry level, I think more or less, we are on par with our top 2 or 3 competitors. There is 1 or 2 percentage point difference between us and a couple of them versus a couple of others are much lower. But I think I will just put that down to slight mixes in product mix, a slight variation in product mix or something that -- what moves, but largely on par at an industry level. I think the difference for us has been at the bottom line level, and that's also been part of our focus. On the market share, et cetera, I think most of us, the top 3 or 4 players and the larger organized players have grown market share, but smaller or the unorganized players we have lost a certain amount of market share during this period, partly because of our ability to turn around supplies and manage this period of the last 5 or 6 months. Will that continue into the future? I don't know. I would definitely hope that we are capable of continuing to do what is right to hold on to the market share gains that we have made. In general, as a management, our aspiration and target remains to outgrow ahead of industry average growth. So at Bajaj Electricals, we will continue to strive for that. And therefore, by definition at least, we hope to continue increasing our market share at least.

[Operator Instructions] The next question is from the line of from Bhargav Buddhadev from Kotak Mutual Fund.

Congratulations team for a very good performance.

Thank you, Bhargav.

First question is in terms of -- is it possible to qualify what is the receivables pertaining to the EPC business as on September 20? And what is the retention amount? And when can this get liquidated?

I will hand this over to our CFO.

Yes. Bhargav, the EPC receivables are -- as of 30th of September are INR 1,720 crores. And out of this, there is a retention money of around INR 660 crores.

And can we expect this retention money to get liquidated in a year's time, meaning whatever is...

See these are across various projects because INR 200 crores is -- pertains to UP projects, around INR 300 crores is related to old rural [indiscernible] 00:17:19 projects and around INR 100 crores is for the transmission line towers. So every -- all these retention measures have different, different due dates for the collection. And they are all, again, linked to the closure of project, close -- financial closure of projects and the retention money. So this will come in the phased manner, so -- will not come everything at one time.

Secondly, I mean, given a very strong cash limitation which has happened and essentially a possibility that some of this can also flow in the next 6 months. Is it fair to say that a year from now, Bajaj Electricals can actually become a debt-free company?

Bhargav, so [indiscernible] 00:18:05 the good news. We hope so, right? Having said that, we have to be, what should I say, balanced in our view. We've managed to over achieve right now in the first 6 months compared to what our full year target was. But let me also tell you why Q3 numbers are so strong. On the consumer side, we have -- we had extended our credit period with most lenders, et cetera, in this period. And our inventory levels had initially gone down because we're selling out everything in a stock out situation. Both of these elements will reverse out with all the vendors extended credit period favors renegotiation that we've done, reverse it out from 1st October. So to that extent, that cycle will normalize in the working capital debt. Similarly on inventory, given the stock-outs, et cetera, that we face, this time, we'd rather hover on side of caution and build up higher stock, so that we do not have a loss of sale situations. I'd rather lead on higher working capital and rather -- and lead sales. And in general inventory by December and onwards starts building up because as you come closer to summer, fans and cooler, you do build that out. My point is that cash flow will read positive but not at this kind of extrapolated numbers. Will we write out INR 550 crores in the next 6 months? Definitely not. Can we do that in the next 4 to 5 quarters? Hopefully, yes.

And lastly, you mentioned in your earlier remarks that this entire gross margin improvement in the consumer business is not sustainable and agreed this is not sustainable because of the savings and the ad spend. But is it possible to quantify what has been the gross margin improvement in the consumer business, and whether that is sustainable or is it possible to improve that going forward?

Yes. So let me answer around on gross and EBIT margin. Our gross margin in consumer has increased Y-o-Y in Q2 from 27.7% to 30.2%, the 2.5 percentage points increase. The gross margin reversing will happen because of the commodity price cycle change. Q1, Q2, we had a downward movement in commodity prices. We had a sharp upward movement since October. So it's actually a trough to what we're using on that, that will lead to an increase in the COGS, that's the gross margin. The second level is the EBIT margin. There it comes into the other elements also that Mr. Bajaj has already spoken about, including normalization of a lot of cost cuts that we've done, advertisement and publicity, A&P et cetera, we will normalize. We've already started spending in Q3, that's a big quarter. But having said that, no, some of the cuts or overhead efficiency that we've delivered, we hope to maintain some of that. We don't want to go back to pre-COVID level overhead in spend. So we will be somewhere in between. So we will seen an improvement in margins, but not to the level we enjoyed in Q2.

The next question is from the line of Renu Baid from IIFL.

Congratulations for the strong results. I missed the initial 5, 10 minutes of the call. So kindly excuse if I repeat couple of my questions. So first question would be, given the strong growth that we have seen in consumer and demand coming back, what would be the broad sense in terms of now looking at growth in the next 6 to 12 months? In addition, the kind of market share gains that we have seen, do we believe a good share of this market share gain should sustain and improve going ahead, given new product launches and revamp and marketing ad spends will queue up for the rest of the year? That's my first question.

I'll see if Mr. Bajaj also answers, then I can supplement.

Basically, I think, before you came in, I already mentioned that these type of margins are not sustainable because there were number of costs which did not incur in the second quarter, plus we cut down publicity substantially in terms of brand building because the supplies were constrained, so there was no logic of spending money when you cannot meet the demand also, which we have started in October. So therefore, to that extent, the margins will come -- it will be better than last year, clearly. But it will be nowhere near 10%, it will be anything 6%, 7% level. I think this is where we may end up at. And as far as growth is concerned, double-digit growth, clearly, I see. If the supplies are better, it may be even better. Anuj, you would like to add?

Yes. So Renu, just the demand question [indiscernible] 00:23:07 question. So the word that's used maximum is pent-up demand. If you look at -- and which means pent-up versus regular demand, right? I think there's another word that people don't talk about, which is work-from-home demand, which is different from pent-up demand. Pent-up demand is simply, during lockdown, people could not go out and buy and therefore they came back in the 2, 3 months post lockdown buy what is pent-up. That part is long over. Now what you're seeing is second cycle of demand, which is the work-from-home demand because people are -- did higher level of gadgetization at home, but now also upgrading the appliances. I think 2, 3 months of pent-up demand, we have another 2, 3 months cycle of work-from-home demand. At some point, that curve or wave will also be over. Then comes back to the normal demand cycle. And the question will be, what is that normal demand cycle going to be. There, I think, my guess is as good as yours. We are waiting to see. Q3 has started well, as I shared earlier on the call, but we're waiting to see what happens after Diwali and if that's rolled out. Somewhere the commentary always has been that rural has done well in the last 5, 6 months. I would like to believe now going forward, urban should also pick up if you see the genuine numbers on COVID or if you see genuine numbers of economy, et cetera, somewhere the economy is kicking in, should see the urban demand also come back. Having said that, what is the level of growth we will see on that, our target internally is first to meet the FY '20 number. So this year, we lost 2 months. But in 10 months, can we reach 12 months of FY '20 number. If you can do that, actually that itself is growth. If we achieve that, then we see actually get growth over and above that, to me that's a bonus. On market share, which I spoke earlier, so I will keep it very brief. As the management, our intent remains to keep growing our market share and go ahead of industry.

What would be the approximate market share gain that we witnessed in the last 3, 6 months?

Renu, that's very general because it varies significantly by category by category. But I would say, all the top 3, 4 players have gained at the cost of others. So right now, we're not gained versus the 3, 4 players, we gained versus the others. I think when things normalize, it comes back to between the 3, 4 players, are we gaining share or not.

Sure.

I'd like to just add. Renu, I'd like to just add that there's a significant fall in the market share of the unorganized players. And therefore, most of the organized players have seen improvement in their sales turnover. So therefore, they must be gaining from the unorganized players because they did not have the supplies. When we had a problem of supply, they would have a much bigger problem, and then dispatch and everything. So that is where, I think, we've gained market share. Whether they will come back or not after a quarter or so, we will have to see. That's a market share gain that we have received.

Sure, sir. And, sir, related to the consumer business, have you guided anything with respect to the ad spend for the second half of the year, given that now we have a strong -- new -- portfolio of new launches in place. So what kind of ad spend do we plan to support that in the next 6 months? Ad spend or ASP spend cumulatively.

So Renu, our original guidance has been that our ad spend ratios will hover between 4.5% to 5% of consumer sales. We've underspent in the first few months, thanks to pandemic and supply situation, but that will normalize going forward. I don't think it's the time to cut ad spend. If the market is buoyant, demand is there and we have a longer strategic objective, we will [indiscernible] 00:26:52 our objectives.

Sure. And sir, my last question would be on this side on Nirlep as in we have started now coming a bit more aggressive on that portfolio also in terms of ASP spend as well as portfolio ramp-up. So if you can give some inputs in terms of initiatives on the portfolio expansion and distribution? And if you have any near- to medium-term targets for this portfolio on the cookware side?

So Nirlep also -- while we don't disclose Nirlep separately in terms of product categories, but let me share that Nirlep has also had very strong growth in the past few months. In fact, Nirlep, more than any of the others, has seen a lot of supply constraint. And our factories been running at far more than 100% capacity. If we could have run it more, we would have seen even more growth in Nirlep. In terms of A&P, you're correct, so Nirlep also is a brand which something that we've supported recently, and we have cut back on air, et cetera the advertisements and that. In terms of portfolio expansion, I don't know if you meant Nirlep specifically or overall. But without -- I can't talk too much, but we are continuing to drive strategic portfolio expansion. We are not expanding or widening for the sake of topline, but we have key focus areas where we will see new launches coming in.

The next question is from the line of Deepak Mehta, an individual Investor. [Operator Instructions] As there is no reply from the current participant, we move to the next question from the line of Riddhima Chandak from Roha Asset Managers.

My first question is regarding our alternate sales channel revenue contribution. So in FY '20, it was approximately 31%, in which e-commerce and government channel contributed significantly. That is 26%, 41%. So now in the first half, what is the current contribution? And going forward, what sort of percentage we are looking at in the consumer channel?

Let me answer that in Q2 because Q1 is an aberration. It's not a good quarter to [indiscernible] 00:29:22 70-30, you're correct. That remains at 70-30 now. In fact, trade is at about 71%. But that's because, if you look at alternate, on the one hand, we had very strong growth on e-commerce. So last year, that was about 10%, 11%. Last quarter, when I spoke, it was about 12%. This quarter, it is about 13%. So e-commerce has grown share. But at the same time, government which is Canteen Stores Department has degrown in absolute terms and MFR has stayed close to flat to slightly low performance. So overall, alternate channels is averaged out at about 29%.

Okay. So going forward, it could remain in this breakup?

I mean, e-commerce will continue to grow very strong. MFR, which in modern retail, will grow stronger for us than it did in the past 2 quarters. Government will remain subdued and will remain negative on the Canteen Stores Department because of -- because of various policy changes at their end.

Okay. And what is the rural and urban contribution breakup?

So rural and urban, we don't publish because we don't have accurate way to measure that. It is very difficult to do that. But it is largely urban for us. Rural growth has been stronger than urban, but the total share of urban remains higher than rural.

Okay. And in the year FY '20, we almost added approximately 19,000 to 20,000 retailers. So it is -- are we focusing majorly on Tier 1 cities in the coming quarters or...

So I think in the last quarter, we've added another 2,000 or 3,000 retailers or retail counters. But for us, given our penetration numbers and reach, the greater focus is to grow SSSG, which is same-store sales growth, and get higher wallet share and higher billing per counter rather than grow number of counters. We're seeing greater benefit and traction in that given where we are at present. So it's a relative point that I'm making. Having said that, of course, we'll keep growing, but relatively greater focus on getting more billing per counter.

Okay. And just one from the information point of view. So our growth is very good during the quarter. So it is -- oh, yes, I know that we are short of supply in some of our broader categories. But is it majorly of volume-driven growth or value driven? Like people -- are people buying more of premium product categories or so? Can you give us some clarity on this?

So for us, it is volume and value-driven growth. One is, there is more demand in terms of volume. In our case, it's not per person spending higher because of them moving up the ladder. If anything, I think, what should I say, there's arbitrage on the lower side on the purchase. But we've also had -- value increase will also come because we've had certain price increases since July/August. So it's more volume combined with our price increases rather than upgrading our products by consumers.

Okay. So price increase in what percentage, 2% to 5%?

No, 2% to 2.5%.

Okay. Okay. Okay, sir. And last question is...

This is not across the board.

Sorry?