Release Date: November 03, 2023
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Orient Electric Ltd (BOM:541301, Financial) reported an 11% overall growth in top line for Q2 FY '24, with fan growth close to 25%.
- The company has successfully doubled its revenues in the direct-to-market (DTM) space, enhancing its product mix and upselling opportunities.
- E-commerce and modern retail routes have shown close to 50% growth, indicating strong traction in these channels.
- Gross contribution margins improved by 400 basis points year-on-year, reflecting better cost management and product mix.
- The company is focusing on strategic levers such as revamping go-to-market structures and enhancing service quality, which are expected to drive long-term growth.
Negative Points
- Profitability remains a concern, with the company indicating that it may take a couple of more quarters to see significant improvements in EBITDA and PAT.
- The Hyderabad project has faced delays due to visa issues for foreign technicians, impacting the expected benefits from this investment in the current year.
- The lighting segment showed only a small growth year-on-year, with significant price erosion in the B2C segment affecting overall performance.
- The transition to direct-to-market in new states may cause short-term disruptions and hurt volumes temporarily.
- The working capital cycle has increased slightly due to higher inventory levels in preparation for the Diwali season, impacting cash flow.
Q & A Highlights
Q: How does the year look like for the second half and outlook for the year? Could you help us understand what have you seen in October from your side?
A: Typically, we do not share information during the quarter. I do have the numbers, but I don't think we are going to be changing what we have done. We will report Q3 at the end of Q3. I have given you indications in line with what we think given last year Q3, how strong it was in fans. So if anyone is looking for very, very large growth in fans, it is not coming in Q3, at least for us. I don't think it will come for the industry as a whole because all of us went through the same cycle of just vacating our -- cleaning up our warehouses and selling all the fans, which as I mentioned, resulted in a huge inventory with the channel, which hit us in Q4. So October numbers, no I'm not sharing at this stage.
Q: Could you provide more details on the gross margin expectations?
A: We are definitely working towards maintaining gross margins in the range of 31% to 32%. Gross margin numbers come from two levers: revenue side and cost parameters. The moment you have a slightly soft quarter and low B2C demand, it tends to bring down the average fan price realized. On cost parameters, we continue to make very good progress. As consumer sentiment improves and we start seeing buying happening at the levels we want in terms of product mix, we will definitely see better margins going forward.
Q: Can you elaborate on the Direct-to-Market (DTM) strategy and its impact on costs?
A: Moving to market directly means spending a little more on people, but those costs are modest in the overall manpower cost. The system at the top has been strengthened well enough where the teams running the DTM market are already in place. The high-cost people are already there, and the operating leverage will come in with the benefits of further deploying the same strategy. Additionally, the margins paid to a master distributor get saved, so the overall benefit on gross margins will be higher than the cost of deploying manpower.
Q: What is the outlook for FY '25 in terms of growth and margins?
A: FY '25 should ideally be a very good year for us, especially once the Hyderabad project benefits kick in. We expect a significant improvement in quality and cost competitiveness, particularly in the TPW category of fans. This capacity will open new market opportunities for us in international markets. We expect robust double-digit growth, although the percentage growth may not look as high due to the growing base. In terms of margins, we should see significant improvements once the Hyderabad project is commissioned.
Q: How do you plan to manage the risk of transitioning more states to DTM while expecting demand recovery on the B2C side?
A: We are very conscious of the risk and are taking a cautious approach. We are transitioning one state at a time and building it up before picking up another. In the next five months, we might pick up not more than two states for DTM. We are mindful of the risk of dislocating ourselves, as we experienced last year when we transitioned too many states together.
Q: Can you provide an update on the Hyderabad project and its expected benefits?
A: The Hyderabad project is a key investment in our ongoing strategy. We expect significant improvements in quality and cost competitiveness, especially in the TPW category of fans. The project will also open new market opportunities in international markets. The lines are automated, which will benefit us in terms of recurring costs and quality. We have internally calculated the benefits, but we will share more details once the project is commissioned.
Q: How do you see the lighting segment revenues going forward, considering the strong traction in Professional Lighting?
A: The price erosion in the B2C segment has been significant, but the Professional Lighting segment is showing strong traction. The price erosion in lighting is difficult to predict as technology changes can make products more affordable. However, the cost savings from technology improvements do not hurt our gross contribution percentage. We will continue to focus on Professional Lighting to offset the price erosion in the B2C segment.
Q: What is the contribution of BLDC and TPW fans to your ECD business?
A: BLDC and TPW fans are growing at high double digits. BLDC fans account for around 15% of the industry level share of business, while TPW fans form about 1/4 of the domestic business. The premium segment, including Deco, contributes around 35% to 40%, which helps in value extraction and margin improvement.
Q: What is the working capital cycle expectation for the year?
A: The working capital cycle is currently around 26 days, which is marginally higher than last year. It should ideally come down as we go through the year, particularly by the end of the year, when inventory liquidation and peak season holdups are neutralized. We expect a considerable reduction in the working capital cycle by the end of the year.
Q: What is the CapEx budget for this year and next year?
A: Our normal maintenance CapEx is around INR 50 crores to INR 60 crores per year, including replacements, technology, and dyes and tools. On top of that, we are doing the Hyderabad project, which is around INR 200 crores. The CWIP in the balance sheet already indicates this. The normal maintenance CapEx will continue to be at INR 50 crores to INR 60 crores level.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
