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Moderator: Ladies and gentlemen, good day and welcome to the Bajaj
Electricals Q3 FY 2011 Earnings Conference Call hosted by Edelweiss Securities.
As a reminder, for the duration of the conference all participant lines will be in
the listen-only mode. There will be an opportunity for you to ask questions at
the end of today’s presentation. Should you need assistance during the
conference call please signal an operator by pressing * and then 0 on your
touchtone telephone. Please note that this conference is being recorded. At this
time, I would now like to hand the conference over to Mr. Rahul Gajare from
Edelweiss Securities. Thank you and over to you Sir.
Rahul Gajare: Thank you Melissa. I would like to welcome all participants on
behalf of Edelweiss to the Q3 earnings conference call of Bajaj Electricals. From
the management we have with us Mr. R. Ramakrishnan, Executive Director; Mr.
P.P. Jathar, CFO; Mr. Lalit Mehta, Executive President, E&P BU. We will have
the opening remarks from Mr. Ramakrishnan after which we will throw the floor
open for question and answers. Thank you and over to you Sir.
R. Ramakrishnan: Hi friends, this is R. Ramakrishnan, Executive Director,
Bajaj Electricals, on the concall. I want to welcome all of you to this particular
conference call. I am very happy to inform you that for Q3 our net sales have
grown by 18.7% to Rs. 689 Crores and the net profit has grown by 19.1% to
Rs. 40.6 Crores. This is for the quarter and for the first nine months of the year
net sales is higher by 22% at Rs. 1761 Crores as against Rs. 1444 Crores last
year for the nine months and the net profit has grown by 8.4% to Rs. 86.4
Crores against Rs. 79.7 Crores in the corresponding period of the previous year.
PBT also obviously has increased by around 8% to Rs. 130 Crores as against Rs.
120 Crores during this period last year. What I am particularly heartened to
inform you is that in the conference call that I had on the last occasion, I had
given some sort of guidance in terms of our various SBUs for the quarter. The
good news is on the revenue front our business units have done exceptionally
well. For the nine months the lighting BU has grown 24%, luminaires BU has
grown 19%, appliance BU has grown 31%, Morphy Richards has grown 42%,
fans BU has grown 42%, so the consumer side of the business has a pretty
good story to tell and the E&P BU has grown by 2%. Now, the good news in this
quarter is even from a margin perspective there is margin expansion in the
lighting business, margin has grown by 26% as far as the quarter is concerned
and in consumer durables there has been a sterling performance. The margin
has expanded from about Rs. 31 Crores last year to Rs. 43 Crores in the current
year that is a 40% improvement in margin. If I keep in mind the severe
pressures on account of unprecedented rise in copper prices almost unabatedly
during the course of this nine-month period I think it is a tremendous
performance put in by the consumer durables business which comprises of our
appliances, Morphy Richards and the fans business. Engineering and Projects I
must say as against about 3% EBITDA margin in Q2 which is something that
really pulled down the company performance during this particular quarter the
EBITmargin has risen to 9.44%. If I compare it to the last year’s same quarter
performance the EBITwas at 11.93% but from a margin compression of about
8% in the last quarter the margin compression is a little over 2% in the current
quarter I had mentioned to the investors in the last conference call that I am
fairly confident of the E&P BU turning in an 8.5% EBIT margin in this quarter, I
am very happy to report that with a careful management of the product mix by
making sure that the products supplies as also the execution happens in a more
careful way we have been able to improve our EBIT margin to 9.44% vis-à-vis
the last quarter which was at 3%. I am also happy to inform you that with an
order book with E&P BU of approximately Rs. 1050 Crores out of which close to
about Rs. 120 Crores is from high-mast, street lights and related products,
approximately Rs. 515 Crores is from the transmission line charge and other
lateral structures and rural electrification is approximately around Rs. 320
Crores and lighting projects is at about Rs. 121 Crores, to this is an order book
of about Rs. 1050 Crores, now with that kind of an order book in this quarter we
have the opportunity to pick and choose. I am reasonably optimistic that the
E&P BU will be able to sustain and probably improve upon this margin level of
9.44% in this quarter in to the coming quarter. The consumer demand on the
whole has been fairly robust in the businesses that we have been in although in
the white goods segment which fortunately we are not in there has there been
some sort of demand compression in the Diwali and post Diwali season. We
have seen very buoyant demand condition whether it be for electric fan or it be
for consumer durable. I am also happy to report that advertising campaigns
that we ran in terms of Bajaj appliances, the Rockstar Mommy campaign, what
we did in terms of Morphy Richards which is Morphy Richards the perfect gift
campaign or the campaign that we ran on Bajaj equals CFL in terms of Chota
CFL Jabardast Roshni, all these three campaigns have been received extremely
well by our trade partners as also by consumers. I think that is one of the
reasons why in this quarter we have got an excellent trigger in terms of
consumer demand. I am fairly confident that in most of the segment that we
are operating in we would have gained market share, we would have improved
our consumer franchise, we would have ensured far greater share in short
whether it be in modern format retail or in terms of traditional retail. The
company’s strategies in terms of the consumer side of the business continues to
be in terms of focus on network expansion; currently we have about 400,000
retailers in our lighting business, about 50,000 retailers in our fans business,
about 40,000 retailers in our appliance business and about 10,000 retailers in
Morphy Richards. We are getting on to a significant network expansion effort in
terms of the rural segments and suburban segment, town classification C and D
if I may say. We are also embarking upon a balanced approach to profitable
growth by driving new product innovation, by looking at strategic sourcing, by
taking specific efforts at supply chain management and in terms of rethinking
our distribution strategy from ensuring better return on investment to our
channel partners and at the same time taking up a significant quality
upgradation and enhancement program. All in all I think it has been a quarter
which against great odds the company has done pretty well. I think with these
opening remarks I will be happy to address any questions that may be there,
but just one little comment in terms of the nine monthly performance in terms
of profitability the net profit for nine months stands at about Rs. 86 Crores
against Rs. 79 Crores last year, that is an expansion of about 8.4% in terms of
net profit and it also represents a strong CAGR of about 44%. I must remind
you that as a company our last five years CAGR is 26% in terms of revenues
and about 44% in terms of profit. At the end of nine months I am happy to
report that with a 22% revenue growth we are at 26% CAGR in terms of
revenues and 44% CAGR in terms of profits. I think all in all it is a quarter that
we can say with confidence that we have achieved what we intended to achieve,
we have built up a platform where in the fourth quarter of the financial year we
hope to build upon whatever success we have achieved in the third quarter and
take it further. I will be happy to answer questions.
Moderator: Thank you. We have the first question from the line of Renu Baid
from B&K Securities. Please go ahead.
Renu Baid:Good evening Sir. Congratulations on a good set of numbers. I have
couple of questions in my mind. First, I would like to have your view on how is
the competitive scenario been in the last three months despite we seeing very
good strong volumes and margins being maintained with improvement in the
consumer goods segment?
R. Ramakrishnan: You see from a demand perspective I would say overall
demand has been pretty good in our segment. We have had extremely buoyant
sales in terms of room heaters or water heating part of the business, I mean
they have done exceptionally well. We completely ran out of stock despite
aggressive planning in terms of the supply chain. If I may give you little more
visibility, even in terms of some extremely competitive item such as water
heaters etc., our growth in the month of December which is a seasonal month
has been about 28%, in a category like room heaters, cumulative for the nine
months we are growing at about 82%, in a category like mixer grinders where
we are a very strong player. For the nine months we are growing at about 32%,
so what I mean even in a category like fans which witnesses very intense
competition sitting on a 40% growth at the end of nine months with the season
ahead January, February, March I think 40% growth and about 34% CAGR
augurs extremely well in terms of our competitive position. What we are doing
is a nice combination of new products, new models, network expansion,
strategic focus in terms of advertising and brand development, the right kind of
presence in terms of modern format retail in terms of promoters and in terms of
visibility and along with that a pretty good advertising campaign to strengthen
the brand and position it appropriately, so I think a combination of all of this has
resulted in very satisfactory performance in the market place, that is the
outcome that we are seeing.
Renu Baid: Sir, you had mentioned initially that we had undertaken certain
rounds of price hikes in select product categories, basically we did not see any
impact on the demand or offtake because of the price hike they were readily
accepted by customer segments.
R. Ramakrishnan: Renu, you know the consumer is not someone who readily
accepts anything in life but I think we need to be very conscious that anything
that we do, we do it in a very calibrated way. So while the cost push has been
intense what we are going to do is in a very calibrated way we will be taking
price increase related decisions and doing it over a period of time. So it is not
that all elements of cost push have been passed on to the consumer in just one
shot. But we have the pricing power, you see today we are clearly a strong
player in appliances, being virtually leaders in the industry whether it be in
mixer grinders or water heaters or irons or oven toaster grillers or small kitchen
appliances we are significantly ahead of anyone else in the market place so that
gives us pricing power. At the very same time, we have done innovation like
Bajaj Platini, we have Morphy Richards at the higher end, so we are able to face
multinational competition not only with the Morphy Richards brand which I am
happy to tell you will be probably a Rs. 110 Crores brand in the current year
from revenue perspective and for a brand which has been in India for six years
to achieve Rs. 110 Crores in its sixth year or so of all-India presence. I think it
is a very, very remarkable achievement.
Renu Baid: Also, recently we had read that Philips has acquired, is looking to
acquire a south indian based home appliance company called Preethi and as we
reckon Bajaj has a sizable presence in southern India so do you think that there
is likely to be any shift in competitive strategy the way the market leaders are
looking in this space, foreign companies are looking the space?
R. Ramakrishnan: Well I do not know whether I should be commenting upon
this but the very fact that Phillips has acquired Preethi what it speaks of is
Philips found Bajaj or Morphy Richards very tough to crack on its own, so
probably they wanted an established brand in order to counter the strength that
we have built up in terms of product range our distribution, our brand strength
etc. To be frank what is not clear is whether the brand will be Preethi or
whether the brand will be Phillips or what it will be. From whatever I have read
in the media the brand is likely to be Preethi and frankly Preethi is a very good
brand, they are clearly the market leader in the mixer grinder segment in the
south but where we compensate is in terms of our pan-India presence. I mean if
you go anywhere in the North East, you go to the seven sisters there and you
will find Bajaj mixer grinders a very solid proposition there in Orissa, in West
Bengal, in Patna, in Jharkhand or wherever. So we have a presence which is all
India and we have a momentum, so I would say good luck to Phillips and good
luck to Preethi, we are not worried at all.
Renu Baid: But then I wanted to understand from this kind of acquisition, is it
that Phillips is now looking at certain mid range segment of the market and
trying to be aggressive in that segment where we are very strong.
R. Ramakrishnan: I think it is better to address the question to Phillips,
unfortunately they are a unlisted company, I do not know whether they will
answer your question but you must understand one thing, if a multinational
company is acquiring a domestic player like Racold in this industry was acquired
by Merloni, the brand continues to be Racold. But today we are the number one
water heater company in the country, so quite frankly it is a pretty complex
relationship when you have multinational acquiring an Indian company; it is a
cultural issue. Now this is not a concall of Phillips or Preethi, so I would not like
to comment more upon that. There are significant challenges of integration,
significant challenges of culture, processes, focus on brands, etc., now how to
retain the cost advantages of Preethi while bringing synergy with Phillips Global
System is going to be a huge challenge. But the fact is mixer grinder is not a
global product in the Phillips stable, so what is it that Phillips can add value to
Preethi but if you ask my comments, these are comments more in terms of my
being a student of consumer durable industry and these are not official views of
Bajaj Electricals on the subject but since you are asking me I am just
commenting upon it.
Renu Baid: Sir, current year we are likely to see E&P just growing modestly by
10-15% and order book also sequentially has been almost flattish, marginal 50
Crore decline, so what is your view in terms of the order pipeline and how do we
look at this segment picking up execution over the next 6 to 12 months and
growth looking forward in this business?
R. Ramakrishnan: I will do one thing. I will pass this question on to Mr. Lalit
Mehta our Executive President of Engineering & Projects Business Unit. He will
comment upon the visibility and after than I will round it off with my own
comments.
Lalit Mehta: Good evening. Well, traditionally the last quarter is always good
for us and this year also I think 45% of our revenues for the year will come in
the last quarter, that is the current quarter. . We have an order book of 1000
plus Crores and the best part is we are very well placed in some of the tenders
and we have just got 12 orders worth Rs. 75 Crores in station lightning
packages which is our strong point, another Rs. 350 Crores of tenders where we
are very well , placed in special projects, cabling electrification, so that is
another strong point and talking as a project manager and not as CFO, we have
66 project sites running on at this stage and we are planning to close 18 of
them in this quarter up to March and another 11 of them by June. The
infrastructure which is spread over 66 sites we will be able to retrieve those
people and establish them in the new site. So almost 40% of the sites will close
down, so our overheads will reduce and I feel that the next financial year will be
very good and the other strong point is that Power Grid for the next six years
have announced nomination tenders worth Rs. 1,10,000 Crores, another Rs.
12,000 Crores worth of BOOM tender, so I am sure even if you get 5% of that
business you know we will be very well placed in the transmission line sector
also.
Renu Baid: But that means we are looking at substantial addition to the order
flows in the next three to six month phase, I mean Rs. 600 Crores worth of
orders?
Lalit Mehta: Traditionally Power Grid invites a lot of tenders but they decide
them in the month of March, so February March is the time when lot of order
flows come in, lot of government department have a tendency to finalize their
orders in March to may achieve their targets.
R. Ramakrishnan: I will just make an additional comment. The good news is
for the E&P BU the fourth quarter of last year was a quarter where the revenue
grew only by 7% whereas their EBIT margin dropped by 22%. Now this year we
definitely see us growing at over 30% in this quarter, so even though the E&P
BU currently has a growth rate of only 2%, we expect to grow higher than 30%
in the fourth quarter and we expect to grow while maintaining the margin which
are at the current levels or maybe marginally improve on the margins. So to
that extent I think that earnings figure for E&P BU will be quite strong and
healthy.
Moderator: The next question is from the line of Mayur Patel from Spark
Capital. Please go ahead.
Mayur Patel: Congratulations Sir on a good set of numbers, just have couple of
questions, number one our gross margins have expanded fairly well sequentially
in this quarter and we have done really good margins of around 13% in
consumer durables. Can you just touch upon what will be the key driver
whether any significant price hike factor or is it because of some inventory at
low cost which was procured earlier or any other factor which is very significant
to this expansion?
R. Ramakrishnan: You see it is actually a combination of multiple things. Very
often, just to give you an idea, I am particularly delighted about the consumer
durables performance before if I look at the third quarter in the previous two
years from 10% it has gone up to 13% and current year we have maintained
13% in consumer durables in the face of very severe pressure in terms of
copper, in terms of aluminium, to an extent plastic etc. Now that is extremely
creditable because when you have such a significant cost push for pursuing
volumes you very often drop margins. I am extremely glad that my units have
consolidated on the margins front, held margins and at the same time delivered
very significant revenue growth of approximately 42% in terms of the third
quarter in terms of the sales performance. So I think segment level consumer
durables have really done us proud in terms of their performance in this
quarter. Also, the third quarter typically sees a favorable product mix because
categories like water heaters, mixer grinders, iron, etc., and also room heaters
where we are traditionally very strong their contribution to the total turnover
increases during this period. Also, the fans BU despite it being winter months I
think has done very well in terms of maintaining growth momentum because
growing in a mature market where we have been consistently gaining market
share we have been the fastest growing fan company in the country if I look at
the last six to seven years, a 40% growth with a 34% CAGR I think augurs very
well. Appliances BU we are clearly the largest small appliance company in the
country with acquisitions; without acquisitions and we are growing at 31% with
a CAGR of about 27%. So I think the business is uniquely well poised and a
yuppie brand like Morphy Richards is growing at 39% with a CAGR of 35% doing
well across categories is another very positive thing.
Mayur Patel: Sir that means product mix is a key factor for expansion in gross
margin this quarter?
R. Ramakrishnan: Actually, four factors, network expansion, product mix,
margin improvement and investment in the brandMayur Patel: Margin
improvement means have we increased prices across segment?
R. Ramakrishnan: Of course we have. You see when I have a cost push I
might have increased my prices to the extent of 60%, 70% of the cost push. I
might not have been able to increase it to the extent of 100% of the cost push,
you can expect further increases that will happen in the coming quarter from
which you know we are able to moderate the growth at the very same time
achieve the profit numbers.
Mayur Patel: My next question is our employee cost sequentially has fallen
from around 38 Crores to around 28 Crores, what would be the key reason and
what kind of employee cost on absolute basis we can expect going forward?
R. Ramakrishnan: Can I hear the numbers again please?
Mayur Patel: In Q2 that means in previous quarter our employee cost was
around Rs. 38 Crores and in this quarter it is around Rs. 29 Crores.
R. Ramakrishnan: You see typically what happens in the July to September
quarter we have our annual incentives and commissions picking in and based on
this performance of various individuals is also the company as a whole, we have
our entire performance appraisal structure designed in such a way that the
incentive and commission are all paid out in the month of July. So to that extent
the hit comes in the second quarter in terms of these things which is quite
significant whereas if you really look at it in terms of employee cost as a whole
the employee cost which was at about 4.29% last year has come down to
4.16% and there is a quarter-on-quarter growth of about 15% in employee
cost. At the same time, for the nine month period, employee cost stands at
about 5.11% this year against 5.22% last year and against 5.37% year before.
So while we are growing and improving, our profits and enhancing shareholder
value we are taking care of our employees but the productivity per person is
also going up.
Mayur Patel: Sir last question on tax rate, this quarter our effective tax rate
was around 32% which is pretty low as compared to 34-35% kind of range we
used to have. Any developments regarding some items which were disallowed
by income tax earlier?
Pravin Jathar: Some of the matters have been decided in our favor and in light
of that there is no need for us to make a higher provision considering those as
disallowance.
Mayur Patel: Then what kind of effective tax rate we should expect going
forward?
Pravin Jathar: Going forward we will always be at the highest tax slab but
there will not be any disallowance?
Mayur Patel: So that means 33-34% is the right range.
R. Ramakrishnan: Unless you can suggest to us ways and means by which we
can do something about it.
Moderator: The next question is from the line of Grishma Shah from Envision
Capital. Please go ahead.
Grishma Shah: Hi, couple of questions. You have spoken about balance of
growth to profitable growth, does that mean that we would first focus on the
profitability rather than aggressively targeting the 20-25% kind of growth going
ahead?
R. Ramakrishnan: We will target 22-25% growth while ensuring a higher level
of profit growth that is as far as the consumer business is concerned. On the
engineering and projects side, fortunately with an order bank of about Rs. 1050
Crores and being well placed in about Rs. 300 Crores worth of future tenders
which are likely to get finalized, I think we have the luxury of being
opportunistic, so we pick up business where we can make money; for the sake
of revenue growth we are not going to compromise in terms of stakeholder
value.
Grishma Shah: Of the 1050 order book that we have currently how much of
these projects would be on the fixed cost basis that means without escalation?
R. Ramakrishnan: On a ballpark basis you see there is high-mast business and
the galvanized business, high-mast and galvanized poles business which is more
or less fixed costs but at the same time the visibility in terms of demand is there
over the next three to six months. The transmission line tower business is there
with a significant amount of price escalation clause, so ballpark if you look at
the entire E&P BU portfolio about 60% has price variation and about 40% is
fixed but that 40% is also low gestation project from a time perspective, so to
that extent we can do hedging in terms of the critical raw material or we can
procure the raw materials and keep it so that we are able to make the kind of
margins that we want to make etc.
Grishma Shah: What is your take on increasing competition in the high-mast
and poles segment considering that the player called Surya Roshni is putting up
a new plant etc., so how are you looking at this?
R. Ramakrishnan: Prima facie, competition is nothing new to Bajaj Electricals.
Very often you could have accused us of getting in to domains of other people
and carving out a very significant market share. I will give you a case in point.
We were a company which about 8 to 9 years ago sold only 25,000 mixer
grinders, now we sell over a million mixer grinders, obviously we have taken
someone else’s share and grown at their expense but on this specific question
we have built up a very dominant position in terms of our high mast and
galvanized poles business. Obviously there are a number of players, new
entrants who see the opportunity and who want to jump in but I must tell you
many of them are taking certain short-sighted calls purely to enhance their
factory capacity utilization, so they are dropping margins and they are losing
money, how long can they sustain it. I certainly do not think they can sustain it
for a very long time going forward but specifically I will request Mr. Lalit Mehta
to answer your question. We normally do not comment upon a specific
competitor, we will answer the question cautiously.
Lalit Mehta: Let me tell you in all the big government departments, even
private players we have a very good reputation. Even if the competitor quotes a
lower price, they ask us why is the difference what is the difference in quality
and whether we can match the price which sometimes we refuse. But so far the
going has been good, we are getting a lot of orders, the new entrants will get
some orders but I think they will be paying a price. When you want to get in to
a new business you will have to pay a price, they have very large capacities and
even to keep that big galvanizing baths running all for 12 months in a year it is
going to cost them a lot of money. We utilize our plant capacity to almost 90-
95% and if the others are able to do only 10 or 15%, you can imagine their
overheads and manufacturing costs as Mr. Ramakrishnan said how long can
they sustain it only time will tell us.
R. Ramakrishnan: I will add a further comment. You see, in the portfolio that
we have in the engineering and project business galvanized and high mast on
the one hand, lighting project, stadium lighting, city lighting etc., on the other
hand rural electrification, for example we are right now lighting up a million
below-the-poverty-line homes in terms of the RE project that we are doing
across West Bengal, Chhattisgarh, Madhya Pradesh etc., now this gives us a
product portfolio where we can really distribute our cost much better. Second,
the capacity that we have set up for galvanizing is spread across high mast
poles and transmission line tower, some players are there who are only in the
high mast space, they are not in the TLT business, some players are there only
in the TLT business they are not in the high mast space, no player is there who
straddles turnkey lighting contracts with rural electrification with power
transmission as well as lighting projects, so I think we are in a sweet pot in
terms of the business that we are in. We are in certain opportunistic slightly
lower margin but high volume businesses at the same time we are in some very
stable brand oriented, execution oriented specification oriented business, so I
will be frank, the proof of the pudding finally lies in terms of not whether these
guys get a job, can they execute, can they maintain quality, can they deliver
value to whoever is paying for that, I think that is where they will falter and that
is where our outstanding execution capabilities as a company will give us a
competitive strength.
Grishma Shah: The next question is pertaining to the lighting BU. I just want
to understand; obviously we have seen the improvement in the margins and the
turnover this quarter. Just wanted to understand what is the way forward now
and how is the competitive scenario like?
R. Ramakrishnan: In lighting business I am pretty happy to inform you in
something like consumer luminaires we have registered a growth of 40%, in
compact fluorescent lamps we are growing at about 20% and a CAGR of about
31%. In terms of the industrial side which is in terms of the luminaires business
which is to deal with street light, office lighting, landscape lighting, retail
lighting there are brands like Trilux and Disano and other brands come in the
good news is the growth is back. You see there was a lag effect because of the
overall economic condition many projects whether it be in the IT space, or in
the construction industry or in terms of commercial offices or in terms of
industrial capacity has got deferred, those businesses are coming and we are
currently growing at about 20% in this business. Now in my opinion the demand
in terms of luminaires will expand with better industrial activity and greater
amount of industrial optimism. On the consumer side, clearly we are stepping in
to some areas like lantern for rural market and torches there is a tremendous
opportunity there and we are exponentially growing and this will also be a
vehicle for our expansion of the retail network and channel, so while competitive
intensity is always there today we are the number three player in the lighting
market and if I look at lighting and luminaires together probably we are the
number two player in the country, that gives us size, scale, competitiveness and
a kind of a distribution trend that is not very easily replicable.
Grishma Shah: Lastly can I know the debt on the books?
Pravin Jathar: Around Rs. 175 Crores as of today and our call is that by March
this should not be more than Rs. 200 Crores.
Grishma Shah: And our average cost?
Pravin Jathar: Today, our cost is less than 9% and most of the debts are being
tied up in March, so even if interest cost raises we do not expect our interest
cost to go up.
Grishma Shah: One more question we did not think of acquiring Preethi
considering that you are also looking out for acquisition?
R. Ramakrishnan: For all we know we might be thinking of acquiring
something better than Preethi.
Moderator: The next question is from the line of Mithun Mehta from Lucky
Securities. Please go ahead.
Mithun Mehta: Congratulations on a good set of numbers. Just wanted to get
some sense on your consumer durable business, currently we are seeing intense
pricing input pressures on consumer durable side despite that we have been
able to get in our margins. Could you just take us through was it because of
price action or there has been a general deficiency in the overall manufacturing?
R. Ramakrishnan: Mithun I am aware that your focus is a little more on our
big brothers from the white good sector but I will just broadly comment. If I
look at the nine month results rather than the quarter numbers you see in 2008
in consumer durables we had 8.3% margin and that expanded to 12.3% for the
nine month period, so there was a 4% point, 400 basis points as you people say
expansion which is virtually huge, in that almost a 50% improvement in terms
of margins, now as against that in this particular quarter we have on quarteron-
quarter compared to last year from 12.4% we have improved it to 13% and
for the nine months we are at 11.42% against 12.28%, so we are held to the
margin improvement despite very adverse cost pressures, see last year the
margins improved because the cost environment was benign, commodity prices
were at record lows, commodity prices, copper for example had come down to
$2500 per tonne, today it is at $9500 per tonne and it is unabated, so I will be
honest with you, is it simply a pass through of pricing effect, you know the
Indian consumer is not an idiot, he is not going to act with a simple pass
through, what we have done is, what we have done is we have come up with
Bajaj Platini, we have strengthened brand Morphy Richards, we have come up
with a lot of product innovation, better features, better performance, a better
brand promise, significantly better retail presence in terms of modern format
retail, far stronger schemes in terms of the traditional trade channel to enable
them to stock and push our brand in preference to others, significant
upgradation in terms of our field based effort, significant rural penetration,
particularly in terms of certain states like Haryana, certain states like Uttar
Pradesh, probably Andhra Pradesh, Tamil Nadu where we are trying to ride the
lighting division channel in terms of let us say super stockists and super
distributors and giving certain products for the rural market through that
channel. You will appreciate that this margin is a very funny thing. It does not
happen for just one reason. It is ultimately a combination of a whole lot of
painstaking effort and I think that is what our team has done.
Moderator: The next question is from the line of Kirti Dalvi from Enam Asset
Management. Please go ahead.
Kirti Dalvi: Good evening Sir, congratulations on a good set of numbers. Few
questions Sir, if you could just give us a broad range how much was the price
rise taken in the last nine months, just a broad range, probably 10-15% across
the board?
R. Ramakrishnan: If we had taken 10-15% across the board I would not be
sitting and taking this concall. Honestly cost pressures have been intense but if
you look at it on a weighted average basis I would say we would have been able
to pass on about a 5% ranging between 4% to 6% across multiple categories.
We do not have the luxury of a 15% increase in cost because it will break the
back or our consumers. We have of course managed to suck out some cost due
to strategic sourcing, due to value engineering, due to significant pressure in
terms of let us say some partners in China from whom we do our procurement.
It is a combination of variety of things. Cost pressures have been high, but it is
not simply a pass through of costs.
Kirti Dalvi: Sir, you just mentioned the debt number, it was Rs. 170 Crores,
what is the gross debt?
Pravin Jathar: It is the gross debt only.
Kirti Dalvi: What is the net debt?
Pravin Jathar: Rs. 130 Crores.
Kirti Dalvi: Sir, the first question would be on the margins. Since we have
already seen our efficiencies in manufacturing as well as brand investment and
in network expansion already resulting in better margin would it be possible to
assume that these margins are sustainable in the fourth quarter as well?
R. Ramakrishnan: I will just try and………You are asking me a tricky question in
the normal course we try not to make forward looking statements but I have
already gone on record as mentioning that the E&P BU will look at over 30%
revenue growth with 10% margin for the fourth quarter. What I am expecting is
the consumer durable side will have a slight change in the margin on account of
product mix because what we do end up selling in the summer months, that is
stocking in terms of the channel price in summer are some amount of sub
economy fans which are obviously at a slightly different price value equation. It
is also the room cooler season and in room coolers you do not enjoy the kind of
margins that you enjoy in say categories like water heaters or mixer grinders,
so there is a certain slight change in product mix, but suffice it to say vis-à-vis
what we have achieved in the fourth quarter of last year there may be a small
drop in margin to the extent of about 150 basis points in the consumer durable
business, may be 100 basis points or 150 basis points but in terms of revenues
we do expect to be able to grow revenues by anywhere between 20-25% in the
fourth quarter of this year. In the lighting part of the business we will be able to
maintain margins more or less in line with last year and we will be able to still
grow at about 22-25% in terms of consumer durables, overall we are looking at
a fourth quarter number of somewhere around 1000 Crores and this probably
with an EBIT margin of 10% or thereabouts.
Kirti Dalvi: Sir, the outlook probably for the fiscal year FY 2012 in terms of the
commodities and the same pressure on our margins?
R. Ramakrishnan: Commodities I think you go and ask God, God himself
cannot tell you what will happen to commodities, from whatever I have been
able to gather commodities like copper are unlikely to remain at the current
level of $9500. I expected definitely to start softening from the later part of this
quarter and is expected to be somewhere in the vicinity of $8000 a tonne
probably in the first two quarters of the next year and that will be having a
salutary effect in terms of margins because whatever price increases we have
taken, we will be able to improve margins as a consequence of it.
Kirti Dalvi: So will we have a huge base impact coming into play next year in
consumer durables as well as lighting probably?
R. Ramakrishnan: Look at our track record, you see we have always had a
base effect. I have a fantastic team of people. I have very good leadership team
who are there focused on continuous value creation and I think higher the base
harder we work.
Kirti Dalvi: Sir, given the current years growth in consumer durables what
would be sustainable growth in FY 2012 which we can anticipate currently?
R. Ramakrishnan: As a company if you really look at it I will be disappointed if
my growth rates in the consumer side of the business are below 22-23%. I
think we should be able to comfortably sustain a growth in that region and I am
usually conservative when it comes to these kinds of forecasts but I think we
have everything going in our favor.
Kirti Dalvi:What is the planned CapEx for this year as well as for the next
year?
R. Ramakrishnan:Well, we have acquired some property in terms of our
offices so there are some advances that have already been paid some capex will
kick in as a consequence, but every year on an average you can take our capex
as about Rs. 15 Crores to Rs. 20 Crores which is manufacturing related or some
office related or whatever and we have enough of profits to be able to fund it
through internal accrual, preferably if these are the last one or two questions I
will be happy.
Moderator: The next question is from the line of Madhuchanda Dey from Kotak
Infina. Please go ahead.
Madhuchanda Dey: Good afternoon, I have a couple of questions. The first
question is there seems to as you had indicated there is a good visibility on the
project business but this quarters order inflow is slightly muted compared to
some of the previous quarters, is it a deliberate decision not to go for lower
margin projects or is it just coincidence?
Lalit Mehta: You see in transmission line business where we get these large
value orders and the main customer is like Power Grid and all, they have been
delaying in finalizing a lot of tenders. Now they will start doing it in the next two
months, so that is one reason and another reason is yes we have already 66
active sites going on, so consciously we are trying to close as many as 18 sites
in this quarter and another 11 in the first quarter of next year because we do
not want to spread our resources very thin and then we can also choose to take
orders which have slightly better margins and which are easier to operate but as
far as our special projects business is concerned we have already quoted for
some Rs. 350 Crores worth of tenders and we are very well placed and our hit
ratio in that business is also pretty good, so we are expecting some very good
orders in that business in the next two months.
Madhuchanda Dey: I have couple of questions on your consumer durables
side, the first is if you could just throw light on the kind of new products that
you are contemplating and my second question is if you could give us some
colour on what is the typical rural urban mix in your consumer durables sales
and my third question is a slightly strategic question, there are lot of foreign
companies who want to do business on their own in India seeing the prospect of
the Indian market, since Morphy Richards has caught on so well as a brand,
could there be a similar thinking on their part?
R. Ramakrishnan: On the new product front we have launched Bajaj pressure
cookers. We have done that in the eastern part of the country and the response
from Bihar, Orissa, Jharkhand and West Bengal, North East has been fantastic.
We have also extended the launch to Pune and Raipur and our pressure cookers
from a quality perspective from the kind of goodwill brand Bajaj has have
proven to be a hit. We are increasing our sales of this in a calibrated way but
that is a new product that we are very optimistic about. Our gas stove has been
received very well and we are penetrating the market nicely and gas appliances
including induction cookers including gas stoves as well as chimneys are doing
pretty well. Going forward the home UPS business is something that will get
some more traction in the current year. In the fans business we have entered
water lifting pumps and we have just launched our DG set in terms of small
application, gas based diesel generating set and the response to that initially
we have done some brand promotion activity, we have done some demo
activities, are also pretty encouraging. In Morphy Richards we have introduced
microwave ovens and like I mentioned to you for the rural market we have
introduced lanterns in terms of the lighting business, so this is my response and
to be frank one segment where there is a large opportunity which we are doing
a lot of technology related work on and lot of innovation work on is the water
business that we are looking at both restanding gravity based models as also UV
and reverse osmosis and other such products.
Coming to the second question that you asked about urban rural split, ballpark
if I may tell you about 15-20% of our business is I would say semi urban
oblique rural, you know we are not like an FMCG company which is rural-rural in
terms of its market focus, so semi urban where there is availability of power
where there is availability of consumer with sufficient money in his pocket to be
able to afford our kind of product that is what we are talking about.
On the multinational question, frankly if you look at it, many multinational
brands have come in to India and gone out. Tefal, Moulinex, and Braun have all
been rather unsuccessful in the context of India and why, they came up with
their international product and simply introduced it in India and as a
consequence they could not repair the product, they could not service the
product and India products are expected to have a lifetime of performance, I
mean in the Indian parliament the fans that we have installed way back in 1947
or 1950 those fans are still running in the Indian parliament and not to mention
many colonial homes, so what I am coming from is being able to offer the right
price value equation, having a large distribution, having a brand that the Indian
consumer can trust and being able to indigenize the technology, to ensure very
good serviceability of the product that is introduced these are critical success
factors, any brand that is able to do all of this is successful and any brand that
fails on even one of these parameters will be thrown out of the market.
Kirti Dalvi: Sir, my specific question is could there be an aspiration from
Morphy Richards side to explore the market by themselves?
R. Ramakrishnan: We have a very long term agreement with Morphy Richards
and we have a very stable, very strong relationship with them and the nature of
our contract is such it precludes any such possibility.
Kirti Dalvi: Very last question is since as you mentioned that at least 80% of
your sale is still urban centric although you as a company are present in an wide
array of products there are pockets of MNC competition in most of your product
ranges, but the products generally tend to be manufactured by the competition
themselves which is different from the outsourcing model that you have, in this
kind of a scenario how do you kind of going forward now that is the product box
is expanding keep a control on the quality of the product and the consistency
that you deliver at a certain price point. What is that you do to ensure that going forward?
R. Ramakrishnan: Madam, this last week I was touring Himachal and visiting
all my vendors. I had my customer care team with me. I had my quality team. I
had my supply chain team with me. Quite frankly it is a very tough and
daunting activity. You know when you have an outsourced model it is a bit light,
but please understand what we are not doing is the physical act of
manufacturing. We do the technology, we do the product design, we do the
specification, and we do the subvendor nomination. We ensure quality processes
with our vendors and subvendors. We supervise it, we monitor and both process
approval as also product approval is an integral part of our quality assurance
process. Every single product with a made in India or made in China is
inspected and approved by our team and that is why from a product reliability
and product performance issue we are way ahead of competition. Anyone can
go with a shopping basket and get product from China or product from Himachal
or Uttaranchal or Hyderabad, the fact of the matter is nobody can give the kind
of product assurance and performance assurance. Every single product of Bajaj
practically comes with a two-year warranty and we have about 270 service
centers and a team of about 1000 technicians who are there all over India to
give service to the customer by and large at his doorstep as well, for products
like ceiling fans and water heaters and room coolers or whatever, so to that
extent that is a very, very strong competitive barrier which not many can pass
through.
Moderator: We have the last question from the line of Achal Lohade from JM
Financial. Please go ahead.
Achal Lohade: Most of my questions are answered, just one thing on the
incremental orders like which particular segment are we targeting in the E&P
space like where is the main focus of the company and how do you see the
margins going forward in light of the rising raw material prices?
R. Ramakrishnan: To be frank with you we have an opportunity in rural
electrification. It is a window of opportunity for two years to electrify nearly 1
lakh villages in India that currently does not have electricity. That is
opportunistic. We will see the margins. We will see the prices we get. We will
assess what is the raw material cost situation and do that business in an
opportunistic way. At the same time galvanized poles, high-mast is core,
lighting projects is core, whatever business we can do, whatever market share
we can gain, what are the competitive barriers we can erect we will do that and
finally transmission line towers will be a calibrated approach towards capacity
utilization moving higher up the value chain, doing projects of greater
complexity and challenge and thereby become a much stronger player in the
power, transmission area in the coming years, that in a nutshell is our strategy.
Achal Lohade: In terms of E&P space what is the current model, is that the
entire fabrication and commissioning work is done by us or we do the
fabrication, we outsource the fabrication work to some extent and do the
commissioning, how does it work Sir?
Lalit Mehta: No, I think we are the only company or one of the only companies
in the electrical field that does everything ourselves right from the design,
procurement, fabrication, testing, commissioning, everything is done in house.
We have a team of over 500 engineers on our rolls and that is a big plus point
over lot of our competitors who outsource these activities and let me add we are
also getting in to substation packages and cabling packages which will be in the
next one or two years that will be another addition to our portfolio of electrical
work that we do.
Achal Lohade: How do you see the working capital movement going forward?
Do we see that lot of working capital getting employed in this particular space?
R. Ramakrishnan: The ratio of the business is such that there is certain
working capital intensity. We are looking at internal processes by which the total
working capital deployment when you look at the manufacturing unit as well as
the engineering and project from a project management perspective is brought
under reasonable control but the fact of the matter is there is a working capital
cycle of about four months or so which is there.
Moderator: I would now like to hand the floor back to Mr. Rahul Gajare for
closing comments. Please go ahead.
Rahul Gajare: Thank you very much for your time in the call and all the very
best for the ensuring quarters.
R. Ramakrishnan: Thank you so much, I appreciate. I thank everyone on the
call. Thank you so much for your support.
Moderator: Thank you gentlemen of the management, thank you Mr. Gajare.
Ladies and gentlemen on behalf of Edelweiss Securities that concludes this
conference call. Thank you for joining us and you may now disconnect your
lines.
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Moderator: Ladies and gentlemen, good day and welcome to the Bajaj
Electricals Q3 FY 2011 Earnings Conference Call hosted by Edelweiss Securities.
As a reminder, for the duration of the conference all participant lines will be in
the listen-only mode. There will be an opportunity for you to ask questions at
the end of today’s presentation. Should you need assistance during the
conference call please signal an operator by pressing * and then 0 on your
touchtone telephone. Please note that this conference is being recorded. At this
time, I would now like to hand the conference over to Mr. Rahul Gajare from
Edelweiss Securities. Thank you and over to you Sir.
Rahul Gajare: Thank you Melissa. I would like to welcome all participants on
behalf of Edelweiss to the Q3 earnings conference call of Bajaj Electricals. From
the management we have with us Mr. R. Ramakrishnan, Executive Director; Mr.
P.P. Jathar, CFO; Mr. Lalit Mehta, Executive President, E&P BU. We will have
the opening remarks from Mr. Ramakrishnan after which we will throw the floor
open for question and answers. Thank you and over to you Sir.
R. Ramakrishnan: Hi friends, this is R. Ramakrishnan, Executive Director,
Bajaj Electricals, on the concall. I want to welcome all of you to this particular
conference call. I am very happy to inform you that for Q3 our net sales have
grown by 18.7% to Rs. 689 Crores and the net profit has grown by 19.1% to
Rs. 40.6 Crores. This is for the quarter and for the first nine months of the year
net sales is higher by 22% at Rs. 1761 Crores as against Rs. 1444 Crores last
year for the nine months and the net profit has grown by 8.4% to Rs. 86.4
Crores against Rs. 79.7 Crores in the corresponding period of the previous year.
PBT also obviously has increased by around 8% to Rs. 130 Crores as against Rs.
120 Crores during this period last year. What I am particularly heartened to
inform you is that in the conference call that I had on the last occasion, I had
given some sort of guidance in terms of our various SBUs for the quarter. The
good news is on the revenue front our business units have done exceptionally
well. For the nine months the lighting BU has grown 24%, luminaires BU has
grown 19%, appliance BU has grown 31%, Morphy Richards has grown 42%,
fans BU has grown 42%, so the consumer side of the business has a pretty
good story to tell and the E&P BU has grown by 2%. Now, the good news in this
quarter is even from a margin perspective there is margin expansion in the
lighting business, margin has grown by 26% as far as the quarter is concerned
and in consumer durables there has been a sterling performance. The margin
has expanded from about Rs. 31 Crores last year to Rs. 43 Crores in the current
year that is a 40% improvement in margin. If I keep in mind the severe
pressures on account of unprecedented rise in copper prices almost unabatedly
during the course of this nine-month period I think it is a tremendous
performance put in by the consumer durables business which comprises of our
appliances, Morphy Richards and the fans business. Engineering and Projects I
must say as against about 3% EBITDA margin in Q2 which is something that
really pulled down the company performance during this particular quarter the
EBITmargin has risen to 9.44%. If I compare it to the last year’s same quarter
performance the EBITwas at 11.93% but from a margin compression of about
8% in the last quarter the margin compression is a little over 2% in the current
quarter I had mentioned to the investors in the last conference call that I am
fairly confident of the E&P BU turning in an 8.5% EBIT margin in this quarter, I
am very happy to report that with a careful management of the product mix by
making sure that the products supplies as also the execution happens in a more
careful way we have been able to improve our EBIT margin to 9.44% vis-à-vis
the last quarter which was at 3%. I am also happy to inform you that with an
order book with E&P BU of approximately Rs. 1050 Crores out of which close to
about Rs. 120 Crores is from high-mast, street lights and related products,
approximately Rs. 515 Crores is from the transmission line charge and other
lateral structures and rural electrification is approximately around Rs. 320
Crores and lighting projects is at about Rs. 121 Crores, to this is an order book
of about Rs. 1050 Crores, now with that kind of an order book in this quarter we
have the opportunity to pick and choose. I am reasonably optimistic that the
E&P BU will be able to sustain and probably improve upon this margin level of
9.44% in this quarter in to the coming quarter. The consumer demand on the
whole has been fairly robust in the businesses that we have been in although in
the white goods segment which fortunately we are not in there has there been
some sort of demand compression in the Diwali and post Diwali season. We
have seen very buoyant demand condition whether it be for electric fan or it be
for consumer durable. I am also happy to report that advertising campaigns
that we ran in terms of Bajaj appliances, the Rockstar Mommy campaign, what
we did in terms of Morphy Richards which is Morphy Richards the perfect gift
campaign or the campaign that we ran on Bajaj equals CFL in terms of Chota
CFL Jabardast Roshni, all these three campaigns have been received extremely
well by our trade partners as also by consumers. I think that is one of the
reasons why in this quarter we have got an excellent trigger in terms of
consumer demand. I am fairly confident that in most of the segment that we
are operating in we would have gained market share, we would have improved
our consumer franchise, we would have ensured far greater share in short
whether it be in modern format retail or in terms of traditional retail. The
company’s strategies in terms of the consumer side of the business continues to
be in terms of focus on network expansion; currently we have about 400,000
retailers in our lighting business, about 50,000 retailers in our fans business,
about 40,000 retailers in our appliance business and about 10,000 retailers in
Morphy Richards. We are getting on to a significant network expansion effort in
terms of the rural segments and suburban segment, town classification C and D
if I may say. We are also embarking upon a balanced approach to profitable
growth by driving new product innovation, by looking at strategic sourcing, by
taking specific efforts at supply chain management and in terms of rethinking
our distribution strategy from ensuring better return on investment to our
channel partners and at the same time taking up a significant quality
upgradation and enhancement program. All in all I think it has been a quarter
which against great odds the company has done pretty well. I think with these
opening remarks I will be happy to address any questions that may be there,
but just one little comment in terms of the nine monthly performance in terms
of profitability the net profit for nine months stands at about Rs. 86 Crores
against Rs. 79 Crores last year, that is an expansion of about 8.4% in terms of
net profit and it also represents a strong CAGR of about 44%. I must remind
you that as a company our last five years CAGR is 26% in terms of revenues
and about 44% in terms of profit. At the end of nine months I am happy to
report that with a 22% revenue growth we are at 26% CAGR in terms of
revenues and 44% CAGR in terms of profits. I think all in all it is a quarter that
we can say with confidence that we have achieved what we intended to achieve,
we have built up a platform where in the fourth quarter of the financial year we
hope to build upon whatever success we have achieved in the third quarter and
take it further. I will be happy to answer questions.
Moderator: Thank you. We have the first question from the line of Renu Baid
from B&K Securities. Please go ahead.
Renu Baid:Good evening Sir. Congratulations on a good set of numbers. I have
couple of questions in my mind. First, I would like to have your view on how is
the competitive scenario been in the last three months despite we seeing very
good strong volumes and margins being maintained with improvement in the
consumer goods segment?
R. Ramakrishnan: You see from a demand perspective I would say overall
demand has been pretty good in our segment. We have had extremely buoyant
sales in terms of room heaters or water heating part of the business, I mean
they have done exceptionally well. We completely ran out of stock despite
aggressive planning in terms of the supply chain. If I may give you little more
visibility, even in terms of some extremely competitive item such as water
heaters etc., our growth in the month of December which is a seasonal month
has been about 28%, in a category like room heaters, cumulative for the nine
months we are growing at about 82%, in a category like mixer grinders where
we are a very strong player. For the nine months we are growing at about 32%,
so what I mean even in a category like fans which witnesses very intense
competition sitting on a 40% growth at the end of nine months with the season
ahead January, February, March I think 40% growth and about 34% CAGR
augurs extremely well in terms of our competitive position. What we are doing
is a nice combination of new products, new models, network expansion,
strategic focus in terms of advertising and brand development, the right kind of
presence in terms of modern format retail in terms of promoters and in terms of
visibility and along with that a pretty good advertising campaign to strengthen
the brand and position it appropriately, so I think a combination of all of this has
resulted in very satisfactory performance in the market place, that is the
outcome that we are seeing.
Renu Baid: Sir, you had mentioned initially that we had undertaken certain
rounds of price hikes in select product categories, basically we did not see any
impact on the demand or offtake because of the price hike they were readily
accepted by customer segments.
R. Ramakrishnan: Renu, you know the consumer is not someone who readily
accepts anything in life but I think we need to be very conscious that anything
that we do, we do it in a very calibrated way. So while the cost push has been
intense what we are going to do is in a very calibrated way we will be taking
price increase related decisions and doing it over a period of time. So it is not
that all elements of cost push have been passed on to the consumer in just one
shot. But we have the pricing power, you see today we are clearly a strong
player in appliances, being virtually leaders in the industry whether it be in
mixer grinders or water heaters or irons or oven toaster grillers or small kitchen
appliances we are significantly ahead of anyone else in the market place so that
gives us pricing power. At the very same time, we have done innovation like
Bajaj Platini, we have Morphy Richards at the higher end, so we are able to face
multinational competition not only with the Morphy Richards brand which I am
happy to tell you will be probably a Rs. 110 Crores brand in the current year
from revenue perspective and for a brand which has been in India for six years
to achieve Rs. 110 Crores in its sixth year or so of all-India presence. I think it
is a very, very remarkable achievement.
Renu Baid: Also, recently we had read that Philips has acquired, is looking to
acquire a south indian based home appliance company called Preethi and as we
reckon Bajaj has a sizable presence in southern India so do you think that there
is likely to be any shift in competitive strategy the way the market leaders are
looking in this space, foreign companies are looking the space?
R. Ramakrishnan: Well I do not know whether I should be commenting upon
this but the very fact that Phillips has acquired Preethi what it speaks of is
Philips found Bajaj or Morphy Richards very tough to crack on its own, so
probably they wanted an established brand in order to counter the strength that
we have built up in terms of product range our distribution, our brand strength
etc. To be frank what is not clear is whether the brand will be Preethi or
whether the brand will be Phillips or what it will be. From whatever I have read
in the media the brand is likely to be Preethi and frankly Preethi is a very good
brand, they are clearly the market leader in the mixer grinder segment in the
south but where we compensate is in terms of our pan-India presence. I mean if
you go anywhere in the North East, you go to the seven sisters there and you
will find Bajaj mixer grinders a very solid proposition there in Orissa, in West
Bengal, in Patna, in Jharkhand or wherever. So we have a presence which is all
India and we have a momentum, so I would say good luck to Phillips and good
luck to Preethi, we are not worried at all.
Renu Baid: But then I wanted to understand from this kind of acquisition, is it
that Phillips is now looking at certain mid range segment of the market and
trying to be aggressive in that segment where we are very strong.
R. Ramakrishnan: I think it is better to address the question to Phillips,
unfortunately they are a unlisted company, I do not know whether they will
answer your question but you must understand one thing, if a multinational
company is acquiring a domestic player like Racold in this industry was acquired
by Merloni, the brand continues to be Racold. But today we are the number one
water heater company in the country, so quite frankly it is a pretty complex
relationship when you have multinational acquiring an Indian company; it is a
cultural issue. Now this is not a concall of Phillips or Preethi, so I would not like
to comment more upon that. There are significant challenges of integration,
significant challenges of culture, processes, focus on brands, etc., now how to
retain the cost advantages of Preethi while bringing synergy with Phillips Global
System is going to be a huge challenge. But the fact is mixer grinder is not a
global product in the Phillips stable, so what is it that Phillips can add value to
Preethi but if you ask my comments, these are comments more in terms of my
being a student of consumer durable industry and these are not official views of
Bajaj Electricals on the subject but since you are asking me I am just
commenting upon it.
Renu Baid: Sir, current year we are likely to see E&P just growing modestly by
10-15% and order book also sequentially has been almost flattish, marginal 50
Crore decline, so what is your view in terms of the order pipeline and how do we
look at this segment picking up execution over the next 6 to 12 months and
growth looking forward in this business?
R. Ramakrishnan: I will do one thing. I will pass this question on to Mr. Lalit
Mehta our Executive President of Engineering & Projects Business Unit. He will
comment upon the visibility and after than I will round it off with my own
comments.
Lalit Mehta: Good evening. Well, traditionally the last quarter is always good
for us and this year also I think 45% of our revenues for the year will come in
the last quarter, that is the current quarter. . We have an order book of 1000
plus Crores and the best part is we are very well placed in some of the tenders
and we have just got 12 orders worth Rs. 75 Crores in station lightning
packages which is our strong point, another Rs. 350 Crores of tenders where we
are very well , placed in special projects, cabling electrification, so that is
another strong point and talking as a project manager and not as CFO, we have
66 project sites running on at this stage and we are planning to close 18 of
them in this quarter up to March and another 11 of them by June. The
infrastructure which is spread over 66 sites we will be able to retrieve those
people and establish them in the new site. So almost 40% of the sites will close
down, so our overheads will reduce and I feel that the next financial year will be
very good and the other strong point is that Power Grid for the next six years
have announced nomination tenders worth Rs. 1,10,000 Crores, another Rs.
12,000 Crores worth of BOOM tender, so I am sure even if you get 5% of that
business you know we will be very well placed in the transmission line sector
also.
Renu Baid: But that means we are looking at substantial addition to the order
flows in the next three to six month phase, I mean Rs. 600 Crores worth of
orders?
Lalit Mehta: Traditionally Power Grid invites a lot of tenders but they decide
them in the month of March, so February March is the time when lot of order
flows come in, lot of government department have a tendency to finalize their
orders in March to may achieve their targets.
R. Ramakrishnan: I will just make an additional comment. The good news is
for the E&P BU the fourth quarter of last year was a quarter where the revenue
grew only by 7% whereas their EBIT margin dropped by 22%. Now this year we
definitely see us growing at over 30% in this quarter, so even though the E&P
BU currently has a growth rate of only 2%, we expect to grow higher than 30%
in the fourth quarter and we expect to grow while maintaining the margin which
are at the current levels or maybe marginally improve on the margins. So to
that extent I think that earnings figure for E&P BU will be quite strong and
healthy.
Moderator: The next question is from the line of Mayur Patel from Spark
Capital. Please go ahead.
Mayur Patel: Congratulations Sir on a good set of numbers, just have couple of
questions, number one our gross margins have expanded fairly well sequentially
in this quarter and we have done really good margins of around 13% in
consumer durables. Can you just touch upon what will be the key driver
whether any significant price hike factor or is it because of some inventory at
low cost which was procured earlier or any other factor which is very significant
to this expansion?
R. Ramakrishnan: You see it is actually a combination of multiple things. Very
often, just to give you an idea, I am particularly delighted about the consumer
durables performance before if I look at the third quarter in the previous two
years from 10% it has gone up to 13% and current year we have maintained
13% in consumer durables in the face of very severe pressure in terms of
copper, in terms of aluminium, to an extent plastic etc. Now that is extremely
creditable because when you have such a significant cost push for pursuing
volumes you very often drop margins. I am extremely glad that my units have
consolidated on the margins front, held margins and at the same time delivered
very significant revenue growth of approximately 42% in terms of the third
quarter in terms of the sales performance. So I think segment level consumer
durables have really done us proud in terms of their performance in this
quarter. Also, the third quarter typically sees a favorable product mix because
categories like water heaters, mixer grinders, iron, etc., and also room heaters
where we are traditionally very strong their contribution to the total turnover
increases during this period. Also, the fans BU despite it being winter months I
think has done very well in terms of maintaining growth momentum because
growing in a mature market where we have been consistently gaining market
share we have been the fastest growing fan company in the country if I look at
the last six to seven years, a 40% growth with a 34% CAGR I think augurs very
well. Appliances BU we are clearly the largest small appliance company in the
country with acquisitions; without acquisitions and we are growing at 31% with
a CAGR of about 27%. So I think the business is uniquely well poised and a
yuppie brand like Morphy Richards is growing at 39% with a CAGR of 35% doing
well across categories is another very positive thing.
Mayur Patel: Sir that means product mix is a key factor for expansion in gross
margin this quarter?
R. Ramakrishnan: Actually, four factors, network expansion, product mix,
margin improvement and investment in the brandMayur Patel: Margin
improvement means have we increased prices across segment?
R. Ramakrishnan: Of course we have. You see when I have a cost push I
might have increased my prices to the extent of 60%, 70% of the cost push. I
might not have been able to increase it to the extent of 100% of the cost push,
you can expect further increases that will happen in the coming quarter from
which you know we are able to moderate the growth at the very same time
achieve the profit numbers.
Mayur Patel: My next question is our employee cost sequentially has fallen
from around 38 Crores to around 28 Crores, what would be the key reason and
what kind of employee cost on absolute basis we can expect going forward?
R. Ramakrishnan: Can I hear the numbers again please?
Mayur Patel: In Q2 that means in previous quarter our employee cost was
around Rs. 38 Crores and in this quarter it is around Rs. 29 Crores.
R. Ramakrishnan: You see typically what happens in the July to September
quarter we have our annual incentives and commissions picking in and based on
this performance of various individuals is also the company as a whole, we have
our entire performance appraisal structure designed in such a way that the
incentive and commission are all paid out in the month of July. So to that extent
the hit comes in the second quarter in terms of these things which is quite
significant whereas if you really look at it in terms of employee cost as a whole
the employee cost which was at about 4.29% last year has come down to
4.16% and there is a quarter-on-quarter growth of about 15% in employee
cost. At the same time, for the nine month period, employee cost stands at
about 5.11% this year against 5.22% last year and against 5.37% year before.
So while we are growing and improving, our profits and enhancing shareholder
value we are taking care of our employees but the productivity per person is
also going up.
Mayur Patel: Sir last question on tax rate, this quarter our effective tax rate
was around 32% which is pretty low as compared to 34-35% kind of range we
used to have. Any developments regarding some items which were disallowed
by income tax earlier?
Pravin Jathar: Some of the matters have been decided in our favor and in light
of that there is no need for us to make a higher provision considering those as
disallowance.
Mayur Patel: Then what kind of effective tax rate we should expect going
forward?
Pravin Jathar: Going forward we will always be at the highest tax slab but
there will not be any disallowance?
Mayur Patel: So that means 33-34% is the right range.
R. Ramakrishnan: Unless you can suggest to us ways and means by which we
can do something about it.
Moderator: The next question is from the line of Grishma Shah from Envision
Capital. Please go ahead.
Grishma Shah: Hi, couple of questions. You have spoken about balance of
growth to profitable growth, does that mean that we would first focus on the
profitability rather than aggressively targeting the 20-25% kind of growth going
ahead?
R. Ramakrishnan: We will target 22-25% growth while ensuring a higher level
of profit growth that is as far as the consumer business is concerned. On the
engineering and projects side, fortunately with an order bank of about Rs. 1050
Crores and being well placed in about Rs. 300 Crores worth of future tenders
which are likely to get finalized, I think we have the luxury of being
opportunistic, so we pick up business where we can make money; for the sake
of revenue growth we are not going to compromise in terms of stakeholder
value.
Grishma Shah: Of the 1050 order book that we have currently how much of
these projects would be on the fixed cost basis that means without escalation?
R. Ramakrishnan: On a ballpark basis you see there is high-mast business and
the galvanized business, high-mast and galvanized poles business which is more
or less fixed costs but at the same time the visibility in terms of demand is there
over the next three to six months. The transmission line tower business is there
with a significant amount of price escalation clause, so ballpark if you look at
the entire E&P BU portfolio about 60% has price variation and about 40% is
fixed but that 40% is also low gestation project from a time perspective, so to
that extent we can do hedging in terms of the critical raw material or we can
procure the raw materials and keep it so that we are able to make the kind of
margins that we want to make etc.
Grishma Shah: What is your take on increasing competition in the high-mast
and poles segment considering that the player called Surya Roshni is putting up
a new plant etc., so how are you looking at this?
R. Ramakrishnan: Prima facie, competition is nothing new to Bajaj Electricals.
Very often you could have accused us of getting in to domains of other people
and carving out a very significant market share. I will give you a case in point.
We were a company which about 8 to 9 years ago sold only 25,000 mixer
grinders, now we sell over a million mixer grinders, obviously we have taken
someone else’s share and grown at their expense but on this specific question
we have built up a very dominant position in terms of our high mast and
galvanized poles business. Obviously there are a number of players, new
entrants who see the opportunity and who want to jump in but I must tell you
many of them are taking certain short-sighted calls purely to enhance their
factory capacity utilization, so they are dropping margins and they are losing
money, how long can they sustain it. I certainly do not think they can sustain it
for a very long time going forward but specifically I will request Mr. Lalit Mehta
to answer your question. We normally do not comment upon a specific
competitor, we will answer the question cautiously.
Lalit Mehta: Let me tell you in all the big government departments, even
private players we have a very good reputation. Even if the competitor quotes a
lower price, they ask us why is the difference what is the difference in quality
and whether we can match the price which sometimes we refuse. But so far the
going has been good, we are getting a lot of orders, the new entrants will get
some orders but I think they will be paying a price. When you want to get in to
a new business you will have to pay a price, they have very large capacities and
even to keep that big galvanizing baths running all for 12 months in a year it is
going to cost them a lot of money. We utilize our plant capacity to almost 90-
95% and if the others are able to do only 10 or 15%, you can imagine their
overheads and manufacturing costs as Mr. Ramakrishnan said how long can
they sustain it only time will tell us.
R. Ramakrishnan: I will add a further comment. You see, in the portfolio that
we have in the engineering and project business galvanized and high mast on
the one hand, lighting project, stadium lighting, city lighting etc., on the other
hand rural electrification, for example we are right now lighting up a million
below-the-poverty-line homes in terms of the RE project that we are doing
across West Bengal, Chhattisgarh, Madhya Pradesh etc., now this gives us a
product portfolio where we can really distribute our cost much better. Second,
the capacity that we have set up for galvanizing is spread across high mast
poles and transmission line tower, some players are there who are only in the
high mast space, they are not in the TLT business, some players are there only
in the TLT business they are not in the high mast space, no player is there who
straddles turnkey lighting contracts with rural electrification with power
transmission as well as lighting projects, so I think we are in a sweet pot in
terms of the business that we are in. We are in certain opportunistic slightly
lower margin but high volume businesses at the same time we are in some very
stable brand oriented, execution oriented specification oriented business, so I
will be frank, the proof of the pudding finally lies in terms of not whether these
guys get a job, can they execute, can they maintain quality, can they deliver
value to whoever is paying for that, I think that is where they will falter and that
is where our outstanding execution capabilities as a company will give us a
competitive strength.
Grishma Shah: The next question is pertaining to the lighting BU. I just want
to understand; obviously we have seen the improvement in the margins and the
turnover this quarter. Just wanted to understand what is the way forward now
and how is the competitive scenario like?
R. Ramakrishnan: In lighting business I am pretty happy to inform you in
something like consumer luminaires we have registered a growth of 40%, in
compact fluorescent lamps we are growing at about 20% and a CAGR of about
31%. In terms of the industrial side which is in terms of the luminaires business
which is to deal with street light, office lighting, landscape lighting, retail
lighting there are brands like Trilux and Disano and other brands come in the
good news is the growth is back. You see there was a lag effect because of the
overall economic condition many projects whether it be in the IT space, or in
the construction industry or in terms of commercial offices or in terms of
industrial capacity has got deferred, those businesses are coming and we are
currently growing at about 20% in this business. Now in my opinion the demand
in terms of luminaires will expand with better industrial activity and greater
amount of industrial optimism. On the consumer side, clearly we are stepping in
to some areas like lantern for rural market and torches there is a tremendous
opportunity there and we are exponentially growing and this will also be a
vehicle for our expansion of the retail network and channel, so while competitive
intensity is always there today we are the number three player in the lighting
market and if I look at lighting and luminaires together probably we are the
number two player in the country, that gives us size, scale, competitiveness and
a kind of a distribution trend that is not very easily replicable.
Grishma Shah: Lastly can I know the debt on the books?
Pravin Jathar: Around Rs. 175 Crores as of today and our call is that by March
this should not be more than Rs. 200 Crores.
Grishma Shah: And our average cost?
Pravin Jathar: Today, our cost is less than 9% and most of the debts are being
tied up in March, so even if interest cost raises we do not expect our interest
cost to go up.
Grishma Shah: One more question we did not think of acquiring Preethi
considering that you are also looking out for acquisition?
R. Ramakrishnan: For all we know we might be thinking of acquiring
something better than Preethi.
Moderator: The next question is from the line of Mithun Mehta from Lucky
Securities. Please go ahead.
Mithun Mehta: Congratulations on a good set of numbers. Just wanted to get
some sense on your consumer durable business, currently we are seeing intense
pricing input pressures on consumer durable side despite that we have been
able to get in our margins. Could you just take us through was it because of
price action or there has been a general deficiency in the overall manufacturing?
R. Ramakrishnan: Mithun I am aware that your focus is a little more on our
big brothers from the white good sector but I will just broadly comment. If I
look at the nine month results rather than the quarter numbers you see in 2008
in consumer durables we had 8.3% margin and that expanded to 12.3% for the
nine month period, so there was a 4% point, 400 basis points as you people say
expansion which is virtually huge, in that almost a 50% improvement in terms
of margins, now as against that in this particular quarter we have on quarteron-
quarter compared to last year from 12.4% we have improved it to 13% and
for the nine months we are at 11.42% against 12.28%, so we are held to the
margin improvement despite very adverse cost pressures, see last year the
margins improved because the cost environment was benign, commodity prices
were at record lows, commodity prices, copper for example had come down to
$2500 per tonne, today it is at $9500 per tonne and it is unabated, so I will be
honest with you, is it simply a pass through of pricing effect, you know the
Indian consumer is not an idiot, he is not going to act with a simple pass
through, what we have done is, what we have done is we have come up with
Bajaj Platini, we have strengthened brand Morphy Richards, we have come up
with a lot of product innovation, better features, better performance, a better
brand promise, significantly better retail presence in terms of modern format
retail, far stronger schemes in terms of the traditional trade channel to enable
them to stock and push our brand in preference to others, significant
upgradation in terms of our field based effort, significant rural penetration,
particularly in terms of certain states like Haryana, certain states like Uttar
Pradesh, probably Andhra Pradesh, Tamil Nadu where we are trying to ride the
lighting division channel in terms of let us say super stockists and super
distributors and giving certain products for the rural market through that
channel. You will appreciate that this margin is a very funny thing. It does not
happen for just one reason. It is ultimately a combination of a whole lot of
painstaking effort and I think that is what our team has done.
Moderator: The next question is from the line of Kirti Dalvi from Enam Asset
Management. Please go ahead.
Kirti Dalvi: Good evening Sir, congratulations on a good set of numbers. Few
questions Sir, if you could just give us a broad range how much was the price
rise taken in the last nine months, just a broad range, probably 10-15% across
the board?
R. Ramakrishnan: If we had taken 10-15% across the board I would not be
sitting and taking this concall. Honestly cost pressures have been intense but if
you look at it on a weighted average basis I would say we would have been able
to pass on about a 5% ranging between 4% to 6% across multiple categories.
We do not have the luxury of a 15% increase in cost because it will break the
back or our consumers. We have of course managed to suck out some cost due
to strategic sourcing, due to value engineering, due to significant pressure in
terms of let us say some partners in China from whom we do our procurement.
It is a combination of variety of things. Cost pressures have been high, but it is
not simply a pass through of costs.
Kirti Dalvi: Sir, you just mentioned the debt number, it was Rs. 170 Crores,
what is the gross debt?
Pravin Jathar: It is the gross debt only.
Kirti Dalvi: What is the net debt?
Pravin Jathar: Rs. 130 Crores.
Kirti Dalvi: Sir, the first question would be on the margins. Since we have
already seen our efficiencies in manufacturing as well as brand investment and
in network expansion already resulting in better margin would it be possible to
assume that these margins are sustainable in the fourth quarter as well?
R. Ramakrishnan: I will just try and………You are asking me a tricky question in
the normal course we try not to make forward looking statements but I have
already gone on record as mentioning that the E&P BU will look at over 30%
revenue growth with 10% margin for the fourth quarter. What I am expecting is
the consumer durable side will have a slight change in the margin on account of
product mix because what we do end up selling in the summer months, that is
stocking in terms of the channel price in summer are some amount of sub
economy fans which are obviously at a slightly different price value equation. It
is also the room cooler season and in room coolers you do not enjoy the kind of
margins that you enjoy in say categories like water heaters or mixer grinders,
so there is a certain slight change in product mix, but suffice it to say vis-à-vis
what we have achieved in the fourth quarter of last year there may be a small
drop in margin to the extent of about 150 basis points in the consumer durable
business, may be 100 basis points or 150 basis points but in terms of revenues
we do expect to be able to grow revenues by anywhere between 20-25% in the
fourth quarter of this year. In the lighting part of the business we will be able to
maintain margins more or less in line with last year and we will be able to still
grow at about 22-25% in terms of consumer durables, overall we are looking at
a fourth quarter number of somewhere around 1000 Crores and this probably
with an EBIT margin of 10% or thereabouts.
Kirti Dalvi: Sir, the outlook probably for the fiscal year FY 2012 in terms of the
commodities and the same pressure on our margins?
R. Ramakrishnan: Commodities I think you go and ask God, God himself
cannot tell you what will happen to commodities, from whatever I have been
able to gather commodities like copper are unlikely to remain at the current
level of $9500. I expected definitely to start softening from the later part of this
quarter and is expected to be somewhere in the vicinity of $8000 a tonne
probably in the first two quarters of the next year and that will be having a
salutary effect in terms of margins because whatever price increases we have
taken, we will be able to improve margins as a consequence of it.
Kirti Dalvi: So will we have a huge base impact coming into play next year in
consumer durables as well as lighting probably?
R. Ramakrishnan: Look at our track record, you see we have always had a
base effect. I have a fantastic team of people. I have very good leadership team
who are there focused on continuous value creation and I think higher the base
harder we work.
Kirti Dalvi: Sir, given the current years growth in consumer durables what
would be sustainable growth in FY 2012 which we can anticipate currently?
R. Ramakrishnan: As a company if you really look at it I will be disappointed if
my growth rates in the consumer side of the business are below 22-23%. I
think we should be able to comfortably sustain a growth in that region and I am
usually conservative when it comes to these kinds of forecasts but I think we
have everything going in our favor.
Kirti Dalvi:What is the planned CapEx for this year as well as for the next
year?
R. Ramakrishnan:Well, we have acquired some property in terms of our
offices so there are some advances that have already been paid some capex will
kick in as a consequence, but every year on an average you can take our capex
as about Rs. 15 Crores to Rs. 20 Crores which is manufacturing related or some
office related or whatever and we have enough of profits to be able to fund it
through internal accrual, preferably if these are the last one or two questions I
will be happy.
Moderator: The next question is from the line of Madhuchanda Dey from Kotak
Infina. Please go ahead.
Madhuchanda Dey: Good afternoon, I have a couple of questions. The first
question is there seems to as you had indicated there is a good visibility on the
project business but this quarters order inflow is slightly muted compared to
some of the previous quarters, is it a deliberate decision not to go for lower
margin projects or is it just coincidence?
Lalit Mehta: You see in transmission line business where we get these large
value orders and the main customer is like Power Grid and all, they have been
delaying in finalizing a lot of tenders. Now they will start doing it in the next two
months, so that is one reason and another reason is yes we have already 66
active sites going on, so consciously we are trying to close as many as 18 sites
in this quarter and another 11 in the first quarter of next year because we do
not want to spread our resources very thin and then we can also choose to take
orders which have slightly better margins and which are easier to operate but as
far as our special projects business is concerned we have already quoted for
some Rs. 350 Crores worth of tenders and we are very well placed and our hit
ratio in that business is also pretty good, so we are expecting some very good
orders in that business in the next two months.
Madhuchanda Dey: I have couple of questions on your consumer durables
side, the first is if you could just throw light on the kind of new products that
you are contemplating and my second question is if you could give us some
colour on what is the typical rural urban mix in your consumer durables sales
and my third question is a slightly strategic question, there are lot of foreign
companies who want to do business on their own in India seeing the prospect of
the Indian market, since Morphy Richards has caught on so well as a brand,
could there be a similar thinking on their part?
R. Ramakrishnan: On the new product front we have launched Bajaj pressure
cookers. We have done that in the eastern part of the country and the response
from Bihar, Orissa, Jharkhand and West Bengal, North East has been fantastic.
We have also extended the launch to Pune and Raipur and our pressure cookers
from a quality perspective from the kind of goodwill brand Bajaj has have
proven to be a hit. We are increasing our sales of this in a calibrated way but
that is a new product that we are very optimistic about. Our gas stove has been
received very well and we are penetrating the market nicely and gas appliances
including induction cookers including gas stoves as well as chimneys are doing
pretty well. Going forward the home UPS business is something that will get
some more traction in the current year. In the fans business we have entered
water lifting pumps and we have just launched our DG set in terms of small
application, gas based diesel generating set and the response to that initially
we have done some brand promotion activity, we have done some demo
activities, are also pretty encouraging. In Morphy Richards we have introduced
microwave ovens and like I mentioned to you for the rural market we have
introduced lanterns in terms of the lighting business, so this is my response and
to be frank one segment where there is a large opportunity which we are doing
a lot of technology related work on and lot of innovation work on is the water
business that we are looking at both restanding gravity based models as also UV
and reverse osmosis and other such products.
Coming to the second question that you asked about urban rural split, ballpark
if I may tell you about 15-20% of our business is I would say semi urban
oblique rural, you know we are not like an FMCG company which is rural-rural in
terms of its market focus, so semi urban where there is availability of power
where there is availability of consumer with sufficient money in his pocket to be
able to afford our kind of product that is what we are talking about.
On the multinational question, frankly if you look at it, many multinational
brands have come in to India and gone out. Tefal, Moulinex, and Braun have all
been rather unsuccessful in the context of India and why, they came up with
their international product and simply introduced it in India and as a
consequence they could not repair the product, they could not service the
product and India products are expected to have a lifetime of performance, I
mean in the Indian parliament the fans that we have installed way back in 1947
or 1950 those fans are still running in the Indian parliament and not to mention
many colonial homes, so what I am coming from is being able to offer the right
price value equation, having a large distribution, having a brand that the Indian
consumer can trust and being able to indigenize the technology, to ensure very
good serviceability of the product that is introduced these are critical success
factors, any brand that is able to do all of this is successful and any brand that
fails on even one of these parameters will be thrown out of the market.
Kirti Dalvi: Sir, my specific question is could there be an aspiration from
Morphy Richards side to explore the market by themselves?
R. Ramakrishnan: We have a very long term agreement with Morphy Richards
and we have a very stable, very strong relationship with them and the nature of
our contract is such it precludes any such possibility.
Kirti Dalvi: Very last question is since as you mentioned that at least 80% of
your sale is still urban centric although you as a company are present in an wide
array of products there are pockets of MNC competition in most of your product
ranges, but the products generally tend to be manufactured by the competition
themselves which is different from the outsourcing model that you have, in this
kind of a scenario how do you kind of going forward now that is the product box
is expanding keep a control on the quality of the product and the consistency
that you deliver at a certain price point. What is that you do to ensure that going forward?
R. Ramakrishnan: Madam, this last week I was touring Himachal and visiting
all my vendors. I had my customer care team with me. I had my quality team. I
had my supply chain team with me. Quite frankly it is a very tough and
daunting activity. You know when you have an outsourced model it is a bit light,
but please understand what we are not doing is the physical act of
manufacturing. We do the technology, we do the product design, we do the
specification, and we do the subvendor nomination. We ensure quality processes
with our vendors and subvendors. We supervise it, we monitor and both process
approval as also product approval is an integral part of our quality assurance
process. Every single product with a made in India or made in China is
inspected and approved by our team and that is why from a product reliability
and product performance issue we are way ahead of competition. Anyone can
go with a shopping basket and get product from China or product from Himachal
or Uttaranchal or Hyderabad, the fact of the matter is nobody can give the kind
of product assurance and performance assurance. Every single product of Bajaj
practically comes with a two-year warranty and we have about 270 service
centers and a team of about 1000 technicians who are there all over India to
give service to the customer by and large at his doorstep as well, for products
like ceiling fans and water heaters and room coolers or whatever, so to that
extent that is a very, very strong competitive barrier which not many can pass
through.
Moderator: We have the last question from the line of Achal Lohade from JM
Financial. Please go ahead.
Achal Lohade: Most of my questions are answered, just one thing on the
incremental orders like which particular segment are we targeting in the E&P
space like where is the main focus of the company and how do you see the
margins going forward in light of the rising raw material prices?
R. Ramakrishnan: To be frank with you we have an opportunity in rural
electrification. It is a window of opportunity for two years to electrify nearly 1
lakh villages in India that currently does not have electricity. That is
opportunistic. We will see the margins. We will see the prices we get. We will
assess what is the raw material cost situation and do that business in an
opportunistic way. At the same time galvanized poles, high-mast is core,
lighting projects is core, whatever business we can do, whatever market share
we can gain, what are the competitive barriers we can erect we will do that and
finally transmission line towers will be a calibrated approach towards capacity
utilization moving higher up the value chain, doing projects of greater
complexity and challenge and thereby become a much stronger player in the
power, transmission area in the coming years, that in a nutshell is our strategy.
Achal Lohade: In terms of E&P space what is the current model, is that the
entire fabrication and commissioning work is done by us or we do the
fabrication, we outsource the fabrication work to some extent and do the
commissioning, how does it work Sir?
Lalit Mehta: No, I think we are the only company or one of the only companies
in the electrical field that does everything ourselves right from the design,
procurement, fabrication, testing, commissioning, everything is done in house.
We have a team of over 500 engineers on our rolls and that is a big plus point
over lot of our competitors who outsource these activities and let me add we are
also getting in to substation packages and cabling packages which will be in the
next one or two years that will be another addition to our portfolio of electrical
work that we do.
Achal Lohade: How do you see the working capital movement going forward?
Do we see that lot of working capital getting employed in this particular space?
R. Ramakrishnan: The ratio of the business is such that there is certain
working capital intensity. We are looking at internal processes by which the total
working capital deployment when you look at the manufacturing unit as well as
the engineering and project from a project management perspective is brought
under reasonable control but the fact of the matter is there is a working capital
cycle of about four months or so which is there.
Moderator: I would now like to hand the floor back to Mr. Rahul Gajare for
closing comments. Please go ahead.
Rahul Gajare: Thank you very much for your time in the call and all the very
best for the ensuring quarters.
R. Ramakrishnan: Thank you so much, I appreciate. I thank everyone on the
call. Thank you so much for your support.
Moderator: Thank you gentlemen of the management, thank you Mr. Gajare.
Ladies and gentlemen on behalf of Edelweiss Securities that concludes this
conference call. Thank you for joining us and you may now disconnect your
lines.
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