Crompton Greaves Consumer Electricals Limited analyst Q&A

My first question , I have three questions here. First, can you just summarize the overall demand momentum in the B2 C segment? You did mention that optimism was seen through September and you expect this to be maintained through festive. Are the B2C or consumer offtake head winds which were witnessed over the last 9 to 12 months , you think they are broadly behind? And any more colour in terms of any regional colour in terms of offtake or segments would be helpful here?

Let me clarify it. When we say B2C, we usually mean B2C lighting, so I will clarify that. There may be B2B business as in the rest of our categories.

My question is broadly on the consumer demand and offtake?

So, I just want to clarify first before I answer. So yes, cons umer demand continues to be moderate. This is not a market segmen t where we are seeing a strong bo ost in consumer demand. Now that may be because of inflation, it maybe because people are not spending as much. There are a bunch of reasons. Frankly, I do not think anybody in the market quite understands why this may be exactly so. Having said that, what we have done in order for us to keep ahead of it is to simultane ously also strengthen our premiumisation journey. And strengthen our position in not only developing the go- to-market, the traditional GT, what we call general trade, but developing our e -commerce and rural platforms as well. And that is the reason why you are seeing the kind of growth that you have seen in recent times. I cannot say I am seeing a strong revival in consumer demand yet. Yes, there is some up tick that we are seeing because of festive season, but that is a simple uptick that you see every year. It is a little later this year than it is every year.

Got it. Second question on the fans and ECDs where fans has come back very strongly with respect to volume growth , while most of the other p eers are still grappling from a higher base and slower offtake in the market. So, this kind of volume growth, do we think should be broa dly sustainable over the second half and incrementally moving how do we look at the share of premi umisation in the fan’s portfolio over the next 12-18 months?

So far as higher base is concerned, I do not think that our base was lower last year.

Absolutely. I think first of all , as you know, we do not want to give any forward guidance in terms of what we are trying to achieve in the coming quarters. See, as we talked about, we are looking at an opport unity to grow fans category across various divisions. Fundamentally, one is premiumisation. Maybe compared to the industry, our share of premium to the portfolio is probably on the lower side. So, there is enough headroom available for us to grow on th at segment and try, which is something that we have been consistently executing on ground and we are starting to see results of that when it comes to premium fans. We also believe there are categories within fans like the table, pedestal and the wall category, which is an opportunity that has not been tapped by us. We have started actions around it, and we are seeing good amount of growth coming in from that also. Coming to the core fans, which is our value segment that we operate in, the re we do see it is something that we will move along with the industry trend. I do not think that w e would be differentiated from there. Wherever there are opportunities on distrib ution and penetration, we continue to address that. That is on the brand product side. Channels also tend to play a very, very strong role in this, as Pr omeet was earlier referring. We do see consumer preferenc es are now slowly moving away from general t rade and it is becoming broad based into channels like e - commerce, channels like modern trade and RCS (Retail Chain Stores) . Our execution opportunity remains very, very high in those areas also. A combination of these four or f ive initiatives, we think there is good headroom available for us to look at the future in terms of how fans as a category can do.

And so far as the channels are concerned, it is a very interesting thing. Our understanding is that a large number of people who look at fans on the e-commerce space, eventually go and buy the fan on the GT, on general trade. So fortunately, we have the strengths that we have on GT. We are building up our strengths on the e -commerce as well. The reverse is more difficult to do as you can imagine. So, we are filling in some of the gaps perhaps that we have had in the past.

And just last question, w hile the Butterfly demerger is now called off, can you help quantify the targeted savings both in terms of the net savings, probably in terms of cost and r evenues that you were expecting for the parent company Crompton and I know getting earnings accretion could be even challenging in fiscal '25 if demand looks so. But how is the way forward in terms of synergies coming in from Butterfly?

One of the things Renu we called out as part of Crompton 2.0 is we have been very good in identifying savings that are above the gross margin via the Unnati programme that we have now been consistently driving for about five, six years. What Butterfly gave us an opportunity is to lo ok at our costs below gross margin. So, we talked about the entire pool of indirect costs , which we have about say Rs. 800 crores sitting in there , which is what we shared when we announced the Crompton 2.0 strategy. We think Crompton and Butterfly coming together i n this area, there is a good headroom for us to look at 7%, 8%, 10% cost reduction on that base, which would start evolving as we close this fiscal and move into early next fiscal. Now largely w e think there are opportunities in warehousing and logistics. There are opportunities in after -sales-service, etc that we are looking at. So , all those things continues to stay. We do not think any of those things were tied into a legal merger. And to give you a little bit more colour from the time of Butterfly acq uisition to now, there were two tr acks that were running in parallel. One is an operational integration of Butterfly with Crompton in spite of a legal merger that we need to do. And the last six months when we announced the intention to merge the company , we opened up a legal track house. So the operational integration track continues , where also prima fac ie focuses on the revenue and cost synergies that we need to get together for both t he organisations and both the shareholders which we do not think so will get significantly hampered by the merger now going through.

Got it. Thanks so much.

Next we have a question from Mr. Keyur Pandya from ICICI Prudential Life Insurance . Please unmute your line and go ahead with your question. Thanks.

The question is on the ECD sales. So , the kind of growth that we have seen with the other players versus the growth we have seen in Crompton, is this in line with secondary or tertiary sales or this is more of stocking for the channel? I just want to understand this and in second half of previous year, I think the commentary was that the company did not push the non -rated fans. In that context, should we outperform in second half also versus the industry? Thank you.

So, Keyur, as we said, we do not want to provide a forward guidance on what would our s econd half could be. We continue to strive and do the things that we talked about for each of the categories we talked about earlier . Let it be fans, applianc es, pumps, or kitchen for that matter including lighting. Now as far as the channel is concerned, you wou ld see that the growths are divided into two buckets. Our alternate channels that outperform significantly and these are largely consumer offtake driven channels like a modern trade or regional chain store or for that matter e -commerce, which is phenomenal ly almost doubled our business in e -commerce as compared to the same time last quarter. So, I do not think so there is a sto cking that comes in here. GT works in line with the market, it is not that you need to look at a significant fill -in that happens . We have been following the market trend as it happens and we would see we a re already seeing good festive moment um happening in October. Let us see how does that move forward as we close the quarter for Q3.

Fair enough. Just one follow -up on this. So basically , there is nothing abnormal in this growth as you mentioned just the breakup of GT, modern retail and e -commerce either for ECD or for the company level as a whole, any broad numbers for this breakup?

We do not give a channel mix split, Keyur. We would see that maybe we are going let's say 2x in alternate channels compared to our GT business.

Understood. Last and second question is on the raw material side. Now have we seen the worst in terms of raw material, now it is up to the company whether the benefits are passed on or retained , but directionally should we see things improving as far as p rofitability is concer ned? Just raw material as well as improving mix ? So raw material getting favourable and improving mix towards premium. Should we assume, that profitability should improve?

See the fundamental strategy that we talked about in Crompton 2.0 states, w hich is as an organisation, we want to drive growth by reinvesting back into business towards marketing, innovation and premiumization - that should provide us a sustainable revenue growth and a sustainable margin model for us. Keeping that as the base, the way we would look at this on the two questions that you have raised, one is on the raw material prices. Interestingly, the categories that we operate in, while there is a commodity play into it, there is a lot of regulatory impact that comes in. Let it be the regulator y changes that we are seeing in fans or the changes that we have to go through in geysers etc in the past. It means that post BEE transition, while the commodity super cycle is over and it is moving into a stabilisation mode, the cost increase that we have to absorb on account of BEE rating is yet to be fully passed on. And we think as a market leader, it is important that apart from the cost actions, we also need to take price actions. That is where you have seen us doing o ne round of price increase already in the month of September. As the demand scenario develops through festive and we get better clarity, we may have to look at a couple of price actions further in the coming quarters also, beyond the other cost benefits that we need to see where it is. So, in a nutshell, the way we need to look at this, at what level the ECD portfolio margin needs to stand at. And we think structurally, there is a headroom to improve on account of the regulatory cost their increases being recovered either throug h price or cost action that needs to be done. Beyond that, we want to focus on investing behind the brand and driving growth. That is the way we would look at it. Yes, obviously, premiumi sation will help us in driving share of profits. T he profit pool with premiumisation is always higher at an absolute level as you compare to a non -premium category. But also, you need to keep in mi nd that a premium category is going to be innovation led and that is a consumer innovation led, which also gives us an opportunity to invest behind the brand to take the brand to the next level. So it will be a calibrated call as to how do we balance growth and profitability and ensure that the absolute profit growth comes in.

Understood. Thanks a lot and all the best. Happy Diwali.

Next we have a question from Rahul Gajare. Please go ahead with your question. Thanks.

This is Rahul Gajare. So, I have one question on your built -in appliances. In this particular quarter, you did report an EBITDA loss of about Rs. 6.5 crore on a revenue of Rs. 14 crore. Could you give us a sense on the total EBITDA loss that you have done in the first half? If I were to adjust for this, your other business is not as bad as what it appears because of this loss. So some financial number s on this will be helpful. And connected with this, while you ar e in the midst of transitioning to Crompton 2 .0, could you also highlight if you have plans in the built -in ap pliances to add more product category in this specific basket? Thank you.

So Rahul, allow me to state by saying results are always comparative i n market and good or bad does not happen b ut what you choose to do in one category. Wi th that, I think total losses that we have incurred at H1 level on a built -in kitchen is about Rs. 14 crores. Structurally, the gross margin of this business is in-line with what we do in other ECD categories. So the unit economics are being built in a strong manner. It is also important that we invest be hind this business to get the pene tration up over a period of time. It is also a funnel approach wh ere you get your customers through a combination of organic and inorganic route, which means it is at a si ze where you do not want to do too much on brand awareness, but you need to calibrate how much you want to spend behind the brand also, which is where you see the upfront investments that we need to make into the business is going towards losses, which we think will continue for a few more quarters before the scale helps it to start making money as a product category and channel. Now, in terms of the overall product additions that we can do into the entire built-in kitchen, I think we are looking at two-pronged approach. One is how can we first improve the t ouchpoints even before getting into the product? The channel opportunity as we talked earlier, we have already opened a 75 th exclusive signature store. What we also need to keep in mind is do not see built-in kitchen appliance as a standa lone business of Crom pton. Look at an opportunity for Crompton to start commanding and selling premium products to the ir consumer. Prior to having this entire category operated, it would have been very difficult for a consume r to relate to a brand like Crompton selling a product that is upwards of Rs. 20,000-25,000. Now, probably we are moving towards one of the fastest to get an annual run r ate of Rs. 100 crores in this segment that also means consumer acceptance , that states as to premiumisation as a strategy that you are workin g up, resonates extremely well with the market. So that's the second benefit that we are trying to get in. Third, outside the EBOs, we are also looking at touch points within modern trades and RCS for the category to expand and move. That is on t he c hannel side. On the product side, yes, within the category that we are playing in built-in kitchen itself, we are looking at new initiatives to come in. It will be a combination of refreshing the product portfolio, what we are having today with better features, and adding few new sub-categories also within the built-in kitchen space.

Fundamentally, to your questio n, Rahul, the answer is yes, we are incubating a new business for good reason. We believe th at it has contributed Rs. 15 crores EBITDA loss in the first quarter. And needless to say, the profitability of the rest of t he businesses is what it is, excluding tho se Rs. 14 crores. And we think it is a good investment to make.

Sure.

Next we have question from Abhilasha Satale. Please go ahead with your question. Thank you.

So, my question is on ECD margin outlook. So , as you have mentioned that the lower margi n is largely because of the channel mix change and that is what has impacted to a large extent. Going forward, how do w e see your channel mix like do we see this 2x growth in alternate channel to continue and therefore, we might face margin pressure in th e near-term and then improve there on. How do we see our near-term margin outlook and long-term? And secondly, if I just exclude this channel mix, whatever the impact on the margin for GT channels, are our margin same what we were making previously or there also we have seen some kind of erosion?

Abhilasha, allow me the opportunity to correct you. Channel mix has got nothing to do with the ECD margins coming down. ECD margins is largely on account of structur al shift in the product cost of fans, which is due to the BEE regulatory changes that has been brought in. So that has led to incremental input cost that we need to factor in to make a fan that is star rated, which was introduced from 1st of January. So we are in the process of fi guring out what is the optimal level of price increase and cost decrease we need to work upon to restore our ECD margins over the period of time. So, as we cross over some of these milestones in the respective quarterly meetings we wil l call out all the progress that has been made on this.

So Abhilasha, we have been doing this for a whil e that we worked quite hard at dealing with cost pressures quite successfully , particularly at the gross market level. There was a bit of a s tretch because of the BEE transition and we are in the process of being able to recover that through internal cost actions as well as through price increases which we talked about. It is not related to a change in GT versus other channel mix.

I do not want to give a forward -looking number there, Abhilasha, but I mean I think it is fair to say that we are actively engaged in this process and over a perio d of time we have talked about Project Unnati, for instance. We have been reasonably successful in neutrali sing cost increases. So I do not know, but if you have any question about whether we hope to continue to step up our alternate channel, yes, absolutely. We have a strength in GTM and we are going to continue to step up our alternate channel reach.

Thank you. Next, we have a question from Mr. Ajit Motwani. Please go ahead with your question. Thanks.

So, one is the question on the regulatory cost that you highlighted, that the BEE rating had impacted the regulatory cost and that sort of nullifying the benefits of commodities. As you know, more than six months that these things came in, so what would have been the price increases or let's say the net impact that you are yet to recover from regulatory costs in creases, and as far as sm all domestic appliances and fans are concerned, how is the festive season started for us which you can highlight? As far as the small domestic applia nces are concerned mixer grinders, water heaters as well as the fans category, how is the festive season started for us?

So first and foremost on the margin side when we moved in to the entire BEE transition, roughly the cost increase was about say 15% on account of the energy rating transition that we need to meet up with. About 8%-9% percentage of that has been met with the cost decreases and the value engineering work that has been done. Industry as a whol e, as you would remember early in last Q3, everybody called out for a price increase that will be taken in the range of 5 %-6% effective January post-energy rating. But as we have seen the demand scenario that it has panned out in the last two, three quarters, it has been pretty difficult to do any kind of pricing actions. Either many organi sations have rolled it back or held back the entire price i ncrease that they are to take in. Now, as we move forward probably two to three quarters down from the entire BEE rating, we believe from a unit economics perspective, we need to balance both price and cost increase. So we had announced roughly about a 1% price increase to 1 .5% across the portfolio in the month of September , that has factor ed in. We are now also working upon further cost decreases that we can do via the Unnati programme that we are working upon. And outside that it might warrant one or two more price increases also, which we are open to take it up to get the margins restored. In terms of festive demand, October has been positive. We could see there has been an uptick in terms of October's momentum, but we will see that more as the quarter gets completed as orders pan out.

We have one question on chat box from Mr . Bhavin Vithlani which I will read out. Could you please help with breakup of ECD divisions, absolute revenue numbers for Q2 and H1. And YoY growth for A. fans, pumps and appliances ; and B. break up of appliances into w ater heater, mixers and air coolers? Thanks.

We will ask Natasha to share the data by portfolio and that might be helpful for us.

To the extent that we disclose, please connect with Natasha for those details.

So next we have a question from Mr. Siddhartha Bera. Please go ahead with your question. Thank you.

What I understood is that there is a 3 % to 4% under recovery in the cos ts like you have mentioned where we need to do some more price increase or cost reduction. So after doing this say in some time, what is the margin level we aspire to owe back to? Will it be closer to 16 or it can be higher than that given that we had delivered even better margins in the past?

So I think Siddhartha, fundamentally as you rightly pointed out, we talked about the action that we are going to work upon continuously on the fan segment to improve the margin and how do we need to recover it. At the end of the day when it comes to EBIT margin delivery, we need to look at Crompton as an organi sation that needs to deliver revenue growth and that is fundamental. And therefore, it is extremely important that we balance our revenue growth versus our profitability growth which is when we said the revenue growth is not at the cost of price or cost actions, it is going to be investment behind the brand and we need to have innovation. So, we talked about premiumisation as a driver. We have talked about progress that has be en made in fans as a category on the premium growth. Now this is coming in only with interventions being made with products that are coming in from our tech cent re with consumer insights and not only led b y competitive intensity. Second, it also means tha t that product that is going into the market needs to be backed by stronger brand communications. That is why if you see H1 as a whole, m arketing spends have gone up by 50%, so that is a significant amo unt that has been put behind the brand to drive the growth engine up. So we do not want to get into a near -term EBIT margin guidance. As we talked about, we are conscious of the fact that we n eed to grow the business and deliver profit growth rather than profitability expansion. But in the journey of profit and p rofitability, structural unit economics would not be left behind, which is why we are reiterating that in spite of the growth agenda that we are working upon, we need to restore our margins in fans via the cost or the price action that we need to take. So, these are two different sets of actions that will be taken. You will see cost and price actions to help to improve the ECD margin profile. At the same point of time, we want to take that as a fuel to reinvest behind the brand and continue growth momentum for many more quarters to come. That's how we wanted to balance our portfolio approach on both growth and profitability.

Got it.

Thank you. Next, we have a question from Utkarsh Mehrotra. Please go ahead with your question.

This is Utkarsh from Scho nfeld. Just one question, in terms of the p rice hike that you have taken, has the competition followed and then since th at you are planning a couple of more price hikes because to your point given the industry dynamics and demand, do you think they would follow and if they don't, then would you roll back? Thanks.

I think the price increases that we have taken a re an indication of, while they are modest price increases, they are an indication of the approach that we want to take . And look, at the end of the day, it is a mix of how we are going to approach this. It is all about intent and what we are saying is that we want to continue to grow, but we also want to protect our margins. So, we are the leaders in the market, so you will see a mix of this playing out in the market , whether other competitors will follow or not, we will see, but look you want to do what is the right thing to your business.

Got it. Thank you.

Yes, we have last question from Mr. Rahul Agarwal. Please go ahead with your question.

Thanks for the op portunity. Just one question on the manufacturing side . I think you talked about some changes there. Could you elaborate a bit on fans, appliances, pumps , and B2C lighting? What are the changes should we expect over the next 12 months on manufacturin g from Crompton Greeves?

Rahul, I think we announced earlier that we are currently i n the process of creating a strategic sourcing footprint, whether that be from own manufacturing or outsourced. So that is still under preparation and we will come back to you when it is possible for us to disclose it to the market. Having said that, we are in so far as fans is concerned , on a journey of more in -housing particularly of our seed category, because that is something that will lead to cost sav ings, greater manufacturing facility and needless to say other strategic benefits. So that is already continuously going up, and you can expect will be expanded in the next few quarters. What that will do is , not only bring in greater in -housing, but step -up the capacit y utilisation of our own units. Hopefully that will also go towards improving our margins. That is a part of the journey. So, but in so far as the rest of the businesses are concerned , i t is work -in- progress is what I'd say . Today our footprint is that abo ut 50:50 in fans between what we do in - house and what we outsource. In so far, as small domestic appliances are concerned, it is largely outsourced. And so far as lighting is concerned, B2C and B2B is largely in-sourced currently. And we will see how this will go and obviously the idea w ould be what maximi ses margins, what maximises the strategic benefits for us.

Okay. Thank you.

Yes, thank you. On behalf of ICICI Securities, we thank the management for the conference call . And now I hand over to the management for closing comments. Thanks and over to you.

Thank you , everyone and wishing you a very, very Happy Diwali. We will con nect in the next earnings call. Thank you.

Thank you.

Thank you. Happy Diwali. (This document has been edited to improve readability)

crompton.investorrelations@crompton.co.in

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