Orient Electric Ltd (ORIENTELEC) Q4 FY23 Earnings Concall Transcript

Orient Electric Ltd (NSE: ORIENTELEC) Q4 FY23 earnings concall dated May. 15, 2023

Corporate Participants:

Rajan Gupta — Managing Director and Chief Executive Officer

Saibal Sengupta — Chief Financial Officer

Analysts:

Deepak Agarwal — PhillipCapital India Private Limited — Analyst

Rahul Agarwal — InCred Capital — Analyst

Bhavin Vithlani — SBI Mutual Fund — Analyst

Bhargav Buddhadev — Kotak Mutual Fund — Analyst

Achal Lohade — JM Financial — Analyst

Nikunj Gala — Sundaram AMC — Analyst

Kuvam Chugh — Aditya Birla Sun Life Mutual Fund — Analyst

Rahul Gajare — Haitong Securities India Private Limited — Analyst

Aniruddha Joshi — ICICI Securities — Analyst

Deepak Lalwani — Unifi Capital — Analyst

Nirav Vasa — Anand Rathi — Analyst

Aakash Samir Javeri — Perpetual Investment Advisors — Analyst

Manoj Gori — Equirus Securities — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to the Q4 FY ’23 Earnings Conference Call of Orient Electric Limited hosted by PhillipCapital India Private Limited. [Operator Instructions]

I now hand the conference over to Mr. Deepak Agarwal from PhillipCapital India Private Limited. Thank you, and over to you, sir.

Deepak Agarwal — PhillipCapital India Private Limited — Analyst

Thanks. Good morning, everyone. On behalf of PhillipCapital India Private Limited, I welcome you all to Orient Electric Limited Q4 FY ’23 earnings conference call. Today we have with us management represented by Mr. Rajan Gupta, Managing Director and CEO; Mr. Saibal Sengupta, Chief Financial Officer.

Without taking much of time, I would like to hand over the floor to the management for their opening remarks, post which we will open the floor for Q&A. Thanks, and over to you, sir. Thank you.

Rajan Gupta — Managing Director and Chief Executive Officer

Thanks, Deepak. Good morning, ladies and gentlemen. My name is Rajan Gupta. I joined as MD and CEO for Orient Electric on 4th April 2023. I’m sure you would have gone through our Q4 results presentation. Before we answer your queries on that, I would like to share some perspective on growth strategy for our Company for FY ’24. Over last 40 days or so, I have traveled across most of our locations, meeting trade partners, consumers, our internal teams, visiting all our factory locations. There is one common theme emerging from all these interactions, there is a lot of acceptability and trust for brand Orient and enthusiasm for all new products and other growth initiatives launched in FY ’23. I’m really excited to work on converting these initiatives into tangible business results.

I will be now sharing some specific growth initiatives for FY ’24. First of all, we identified hero products across all our business units. These are products where we have concluded through consumer insights that they have potential of significantly scaling up our growth numbers, supply chain alignment for same has been done, and most of the sales marketing, GTM initiatives for FY ’24 will be sharply focused on these hero products.

Secondly, premiumization initiatives across all BUs will drive incremental revenue for FY ’24. Groundwork on identifying these SKUs has been done, and by Q1 end, most of this plan will get rolled out. In the lighting view, we aim to continue last three years of trend of industry-leading growth through additional focus on value-added categories along with ramping up distribution and continued brand investments. We now have a full range of professional luminaire products to make aggressive inroads in the B2B segment. This along with strengthening our design capabilities for facade lighting, another lighting solutions will help us deliver disproportionate growth in the B2B segment.

We have developed products and infrastructure to make sure 5% of the overall Company revenue growth in FY ’24 come from Switchgear and the Wires segment. We have identified some states to go deeper and will use power of our new product range and initiatives around electricians and contractors to make scalable, profitable model, which can be taken to other states in 2025. We are rolling out Center of Excellence on NPD. The objective is to increase our focus on getting consumer insights driven profitable products ready for FY ’25. Going forward, this will be a major growth driver for both bottom-line and top-line. We are targeting approximately 15% revenue from NPD in FY ’25.

We are institutionalizing cost reduction initiatives through a new cost excellence center to deliver on our goal of cost leadership. FY ’24, we have plan of increasing EBITDA by approximately INR50 crores based on accruals of work done in FY ’23 on cost reduction through Sanchay initiatives done along with McKinsey. Over and above, our new initiatives will further add to the EBITDA in FY ’24. We have established a new COE on sales capability development, which will work with all our BUs to help them cover all white spaces in our distribution network. All gaps have been identified and our work on plugging these gaps has started.

We are expanding our e-commerce capability and aim to double the share of e-commerce business in the overall mix in the current financial year. In addition, we launched our own B2C platform this year. I also would like to update all participants that our Company is privileged to be certified as Great Place to Work for the fourth time in a row.

Before we move to the Q&A, I’d like to — I like my colleague, Saibal Sengupta, CFO, Orient Electric to give some brief comments on Q4 performance.

Saibal Sengupta — Chief Financial Officer

Thank you. Rajan, and good morning to all distinguished participants. Well, in Q4, we had an impressive growth of around 12% in our Lighting and Switchgear segment. Fans performance was again to market trends that was impacted by erratic weather conditions leading to muted consumer demand and high channel stocking. Air Coolers and Water Heaters witnessed strong growth. During the quarter, we launched our innovative product in the premium space, the Cloud 3 fan with advanced cloud-chill technology and digital platform. We now have a wide range of BLDC fans across the price segments and supported by a new campaign in six languages for pan-India appeal.

Considerable effort has been put in reducing inventory and receivables and improving working capital, which has now reduced from 28 days March last year to 24 days this year-end. As a result, we moderately strengthened our year-end net cash position. Consequently, revenue was around INR658 crores in Q4 FY ’23 with a minus almost 13% year-on-year with Lighting and Switchgear up by close to 12% to INR200 crores, while ECD at INR458 crores was a negative 20% year-on-year. Our gross profit was INR186 crores with a minus 11% year-on-year with EBITDA at INR46 crores de-growing by 42% year-on-year due to operating deleverage, higher investments in brand and capability building initiatives. PAT was at INR25 crores with a minus 48% year-on-year. You would have all seen our investor presentation that we had uploaded along with the results.

With this I would like to open the floor for Q&A and hand over to the moderator. Can we have the open — opening of the Q&A session, please?

Questions and Answers:

Operator

Thank you very much, sir. We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Rahul Agarwal from InCred Capital. Please go ahead.

Rahul Agarwal — InCred Capital — Analyst

Yeah, hi, good morning, and thank you so much for the opportunity. And I welcome Rajan to Orient and best wishes. So since Rajan is on the call, I’m taking this liberty to ask three questions, one to him and two on the business to Saibal [Foreign Speech]. Firstly, Rajan, obviously, you’re taking over at a situation when Orient is not having a very good time, and you said you traveled and you met a lot of partners. During your initial interactions, what do you think are the things that take your top of your mind share and need immediate attention, if you could share a bit more on this, please? Thank you.

Rajan Gupta — Managing Director and Chief Executive Officer

Thanks, Rahul. Very meaningful question. As I already mentioned in the last 40 days, wherever I travel, I think few things are emerging, okay. I spoke about lighting view, okay. There a lot of work has happened on B2C segment there in terms of developing value-added products, and now we have full range ready there. So I think there’s a lot of growth potential there. There is very high trade and consumer acceptability there. I’m more referring to our decorative range, more referring to value-added products in the Lighting segment, okay.

Continued lighting in the B2B, okay, we have been growing at exponential rate for last some years now and the way growth is planned in future and the kind of immediate pipeline in order is there, we should have very meaningful increase in further contribution of B2B, okay. So I think there is a nice story going on there with the continuous market share gains and we’ll further strengthen that. That’s the initial kind of signal I’m getting from all stakeholders there. So that’s about Lighting.

Switchgear and the whole Wires part, we are launching a couple of states, the Wires. Switchgear obviously has been there. There look like we can go deeper now in six states to eight states. So that’s the current plan, because the idea is to grow profitably. So these are the states where we see a lot of traction coming in. And once we scale there, obviously we can go pan-India, okay.

Coming to the ECD part which probably you mentioned about the subdued demand and all that, look, there’s a lot of things are going right there as well. If you see the whole BLDC for [Indecipherable] fans, we were the early pioneer of that many years back. We are one of the few companies where the full range in BLDC is ready. I see a lot of innovation pipeline. Last 40 days itself, the kind of workshops we have done on NPD and the way the whole NPD pipeline is ready, that gives me a lot of confidence.

On fans, if you remember, we have been sharing in last few calls, the kind of gains we have made in DTM markets, the six states we were launched DTM. And more importantly, we’ve taken learnings with the kind of work which has happened at retailers and consumer end in terms of DMS, in terms of sales force automation, etc., And I remain very excited about taking this work to our markets managed by master distributors, because finally, markets are same, same money can be applied there, okay.

On appliances, I’ve seen very high acceptability for our Water Heater and Coolers segment, while coolers and fan are a little affected by unseasonal rains in April and delayed start of season in some of the markets, but now we see heat picking up. But essentially these two products has a very high traction. So in all, Rahul, while we see some tepid quarters, etc., but I think there is a very, very strong foundation which we are ready for delivering the growth objectives for FY ’24.

Rahul Agarwal — InCred Capital — Analyst

Got it, sir. Just getting into my second question and a bit more specific, so outlook on fans, right, I mean, just wanted to know on the way ahead. In fiscal ’23, I don’t know if the fan sales have actually grown or degrown for the Company. And should we expect like is the base is like really favorable, and given what you’re saying, should we expect like 20% revenue growth next year on fans, is that how we should think about it?

Rajan Gupta — Managing Director and Chief Executive Officer

Rahul, look, as you know, it’s always difficult to predict a number. But with the kind of foundation, which will build up, like for example the DTM states, okay, already, we grew by very high double-digit last year itself, and with the foundation which is ready, these are the states which are ready to explore, okay. We are doing extremely well in our e-commerce in fan. April itself has been a great month, okay. Generally, the focus is on improving profitability as well. The idea is to gain market share profitably, okay.

It’s a lot of work on margin corrections based on product mix change, based on our cost savings through our R&D and Sanchay initiative that’s happening. So idea is to grow and gain market share profitably, and I think April itself has been very meaningful in that sense. So let’s see where we land, but we understand last year hasn’t been that great, and we have responsibility to deliver healthy CAGRs.

Rahul Agarwal — InCred Capital — Analyst

Got it, sir. And lastly on Lighting. So I understand the fourth quarter numbers obviously include Wires and Switchgear sales. So I don’t think the entire — entirely reflecting top-line growth for Lighting and just the margins also been quite high. Could you help me break down that Saibal [Foreign Speech] both on revenue and EBIT level, what is Lighting and everything else separately, please?

Saibal Sengupta — Chief Financial Officer

Rahul, the Switchgear share of business is a very, very small one. As I had mentioned earlier as well, that range is only between 2% to 3% annually, and that is continuing to remain. The Wires, as we had mentioned, we had launched just about five months back and that too has an extension of the portfolio for completion. We are getting initial positive response and that is why we are feeling confident to further extend this. So as of today, it continues to remain to that round-about 3% range of the total share of revenue to the business.

Rahul Agarwal — InCred Capital — Analyst

So all the margin benefits is all because of product mix into Lighting, is that what you’re saying?

Saibal Sengupta — Chief Financial Officer

Predominantly yes, you’re right.

Rahul Agarwal — InCred Capital — Analyst

Okay, perfect. I’ll come back in the queue. All the best. Thank you so much.

Saibal Sengupta — Chief Financial Officer

Thank you, Rahul.

Operator

Thank you. [Operator Instructions] Thank you. We have the next question from the line of Bhavin Vithlani from SBI Mutual Fund. Please go ahead.

Bhavin Vithlani — SBI Mutual Fund — Analyst

Yeah, good morning, gentlemen, and thank you for taking my question. So, Mr. Gupta, just one question from my side. So as an outsider, when you see — when we look at a fan company, Atomberg just coming primarily on the back of e-commerce. Do you believe that one of the critical modes of the electrical company like yours which is the distribution reach is getting disrupted, and how is it that you’re looking to mitigate it? You did speak about e-commerce, but more thoughts on that will be helpful?

Rajan Gupta — Managing Director and Chief Executive Officer

Yeah, thanks, Bhavin. So essentially, if you see, we see opportunity a, in all consumer segments, we see opportunity in all channels, okay. You spoke about BLDC, as I mentioned earlier, we are one of the pioneer in launching BLDC, today we have the maximum range of BLDC products, okay. And potential, of course, is there in all segments of fan market consumer level. There are people at the bottom of pyramid who will still need a one-star fan, okay. Even their aspirations are to get a little better product, they’re looking for more color options, they’re looking for a little bit more of a decoration even in the economy and the base segment of the fans.

So I think it’s a large fan Company which is consistently among the top three players in all segments, we have to cater to all consumer segments. Having said that, BLDC will remain engine of growth. I see next couple of years, BLDC even kind of crossing high-teens, okay. That’s the kind of growth we’re looking at, okay. In terms of channels, look, again, we have to be omnichannel. So we are not going to get restricted to one channel, okay. Distribution has been our strength, and through all the initiatives in DTM market and replicating the learning in MV markets, we see distribution further increasing big time.

But parallelly, e-commerce, modern trade, LFR, LFR are the large format retail stores, okay, I think we have an excellent product range ready for these channels, okay. And there is an excellent traction already coming in the last couple of months. So — and you know there are separate teams altogether. We developed the whole digital team and the modern trade team and a lot of recruitment was done in last two quarters. There are separate teams handling these channels. So I personally see all the channels growing pretty well with the kind of range we have.

Bhavin Vithlani — SBI Mutual Fund — Analyst

Sure. And would it be possible to share what the underlying distribution share between the conventional e-com, modern retail? And what was it maybe four years, five years ago and how do you see it going forward?

Rajan Gupta — Managing Director and Chief Executive Officer

Unfortunately, I don’t think so I can share the exact number, but I can only tell you, we see the way e-commerce and the modern trade and large format stores, their contribution doubling up in next couple of years’ time.

Bhavin Vithlani — SBI Mutual Fund — Analyst

Sure, yeah, thank you so much for taking my questions.

Operator

Thank you. The next question is from the line of Bhargav Buddhadev from Kotak Mutual Fund. Please go ahead.

Bhargav Buddhadev — Kotak Mutual Fund — Analyst

Yeah, good morning, team and thank you for the opportunity. My first question is that the resignation of Mr. Khanna obviously came as a surprise. So just to be sure, is it fair to say that few of the steps that Mr. Khanna had initiated would still continue as far as the strategy is concerned, for instance, the direct-to-market transition, which happened in six states as you mentioned. Is it fair to say that we will continue with that or we’ll again resort back to our old practices of appointing master distributors?

Rajan Gupta — Managing Director and Chief Executive Officer

As far as Mr. Khanna resignation is concerned, Company has already done a press release, and frankly, we have nothing more to add on that, okay. As you all understand, we have been sharing the kind of team capability, which has been developed over the years. We have a very strong team OCF source, supported by a very, very strong Board, okay, and guided by them. So I think that all is in place. Now specifically reacting to your point on continuing of some strategic pillars, if you see my initial speech itself, that’s clearly carry continuing most of them actually, because strategy is obviously not one person, okay.

Specifically coming to DTM, so six states where we launched, I mentioned, already, we have seen high-teens growth, a lot of learnings have come in terms of consumer segmentation because we are much more closer to consumer there and retailer there, okay. Those are the learning which we’re going to take to MD markets as well. And so growing business in DTM sales remains critical to our overall fan growth. So no discontinuity there.

Bhargav Buddhadev — Kotak Mutual Fund — Analyst

Okay, okay, understood. And is there any sort of long-term incentives, which have been planned maybe in the last 40 days to ensure there is no further attrition as far as the senior management is concerned?

Rajan Gupta — Managing Director and Chief Executive Officer

Frankly, first I don’t even know if there is a concern there, okay. The senior management if you see has been quite consistent, okay. We have made some planned changes, okay. We have a kind of fan BU Head, who came on Board in the month of January. We want to develop our digital and organized trade, the modern trade space. We recruited a leader for that somewhere in the month of February. The CMO and CHRO have come last year, okay. CFO has been very stable. So essentially there is a — it’s a team which is all in place. And all of them are doing meaningful contribution. Whatever we need to engage them, that’s happening on a continuous basis.

Saibal Sengupta — Chief Financial Officer

Bhargav, just to add on top of what Rajan already said, as you are aware, we have our ESOP scheme in place, which is running for last several years and some of the leadership team members are already covered in that before which we had taken approvals as well. So that part of the incentive is still on. So this is just to double up what Rajan just spoke about. Thank you.

Bhargav Buddhadev — Kotak Mutual Fund — Analyst

And my last question is, you alluded to new product development. So post the Aero series in fans, Orient hasn’t come up with sort of new launches which can be considered as very differentiated. So if you can highlight on that? And also you mentioned about a few hero products that you identified, if you can share some examples that would be very helpful? And this is my last question.

Rajan Gupta — Managing Director and Chief Executive Officer

On NPD, I think I think a lot of focus has been there already for last few years, okay. Since you want to name, we’ve just one product, for example, we launched Ecotech Supreme last year. I was in markets in East, I was in market in South, we have seen in fact a lot of shortage of that. We have seen a lot of consumer traction around that, some of the new colors which we introduced, they are picking up huge amount of traction, okay. So I think NPD pipeline always has been there, okay.

But going forward, we understand our responsibility to use NPD as a lever much more, which is where we’re taking a ambitious target of 15% of revenue for FY ’25 to come from that. So a lot of work on that is already happening.

Bhargav Buddhadev — Kotak Mutual Fund — Analyst

Okay, thank you.

Operator

Thank you. The next question is from the line of Achal Lohade from JM Financial. Please go ahead.

Achal Lohade — JM Financial — Analyst

Yeah, good morning. Thank you for the opportunity. Sir, two questions. One is in terms of the direct-to-market, if you could talk a bit about how much ground have we covered? How much do we plan to cover in FY ’24? And in the same context, what has been the fans decline or change in fans revenue in FY ’23 and what market share would we have achieved in FY ’23?

Rajan Gupta — Managing Director and Chief Executive Officer

So in DTM markets, I already mentioned, last year, the full year, we have grown in double digit high-teens, which, of course, has led to market share gain, because as you all know, fan market hasn’t grown that much, okay? And as I mentioned earlier, a lot of learning, which has come in terms of consumer segmentation that help us in identifying the right products, that help us in doing the right kind of merchandising at a lot of these retail locations, okay, which is gradually resulting in our mix change in these markets. We are becoming much more profitable, okay. That’s giving us learning for getting more NPD to address the different consumer segments, okay.

Now that will continue, but these markets are more or less stable now, okay. There was some work which needed to be done on AP and Telangana, which also has got completed to the large extent. And this is a year when we should see explosive growth from these markets. And more important learnings from these markets are going to other markets being managed by master distributors. And over a period, it will help them also do steady gains.

Achal Lohade — JM Financial — Analyst

Sorry, sir, just to clarify, six states to eight states, if you were to quantify how much would they be as a percentage of total revenue for fans? And I presume this is largely for fans product or is this for all the product categories?

Rajan Gupta — Managing Director and Chief Executive Officer

No, first of all, DTM is only for fans. Other categories already, we have a direct distribution structure, okay. And in the past, we have indicated around 25%, the revenue on the fan is coming from retail sales. The current trend is more or less similar. Obviously, these markets are growing higher. So you will see a gradual increase in contribution of these markets.

Achal Lohade — JM Financial — Analyst

And just a related question, did you comment about what the next steps are? Are we going to go for more states or now this is about it and now it’s more to do with the organic growth?

Rajan Gupta — Managing Director and Chief Executive Officer

No, I think I mentioned that earlier, maybe I can clarify once again. So idea is to take learning from these markets to all other markets being managed by master distributors as well. okay. And we are hopeful our partners will help us improve execution in all markets, and they help us increase numeric distribution, help us improve merchandising standards at all the outlets, push a lot of NPD, which we have in pipeline okay. And frankly, we’re going to review it every quarter.

Wherever we see the scope for any change, we’re not going to hesitate to make the decision. But as of now, we remain very optimistic that even in all the MD markets, we should see a meaningful shift towards the kind of product range we want to do, towards the kind of execution we want to do.

Achal Lohade — JM Financial — Analyst

Understood. Sir, in terms of the fans revenue change whether a growth or a decline in the market share, whatever number you could share, sir, FY ’23?

Rajan Gupta — Managing Director and Chief Executive Officer

You’re talking about the market or are you talking about us?

Achal Lohade — JM Financial — Analyst

For us. For us. What has been the fact of decline or…

Saibal Sengupta — Chief Financial Officer

For us — yeah, yeah. As you have seen, ECD is already at a negative 20% for the quarter, which is indicative because the lion’s share of that comes from fans and appliances has actually grown has had a healthy growth. So it’s quite obvious that the fans has a decline in quarter four and quarter four being a bigger quarter for obvious reasons that you’re aware from the market side in terms of transition, weaker demand, channel inventory going up as a result. So that’s the position as on fans. So essentially out of the entire basket, it is fans, which has led to this decline.

Achal Lohade — JM Financial — Analyst

If you could clarify on for the full year FY ’23?

Saibal Sengupta — Chief Financial Officer

For the full year FY ’23 also, if you would recall, H1 was not a very steady period for fans and those — that period of time. So if you take an aggregated, it was a very flattish kind of a growth for fans for the full year as well.

Achal Lohade — JM Financial — Analyst

It’s a flat Y-o-Y for fans and appliances have grown.

Saibal Sengupta — Chief Financial Officer

Yes, yes. Yes, flattish.

Achal Lohade — JM Financial — Analyst

Would there be double-digit appliances growth?

Saibal Sengupta — Chief Financial Officer

Appliances will be, yes, appliances will be moderate.

Achal Lohade — JM Financial — Analyst

Got it. And just one more question, if I may, sir, with respect to Lighting business, if you could clarify what is the mix of B2B and B2C as we speak for FY ’23? And the margins seem to be extremely robust. Do you think the 4Q margins are sustainable for this Lighting and Switchgear segment?

Rajan Gupta — Managing Director and Chief Executive Officer

So B2B is currently around 15%. Obviously, it varies quarter-to-quarter based on seasonality, but it’s broadly in that range. And as I mentioned, the B2B is going to be one lever of growth based on the kind of demands we are getting from the facade lighting, various National Highway projects, etc., okay, and so that contribution will gradually increase.

Achal Lohade — JM Financial — Analyst

And the margins — are 4Q margins sustainable or is there any write-backs or anything which has driven this margin improvement to 19.5% [Phonetic]?

Rajan Gupta — Managing Director and Chief Executive Officer

No, no, nothing. There’s no exceptional as far as Lighting is concerned. These are steady margins that we are giving as far as Lighting is concerned.

Achal Lohade — JM Financial — Analyst

Got it. Thank you so much. I’ll come back in the queue, sir. Thank you.

Operator

Thank you. [Operator Instructions] The next question is from the line of Nikunj Gala from Sundaram AMC. Please go ahead.

Nikunj Gala — Sundaram AMC — Analyst

Yeah, good morning, everyone. Just one question from my side on fans. So it’s been four and a half months of new rating application. Can you help us with where the consumer demand is settling in, in terms of star-rated fans, like whether consumers are preferring 1-star, 2-star, like where the large amount of demand is settling in?

Rajan Gupta — Managing Director and Chief Executive Officer

So Nikunj, essentially speaking, most of the non-star-rated inventory in the trade is more or less not there, okay, while some counters, I still see carrying the old inventory because obviously, there was a push which has happened in December at industry level, okay, no company selling non-star-rated fans from January, but the trade has been carrying a lot of inventory, okay. And, of course, the whole premium segment or the BLDC segment, which is the four-star [Phonetic] or five-star rated, that has seen a little higher growth. But we are yet to see the — a lot of consumer traction around the whole star rating thing, like the way it is there in many other categories, okay. But these are very early days, and we should have more clear trend by next quarter end.

Nikunj Gala — Sundaram AMC — Analyst

Sure. And then if I can ask from your production perspective, like how big maybe 1-star and 2-star at this point of time?

Rajan Gupta — Managing Director and Chief Executive Officer

So while I may not be able to give you exact numbers, but I mentioned earlier the hero products, which are going to drive our growth, okay. A lot of those hero products are obviously 4-star and 5-star rated. These are products which are gaining traction in consumers, these are premium products and which are taking care of consumer aspirations in different pricing segments. So you will see some of these products driving growth and gradually contribution will increase.

Nikunj Gala — Sundaram AMC — Analyst

Sure. Thank you. Thanks for your time, sir. Yeah.

Operator

Thank you. The next question is from the line of Kuvam Chugh from Birla Mutual Fund. Please go ahead.

Kuvam Chugh — Aditya Birla Sun Life Mutual Fund — Analyst

Yes. Good morning, and thank you for the opportunity. So my first question is on our margin profile. If you look at correctly, Orient’s margin profile has been significantly lower than competitors by 300 basis points, 400 basis points. So coming in, in the last 40 days, 45 days, what is you noticed as the source of our margin increase opportunity?

Rajan Gupta — Managing Director and Chief Executive Officer

So if you see last few quarters or the last full year itself, we have been sharing the kind of investment which is happening in terms of A&M costs, in terms of people costs, idea is to take business to a very different level. And the management felt that all this investment is needed to take it to the next level. So that is one of the reason when margins have been a little lower, okay. Even going forward, essentially, there’s a clear plan to grow gross margins, okay, which will come out of the mix change, pricing wherever possible. I mentioned about premiumization, etc. And we’ll continue to invest on A&M and people because we believe these are the two levers which will help us take to the next orbit.

Kuvam Chugh — Aditya Birla Sun Life Mutual Fund — Analyst

So when we speak about margin improvement in the current year, is it mostly a return to pre-COVID level of margins or should we expect our margins to converge through the market with the level of the competitors’ level of 14%, 15%?

Rajan Gupta — Managing Director and Chief Executive Officer

Look, as I mentioned, there will be a steady increase. So nothing can be increased only one quarter, but it will be led by increase in gross margins and the fixed costs, which will be people and A&M and some of the constituency costs that will continue. But first improvements you will see is in margin percentage.

Saibal Sengupta — Chief Financial Officer

Kuvam, I’d also like to add to what Rajan mentioned. If you recall in the previous quarters also, we had mentioned that this margin improvement will be gradual during — in the next few quarters, which we have told earlier also. If you would recall in the previous year, we had implications both in terms of inflation as well as in terms of realizations coming down because of intense competitive pressures prior to the transition.

Those things are getting addressed now. We — they are all behind us. And as Rajan already mentioned, almost like a 10-point program that he had mentioned that we had — we have all these things in place to improve realizations to improve mix. So there will be two ways of improving the margins, and that will go up gradually. Number one is the gross margin, and number two is the operating deleverage, which we had suffered last year. The moment, the operating leverage comes off with — which accelerated growth, that also will be taken care of and the EBITDA margins, you will see that improvement gradually growing.

But it will be gradual. It will not be on a specific quarter because we will have to cover up this stage as well. And this is something in line of our action plan, which we already had. And with further actions that is being planned now with Rajan coming in, this will definitely help in further accelerating it. I just wanted to clarify that point.

Kuvam Chugh — Aditya Birla Sun Life Mutual Fund — Analyst

Yes, certainly. That’s very helpful. So just finally, one bookkeeping question. Our unallocable corporate expenses in the segmental P&L have increased quite dramatically this year, I think we closed with 7%, say, in unallocable expenses, we used to historically be around 4%. So is there some policy change or what is actually in this increase on unallocable expenses?

Rajan Gupta — Managing Director and Chief Executive Officer

You were talking about increase in unallocated expenses for the — in the segment. That’s what you’re talking about, right?

Kuvam Chugh — Aditya Birla Sun Life Mutual Fund — Analyst

Yes. Yes.

Rajan Gupta — Managing Director and Chief Executive Officer

Okay. Increase in unallocated expenses see mainly happens in terms of the shared costs, which is the central costs, mainly the corporate costs, etc. If you are seeing year-on-year, this has obviously happened with — over the last 12 months, 13 months, a lot of new CXOs have joined, leadership team has got strengthened. So those kind of costs will definitely add to it. On top of that, there are certain central costs also which we had been discussing from time to time, which has gone up and some of the investments that we have made, most of these are on a central basis, and that’s why you see the unallocated costs going up.

Kuvam Chugh — Aditya Birla Sun Life Mutual Fund — Analyst

Okay, all right. I’ll rejoin the queue. Thank you. That was very helpful.

Rajan Gupta — Managing Director and Chief Executive Officer

Thank you.

Operator

Thank you. The next question is from the line of Rahul Gajare from Haitong Securities India Private Limited. Please go ahead.

Rahul Gajare — Haitong Securities India Private Limited — Analyst

Thank you, gentlemen, for the opportunity. And congratulations and best wishes to Rajan for assuming the role of MD. Sir, my first question is coming back to the hero product that you delved upon earlier. Now I want to understand, if these hero products are restricted to fans or you have hero products across all categories? And if you could talk about the industry potential and why is it that you think that there is a very strong growth potential in these particular hero products? Thank you.

Rajan Gupta — Managing Director and Chief Executive Officer

Thanks, Rahul. So essentially, hero products are across all BUs, okay. These products are — I can divide them probably into two categories. 1 products which were already launched in the last two years, and we felt that there is scope to improve demand planning, there’s scope to have additional focus on them, okay. And that’s what our consumer insights told us and that also got supplemented by various market visits, which we have done or meeting with consumers, etc. Finally, these are products where we have realigned our supply chain so that we can actually meet all the demand from the market, okay. So that’s one category.

Second thing, which we’re already in the process of launching okay. It could be different colors, it could be certain add-ons, and it could be entire new product altogether, okay. The mix of these two things is what makes hero products. And in fans, we spoke about it. In lighting, we spoke about decorative lighting, for example, okay. Switchgear, we have a new range, which is in place. So hero products are essentially all across BUs.

Rahul Gajare — Haitong Securities India Private Limited — Analyst

Sure. Thank you. So my second question is given that we’ve seen a fairly sharp drop in revenue. Can you comment if there is any pricing action that was taken in the fourth quarter? And I think Mr. Saibal also indicated that fans was flattish in FY ’24 with BLDC, I’m sure there’s a pricing action. So I just want to understand, break this flattish into volume number. Thank you.

Rajan Gupta — Managing Director and Chief Executive Officer

So there was a pricing action, which happened in the month of January, okay, to the tune of what, 4%, Saibal?

Saibal Sengupta — Chief Financial Officer

Yes.

Rajan Gupta — Managing Director and Chief Executive Officer

Okay, approximately in that range based on the SKUs and based on the different categories, okay, which was essentially because of increase in cost because of whole rating change, okay. We have taken one more action in the month of April, okay. Around 2.5% weighted average price increase has already happened. Many of our competitors haven’t done that, okay. So market MOPs, so operating prices have still not gone up, okay. We are hoping as somebody is picking up, the entire industry will follow. And the MOPs for — because fans obviously now have much better quality because of star rating and they deserve to have better MOPs. So we are hopeful that MOPs will increase in the next few weeks.

Rahul Gajare — Haitong Securities India Private Limited — Analyst

Sir, my last question is on the profitability. We understand that there’s a negative operating leverage which has played out in this particular quarter. But you also indicated that there has been a significant increase in the A&P spending for brand building, etc. Is it possible you could highlight those numbers and comparable numbers for the last year? Thank you.

Rajan Gupta — Managing Director and Chief Executive Officer

So A&M numbers are in the range of 4% to 5%. And even going forward, as I mentioned, we are not going to reduce some of this investment, okay, specifically the people and A&M. So this investment will continue. So this is a broad range we are talking about. Saibal, you want to add?

Saibal Sengupta — Chief Financial Officer

Yeah, Rahul, this is the trend that we had followed earlier also, there, you will see some base effect because of the carry-forward of the COVID effect. But other than that, we are maintaining that 4%, 4.5% of ratio to revenue, and that will continue. As and when the revenues grow up, obviously, the absolute amount will keep growing to that extent. But in terms of investments, that level will still — we will still maintain it. Does that answer your question?

Rahul Gajare — Haitong Securities India Private Limited — Analyst

Yes, sir. Thank you very much.

Saibal Sengupta — Chief Financial Officer

Thank you.

Operator

Thank you. [Operator Instructions] We have the next question from the line of Aniruddha Joshi from ICICI Securities. Please go ahead.

Aniruddha Joshi — ICICI Securities — Analyst

Yeah. Thanks. Sir…

Operator

I’m sorry to interrupt, Mr. Joshi, there is a static from your line. I would request to use your handset to ask a question.

Aniruddha Joshi — ICICI Securities — Analyst

Yeah, is it okay now?

Operator

Yes, sir, please proceed. Excuse me, sir, there is a static on your line.

Aniruddha Joshi — ICICI Securities — Analyst

Is it okay now?

Operator

Yes, sir, please proceed.

Aniruddha Joshi — ICICI Securities — Analyst

Sir, two questions. One, what is the difference in trade margin between the direct states that we are doing and the other states, where we are having a relatively longer trade channel? So what is the difference in between the trade margins? That is point number one. And second is, what is the inventory in number of days or weeks right now of the non star-rated fans in the trade as per your best estimates for Orient as well as for the industry? And I mean, do you see any impact of that inventory again on Q1 results? Yes, that’s it from my side. Thank you.

Rajan Gupta — Managing Director and Chief Executive Officer

Sorry, I’m a little confused. There was a lengthy question towards the second part. Okay, first part, the whole DTM trade margins, okay. Look, we have clarified in earlier calls as well, the DTM was not done to increase profitability. Our profitability for DTM and non-DTM state is approximately same. Our channel schemes, our channel margins are same all across India, okay. DTM was done primarily to come closer to retailer and consumer, which I mentioned earlier, the benefits coming from that.

So there’s no major difference in either trade margins or our own profitability for DTM versus non-DTM markets, okay. On channel inventory, look, it’s very difficult to give a figure because it varies from state to state based on how season has picked up. Some states, it has been quite hot. Other states, season is delayed, of course, where last weekend was very, very good. So we remain quite optimistic. But if I had to hazard a guess, average inventory would be in the range of 30 days to 45 days for all fans in many of the states.

Aniruddha Joshi — ICICI Securities — Analyst

Sir, will you address the [Phonetic] Q1 numbers?

Rajan Gupta — Managing Director and Chief Executive Officer

No, for Q1, all the growth initiatives have been already shared. So I don’t think the channel inventory will be a bigger factor influencing that. Of course, we had a delayed start of April as all of us are aware about it. We are seeing unseasonal rains in many parts of the country that had some impact on April, okay. But I think we had a very meaningful April, specifically, it’s coming on a high base of last year April. And so we remain very, very optimistic.

Aniruddha Joshi — ICICI Securities — Analyst

Okay, sure, sir. Thank you.

Operator

Thank you. The next question is from the line of Deepak Lalwani from Unifi Capital. Please go ahead.

Deepak Lalwani — Unifi Capital — Analyst

Hi, sir, thank you for the opportunity. I had two questions. So since you’ve answered the recent phenomena that April was better than last year. If you can mention on the profitability side since most of your margin improvement will be driven by gross margin is still at the lower end of the margin band at 28%. So can you indicate if this is a short-term scenario and we should see improvement starting Q1 itself?

Rajan Gupta — Managing Director and Chief Executive Officer

So I think I mentioned this earlier as well. We understand there is scope for margins and gross margin is the one which will drive overall profitability increase. I mentioned about price increase, which were taken in the month of April itself, okay. We didn’t wait for any of the leaders in any market to do that. We’re one of the first one to do that. And if you notice all the initiatives around premiumization or focused SKUs, I spoke about BLDC driving growth in fan. I spoke about premium range of Water Heaters and Coolers, the whole decorative lighting, all those initiatives are obviously centered around putting in place higher profitable products, which will change the whole mix. So essentially, that’s the plan.

Deepak Lalwani — Unifi Capital — Analyst

Right. So we should assume that Orient comes back to the 30%, 32%, which was there pre-COVID sooner by at least the start of Q2?

Rajan Gupta — Managing Director and Chief Executive Officer

No, so we understand, I appreciate your expectations. At this stage, I can share that there will be a meaningful increase, which will happen based on all the initiatives and work which is being done.

Deepak Lalwani — Unifi Capital — Analyst

Okay. And sir, lastly, your presentation mentioned a great point on the diversification that you’ve done over the last two years. So if you can indicate how this journey will go on starting FY ’24? And if you can highlight which areas will the revenue streams go on from here on?

Saibal Sengupta — Chief Financial Officer

Which kind of diversification are you referring to? See, Deepak, from the diversification perspective, basically, we have launched a few products. But if you’re talking about last two years, honestly, there has been not too many product launches because given the situation of transition and other factors, we have done something in Lighting, of course.

We have done this cloud fan, which we have done very, very recently in the month of March, which we have already talked about. But given that the action plan, which Rajan just talked about a couple of times, we do have plans to roll out a lot of other products. Why is this something which we got into house wires, it was initially because of the extension of the Switchgear product line and the completion of that product portfolio. But now we are getting very enthused and we feel that we should be able to scale that up. And therefore, we are — we will be moderately attempting in some specific states with dedicated sales teams, etc., which also Rajan had also mentioned about. Apart from this, any other things, Rajan, you want to…

Rajan Gupta — Managing Director and Chief Executive Officer

So Deepak, I just want to add more than diversification, I won’t — I don’t know if I say it’s a diversification, but essentially, the plan is across our portfolio, there’s a range which is higher gross margin, okay, wherein we see scope for market share increase, wherein we see scope for volume increase, okay. So that’s the range we are going to focus, whether it’s a Switchgear, it’s a Fan or Water Heater or a Cooler or other products, okay. So essentially, that’s a plan we have.

Deepak Lalwani — Unifi Capital — Analyst

Right. Thank you, sir. That answers my questions. Thanks.

Operator

Thank you. The next question is from the line of Nirav Vasa from Anand Rathi. Please go ahead.

Nirav Vasa — Anand Rathi — Analyst

Hello, sir, and thank you very much for the opportunity. So I have a strategic question. Sir, now how do you intend to take this Company, whether this — whether Orient Electric would be an asset-heavy Company, wherein you will be investing heavily in increasing your capacities as there is size and scale or you prefer to have an outsourced model? Yeah, this would be my first question. And what can be the capex for ’24 and ’25? Thank you.

Operator

Excuse me, sir, on the management’s line, we are not able to hear you, sir, kindly unmute yourself and speak, please.

Rajan Gupta — Managing Director and Chief Executive Officer

So essentially coming to this whole buy versus make decision, it’s a very dynamic decision, okay, which will — which depends on a lot of factors. But you are aware about our Hyderabad factory rollout plan, it was shared earlier. By end of September by end of Q2, the factory should be fully in place. And that will obviously help us make a lot of high-quality all over hero product in fans in-house, okay. And we’ll continuously keep on evaluating this buy versus make decision, okay. Saibal can share the exact number on capex.

Saibal Sengupta — Chief Financial Officer

Yes. Thanks, Rajan. Well, Nirav, as far as just to build a little bit more on this buy — make versus buy, as you know, we have always maintained this, that it’s a very, very close commercial call, and, of course, the product quality, etc. So that we keep on studying frequently to keep the moderations. Our capacity plans and capex plans are not really guided by those in-source versus outsource. Obviously, it is subject to availability of capacity. It makes a strong commercial sense, then we will not hesitate to make moderate investments. That brings me to the point that you mentioned, whether we will be asset light or asset heavy. Of course, we will continue to remain asset light.

This Hyderabad capex that we are making, honestly, it is a fresh greenfield investment in this Company after a span of 40 years that we are making. We had been continuously earning on the productivity to be increasing our capacities. But now from the pre-COVID levels when we decided to go ahead with Hyderabad, the growth opportunities were very exciting to go ahead with these enhanced capacity in Hyderabad, and that’s what we are doing. Coming to numbers, we have already spent about close to INR78 crores as far as Hyderabad is concerned. We still have to spend a good amount of money because INR200 crores — close to INR200 crores, not exactly INR200 crores, about INR185 crores, INR190 crores is the estimate as of today.

So the balance we will be spending shortly. It is going on in full scheme. As far as normal capex is concerned, which also I had mentioned earlier, it is in the range of INR40 crores to INR50 crores, that will continue to happen year-on-year because these are the normal either replacement capex is or their efficiency capex or product improvement capex is. So this is the line of capex, which will continue to remain. As of today, as we speak, we do not really have any plan of another greenfield or a big project like Hyderabad as of today lined up. As in case if it comes up, we will get back to you, but no plans as of today. I hope that answers your question.

Nirav Vasa — Anand Rathi — Analyst

Broadly, it does. So would it be possible for you to share a bit more on the Hyderabad factory with regards to what can be the capacity there, how do we intend to increase the capacity in phase-wise manner? And what can be the maximum output that it can generate?

Saibal Sengupta — Chief Financial Officer

On a capacity basis, we are adding about additional one-third capacity over there. Let me put it. It’s a combination of both ceiling and PPW that we are adding, which is the combined capacity of Faridabad and Calcutta combined, another one-third we are adding. But having said that, I must say that it will not happen in one-go. So we will be adding lines almost on an every-year basis depending how the volumes and the capacity requirements go up. And we are having very flexible automated lines to be doing that ramp-up on an incremental basis on that on a need basis. So we are very conscious and mindful about capex investments and not to make it a asset heavy Company, but yes, this is what is required for future sustainable growth.

Nirav Vasa — Anand Rathi — Analyst

Sir, final question, what was the payment that was done to BCG in FY ’23? And what can be that number for next year? Thank you.

Saibal Sengupta — Chief Financial Officer

Well, Nirav, it was not BCG. We had engaged McKinsey, if you are referring to that.

Nirav Vasa — Anand Rathi — Analyst

Sorry, McKinsey.

Saibal Sengupta — Chief Financial Officer

We’ll not share exactly numbers. So you have excuse me on that. But yes, that’s the engagement that we are having for two years, one year is already gone, and the second year is in progress. They are adding good amount of value in the three tracks that we are doing that we had mentioned earlier in terms of cost reduction, in terms of GTM support, the GTM scale up, including the DTM as well as the digital building up and helping us in building up the capability for the digital, which we have a very ambitious plan to grow that business. So that — those results are already coming up. This is the second and the last year of engagement is going on right now as we speak.

Nirav Vasa — Anand Rathi — Analyst

Thank you very much gentlemen.

Operator

Thank you. The next question is from the line of Aakash Samir Javeri from Perpetual Investment Advisors. Please go ahead.

Aakash Samir Javeri — Perpetual Investment Advisors — Analyst

Good morning, and thank you for the opportunity. My question is with respect to fans. So what is the current percentage of BLDC sales out of our overall fan sales? And how do we expect this to move in the next two years to three years?

Rajan Gupta — Managing Director and Chief Executive Officer

So Aakash, in a way, I answered it already. So BLDC range is now going to high single-digit as a percentage to overall volume contribution. And as I mentioned earlier, the entire BLDC range is part of our hero products and a lot of new products are coming in that. So we see over a period, now it could be two years to three years, BLDC will become high-teens kind of contribution to the overall fans portfolio.

Aakash Samir Javeri — Perpetual Investment Advisors — Analyst

Sure. Thank you so much.

Operator

Any further questions, Mr. Javeri?

Aakash Samir Javeri — Perpetual Investment Advisors — Analyst

No, that’s it. Thank you.

Operator

Thank you. [Operator Instructions] Thank you. The next question is from the line of Drashti [Phonetic] from Thinqwise Wealth Managers. Please go ahead.

Unidentified Participant — — Analyst

Thank you for the opportunity, sir. So you’ve very well put down the strength of Orient and your measures that you’re actually doing to increase your distribution and further deepen your distribution. But I wanted to know that in the last 40 [Phonetic] days that you’ve been — that you’ve joined the Company, what are the risks that you’ve seen in the Company? And how do you plan to overcome those, if you could highlight more on that? Thank you.

Rajan Gupta — Managing Director and Chief Executive Officer

So, Drashti, thanks for a very nice question. Risk for any company essentially more than any other environmental risk, other things, risk is on growth, risk is on profitable growth. And if you see my initial 10 pointers on growth strategy way forward, profitable growth strategy way forward, attempt has been there to kind of minimize that risk, okay. That is where this whole entire portfolio change, entire hero products, entire premiumization, okay, and focus on that, say across the BUs, okay. The whole plan on DTM, which is closing — coming closer to our retailers, our consumers, okay, the plan to grow channels wherein we haven’t done well historically, for example, the whole e-commerce and modern trade and large format retail stores, that’s entirely to derisk the whole thing, okay.

Operator

Thank you. The next question is from the line of Manoj Gori from Equirus Securities. Please go ahead.

Manoj Gori — Equirus Securities — Analyst

Yeah, good morning, team, and thanks for the opportunity, and best wishes to Rajan. Sir, we have talked a lot on future plans along with robust outlook. However, if you look at the Q3 performance in the ECD segment, given that we were having a favorable base of 4Q FY ’22, are we disappointed with our 4Q performance? Also, when we look at the 3Q, like one of the listed brands obviously reported very strong numbers in the fans portfolio. So has it hurt you or industry at large? So any color here would be very helpful.

Rajan Gupta — Managing Director and Chief Executive Officer

So Manoj, I’m not very clear on your question. So if the idea is to ask how is the Q4 at industry level, okay, from other numbers we have seen from the listed companies results, which have come. Q4 has been a muted quarter for almost all the fan companies. There was a kind of delayed start of season. And all the non-star-rated inventory, which has pushed at industry level in the month of December, that, of course, had an impact. And — but if the question is, is there scope for improvement? That’s where all the initiatives we shared with you. So we appreciate that we can do much better, and that’s the whole intent which is in place.

Manoj Gori — Equirus Securities — Analyst

Right. So sir, in this case, can we assume like obviously — hello?

Operator

Please continue.

Manoj Gori — Equirus Securities — Analyst

Yeah. Sir, can we assume that probably apart from the direct states that we would be looking to cater during current year probably in the rest of the markets also, we can outperform the industry growth rates and probably we might see significant growth in fans with respect to the industry?

Rajan Gupta — Managing Director and Chief Executive Officer

I think I mentioned earlier, obviously, we are taking learning from these direct markets to all our other markets being managed by master distributors. Many of those markets, we have built a huge strength over the years. That’s where the Company has grown over the last many years in these markets. And we remain quite constructive about much better results coming from these initiatives over a period of time. okay. Having said that, some of those industry issues are, for example, the late start of season, etc., is going to affect almost all markets.

Manoj Gori — Equirus Securities — Analyst

Right, sir. Sir, lastly, on Wires, can you throw some light on the mid to long-term strategy with regards to investments, any plans of capacity additions? And probably, if there is any drag on the EBITDA margin level that would be helpful, sir?

Rajan Gupta — Managing Director and Chief Executive Officer

I think Wires we already mentioned, the idea was it started with completing portfolio, but we are seeing very high acceptability in some markets in a couple of states with electrician, with contractors and the retail channel, which is where, as we mentioned earlier, ideas to go deeper into six markets. These are the markets where we feel we have a case for building a kind of scalable business. And these markets will give a lot of learnings. So at this moment, frankly, difficult to comment upon that. As we pass through next few quarters and we believe by the end of the year FY ’24, we should have a more kind of informed plan, which should be there in place, but market potential is, of course, huge as all of you are aware about it.

Operator

Thank you. Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to the management for closing comments. Over to you, sir.

Rajan Gupta — Managing Director and Chief Executive Officer

I would like to thank all participants for their continuous and active interest and engagement with Orient Electric. As mentioned in my initial remarks, growth initiatives for FY ’24 have been rolled out, and we are committed for steady but consistent and meaningful improvement in both top-line and bottom line in coming quarters. Thank you so much, and have a good day.

Operator

[Operator Closing Remarks]