Orient Electric Ltd. (ORIENTELEC) Q1 2023 Earnings Call Transcript

Orient Electric Ltd  ( NSE : ORIENTELEC) Q1 2023 Earnings Call dated Jul. 26, 2022.

Corporate Participants:

Rakesh Khanna — Managing Director & CEO

Analysts:

Dhruv Jain — Ambit Capital — Analyst

Rahul Agarwal — Incred Capital — Analyst

Nitin Arora — Axis Mutual Fund — Analyst

Saibal Sengupta — Chief Financial Officer

Rahul Gajare — Haitong Securities — Analyst

Aakash Javeri — Perpetual Investment Advisors — Analyst

Praveen Sahay — Edelweiss Financial — Analyst

Unidentified Participant — — Analyst

Bhargav Buddhadev — Kotak Mutual Fund — Analyst

Anirudh Doshi — ICICI Securities — Analyst

Aditya Bhartiya — Investec — Analyst

Ashish Kumar — Infinity Alternatives — Analy

st

Achal Lohade — JM Financial — Analyst

Amit Mahawar — Edelweiss — Analyst

Presentation:

Operator

Ladies and gentlemen, good morning and welcome to Orient Electric Limited Q1 FY ’23 Earnings Conference Call, hosted by Ambit Capital. As a reminder, all participant lines will be in the listen-only mode. And there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Dhruv Jain from Ambit Capital. Thank you, and over to you, sir.

Dhruv Jain — Ambit Capital — Analyst

Thank you. Hello, everyone, welcome to Orient Electric’s 1Q FY ’23 earnings call. From the management side today we have with us Mr. Rakesh Khanna, Managing Director and CEO; and Mr. Saibal Sengupta, the Chief Financial Officer.

Thank you, and over to you, sir, for your opening remarks.

Rakesh Khanna — Managing Director & CEO

Thank you, Dhruv. Good morning, everyone and thank you all for joining us for our first quarter results discussion for the financial year 2023. I hope all of you and your families are staying safe and healthy. At Orient Electric, we continued to follow all COVID-related protocols while maintaining physical presence for all business activities.

Coming to our overall performance, the first quarter of fiscal 2023 saw an overall positive performance in the face of multiple challenges faced by the industry. For quarter one financial year ’23, OEL continued strong revenue momentum, growing by 47% year-on-year. The year started with early summer with record heatwaves cross the country resulting in healthy demand for cooling products. But by the middle of May, early rains in several parts of the country and steep inflation dampened the consumer demand. At the same time, correction in commodity costs indicated a likely price correction thereby, leading to inventory correction by the trade, which led to lower primary sales.

Despite these lags, OEL was stable to post revenues of INR622 crores for quarter one financial year ’23, growth of 47% over last year and the CAGR of 14% over last five years in quarter one. Following on from financial year 2022, our concern for protecting our gross margin continues unabated. We have been able to contain commodity price pressure on our margins through strategic price corrections and efficient cost-control measures. Our gross margin witnessing severe pressure of more than 217 bps over the last three years due to severe commodity inflation, we arrested a potentially much sharper fall in EBITDA margins limiting it to 217 bps in quarter one since pre-COVID levels.

Company has been evenly focused on qualitative growth along with revenue, profitability and market share. With higher raw material costs, inventory management remains one of the crucial elements in balancing growth. Our working capital days have been consistently coming down over time despite multiple challenges over the past few years. In quarter one financial year ’23, our working capital stands at 33 days at par with pre-COVID levels and our cash flows from operations remained healthy at INR45 crores for the same period.

In terms of liquidity, our net cash position improved during the quarter due to improved collections and better working capital management. Looking ahead at quarter two financial year ’23, we hope to improve our net cash position further. Despite experiencing mixed trends during Q1 financial year ’23, the ECD segment grew by 37% year-on-year in revenue. The reported heatwave in the first half of the quarter help liquidate channel inventories of coolers. Due to early rains in some parts of the country, we noticed early channel stocking for water heaters towards the close of the quarter. Despite the headwinds, OEL was able to marginally grow ECD revenues by 4% compared to pre-pandemic levels, thanks to smart marketing, distribution strategies and price management to cost controls.

Our Lighting and Switchgear segment witnessed a much promising and optimistic scenario, de-risking the seasonality factors that have typically impacted OEL. This segment reported revenue growth of 80% for quarter one financial year ’23 year-on-year, displaying great buoyancy and resilience against the macro headwinds I referred to earlier. After some slowdown in B2B business in FY 2022, quarter one financial year ’23 has been witnessing an uptick on the back of higher reach and portfolio expansion, including some prestigious orders in facade lightings.

The lighting business continues to deliver strong growth at 79% year-on-year in Q1 ’23 led by consumer lamps and luminaires, which are enjoying strong demand from the homes, small offices and showroom segment. We have noticed that government spending has started picking up, which should keep the order book for lighting segment on a strong momentum. Lighting orders for our facade line has also seen good traction with a healthy inquiry pipeline. The company remains optimistic about its prospects going ahead.

OEL’s switchgear business continues to grow well, thanks to the company’s new range of switches catering to mass premium segment. This line is being very well received by channels and consumers alike. And the pick in volume continues to fuel the pace of growth. Being able to add new products and swiftly change what our portfolio mix, makes OEL competitively agile in this segment. Furthermore, the continued efforts in expanding our distribution network through digital means have helped in increasing the share of this segment in our overall revenue path. OEL has been making good progress in building a base for its Lighting and Switchgear segment, which will start reaping material benefits in the medium term.

During quarter four financial year ’22, we transitioned our distribution approach for our fan segment in under-penetrated markets of Odisha and Bihar with direct to dealer approach and away from our traditional approach of selling via master distributors. With much success in this approach becoming evident in quarter one financial year ’23, we decided to further extend this distribution model to other states, UP, Karnataka, AP, Telangana where masters’ distributors access has been weak. Although due to this transition, there has been some weakness in sale in these markets, we hope that in the coming period, this action will allow us to improve our market shares further in these under-penetrated markets.

The company sees this as a positive step as it will help us to further expand in this under-penetrated market in a more controlled way. While India’s path to double-digit growth has become more challenging due to general inflationary pressures, the country’s underlying economic fundamentals along with government’s goal for self-sufficiency are likely to protect the country’s long-term positive outlook from the present short-term headwinds.

Our fundamentals remain robust and future-ready to handle the current scenario and capitalize on these possibilities. We believe that our new Hyderabad plant, which has already broken ground will enable us to sustain our capacity to deliver quality growth. In the meantime, our unremitting focus on consumer centricity has helped redefine processes across all functions for developing and delivering innovative products to enhance consumer delight. Our NPS score continues to be about 45%. We have also made a clear roadmap along with external consulting partners to speed up our progress in the fields of e-commerce, cost reduction and go-to-market. This is and we believe giving us fresh energy for growth.

Thank you all for joining with us and thank you, Ambit team. On this note, I now hand over back to, Dhruv.

Operator

Sir, shall we open for the Q&A session?

Rakesh Khanna — Managing Director & CEO

Yes.

Questions and Answers:

Operator

Thank you very much. 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, Rakesh and Saibal. Thank you for the opportunity. Sir, two questions, firstly, in your own assessment, was first quarter in line or below your internal expectations? You could help us understand some kind of outlook for fiscal ’23 because the way we understand base is high for last year going into the next nine months, whatever you can talk about for ECD and lighting and switches, do we really grow in double-digits this year? Could you please help us understand this over the next nine months what should we expect?

Rakesh Khanna — Managing Director & CEO

Good morning, Rahul. First of all, I must tell you, I’m not a future teller. Yes, the quarter one performance has been below our expectations, especially in the fans portion. Everything else did tick well but the sudden slowdown in the month of May and June for fans, especially has been below the expectation and below our plan. It is difficult to say how it will pan-on in future, but we do see that there is going to be a double-whammy. There are inventories at high cost and the trade will start taking correction in the inventory. The quarter two may see a certain level of inventory correction. But the fact that the commodity costs are easing out, we expect that it will help the demand to again get back and help the industry to cover up the loss rate. So overall, it’s a positive judgment, but once again I would clarify, I do not tell future.

Rahul Agarwal — Incred Capital — Analyst

Got it, sir. And secondly on the margins, the second quarter is generally weaker than first quarter seasonally for Orient historically. How would — how should we think about in our minds over the next two to three years? I know as you said you don’t talk about short-term trends, but any long-term outlook on margins, please, if that’s possible?

Rakesh Khanna — Managing Director & CEO

We definitely have our eyes on margins and we believe that industry has been always supportive of carrying the margins home. We continue to have our faith and we believe as the commodity will start getting corrected, a substantial part should get back into the margins. So, we do hope margins to come back. However, it all depends on what is the competitive landscape during that period.

Rahul Agarwal — Incred Capital — Analyst

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

Rakesh Khanna — Managing Director & CEO

I will also add one more thing — I will also add one more thing Rahul, is the kind of efforts that we’re putting in our cost reduction will hopefully help us to garner highest trends to defend our market shares and protective of margins.

Rahul Agarwal — Incred Capital — Analyst

Got it, sir. Thank you so much.

Rakesh Khanna — Managing Director & CEO

Thank you.

Operator

Thank you. The next question is from the line of Nitin Arora from Axis Mutual Fund. Please, go ahead.

Nitin Arora — Axis Mutual Fund — Analyst

Hi, sir. Thanks for taking my question. If I look at the last six quarters, your gross margin are in the range of 27% to 28%. If I look at the competition, assuming that headwinds and the tailwinds of the industry in last six quarters would be same for all of you, the other electrical companies almost achieved their pre-COVID levels in four quarters out of six. And we are still about at 27% to 28%. Just need your comment on it how one should look at this kind of performance and whether we should be going back to our own original pre-COVID gross margin where we were at 32% plus? That’s my first question. Need your comment on that.

And second, on the consumer demand, inventory correction of the industry, the price correction, must be for the competition as well, but generally on the consumer sentiment, on the consumer demand, how you are looking things at the ground level given the high inflation across the product categories in electricals, even other product categories as well? So, just these two questions. Thanks.

Rakesh Khanna — Managing Director & CEO

Okay. Nitin, regarding the consumer demand, as you said, we are seeing the demand in lighting to be continuing well in the consumer side, in the government side, it has been a little low, but we are hopeful that as per government, continues from about investing in infrastructure that demand should also quickly come in place. Facade is growing and growing at a very good pace and we are getting very well placed there. In terms of switches and switchgears, for us, because we are very small, I don’t know to what extent market growth will make a difference, but I understand that housing has shown some good uptake and the housing-related products are moving on. And this segment is also seeing an uptick.

When it comes to water heater, I think it’s doing well. Q1, we’ve seen good growth. We do hope it will continue. Coolers, this time the trade inventories have got cleared. We do hope that will also take on where consumer demand is growing very well there. So, in all products, it’s going well. It is just that in fans for some time, we have seen a little dampening of demand, but I’m very hopeful that will also come back in place. So overall demand should be good. Should we look at the pre-COVID gross margins, our efforts will be there. And as I said, we are hopeful that industry will provide that space for the gross margins to go to pre-COVID levels.

In terms of relative performance on gross margins, I would like to understand from where you come because my understanding is that we have been able to keep our gross margins in terms of positions at the similar level. Although, our gross margins have been lower than some of our peer group companies and we are trying to build them up, scale also plays a role there. So, as you build up scale, we should be able to start bridging the gaps.

Nitin Arora — Axis Mutual Fund — Analyst

All right. Thank you very much for your answer, I’ll come back in the queue. Yeah, yeah, Saibal, sir, you were saying something, sorry.

Saibal Sengupta — Chief Financial Officer

Yeah. Just to add on that. Since you mentioned about the sequential and pre-COVID, just be mindful of the fact that pre-COVID in ’19, we had seen the lowest levels of — not lowest, but relatively much, much lower levels of commodity prices that were trending. And the quarterly — we have to be a little bit mindful about the quarterly mix that that happens as far as our company is concerned, because of the product mix changes from quarter-on-quarter. But having said that, we have been considerably doing well in terms of consistency, holding the gross margins for the last couple of quarters despite the commodity inflation that has happened.

With the commodity prices slightly going benign at this point of time, we have to see how it stabilizes in the coming quarters. But given the fact that we are holding high cost inventories from the previous quarter, it will take a little bit of time maybe to stabilize to those levels. But as and when we pick up and we go and change the product mix over a period of time, yes, it should start coming back, but that will take a little bit of time. It will not be appropriate to expected it immediately in the given context and situation. I hope that clarifies.

Operator

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

Rahul Gajare — Haitong Securities — Analyst

Good morning, gentlemen. I’ve got a couple of questions. First on your distribution, the distribution revamp that you started with fans business in Odisha, Bihar, now done that in Karnataka and UP, could you give us a sense on your overall distribution revamp plan? Do you intend to go pan-India NECL [Phonetic]? Is it going to be restricted to a particular product or across the product and what’s the kind of timeline that you have internally for this entire transition of your distribution net? That’s the first question.

Rakesh Khanna — Managing Director & CEO

Okay. Yeah, Rahul, we have taken up these states. The first two states, Odisha and Bihar are already stable and they’re doing very well. The next states are in the state of transition. As you said, it has, it has put pressure on our total numbers during quarter one, but we are very hopeful and looking at the results from the first two states that we will be able to make up good market share in these states also. This step is being taken because some markets remained underpenetrated under our RBL model for long time and we have taken this action only in the markets before underpenetrated.

Wherever we have a strength of a very good master distributors, we want to maintain that strength because that’s amazing strength that we have and we really value that strength. We will continue with that wherever our strength is strong. So, we will pick up whatever is good for the market. In terms of which all categories, yes, this particular master distributor system has been only for fans and for the rest we anyway going directly to the market. However, to top it all, as I said, that we have partnered with external partners and developed a very strong growth map or go-to-market with very strong digitization. So, that will extend to all categories in due course of time. As of now, we started in all directions but our main focus is on these states to put a right working model, which has become a model to be replicated in the rest of the states and rest of the businesses.

Rahul Gajare — Haitong Securities — Analyst

But time line, when do you intend to finish this entire revamp in fans?

Rakesh Khanna — Managing Director & CEO

Normally, a full setup of GTM takes one to two years, but since we have a great partner, we have a very clear roadmap, our [Indecipherable] digital program has already taken off and well-established. We do hope that we should be able to complete it much earlier.

Rahul Gajare — Haitong Securities — Analyst

Okay. Sir, my second question is on the lighting and switchgear business, we’ve done well in this particular quarter. Can you split lighting and switchgear revenue and growth in each vertical? And also if you can comment on profitability of each vertical. This will essentially help us compare the performance with peers. So, that’s the reason to ask this question.

Rakesh Khanna — Managing Director & CEO

You can take most of the performance as lighting driven performance. The numbers of switchgear still continues to be small. Within lighting, switchgear, it is less than 10%. However, both the businesses are profitable today stand-alone. Most of the profit being driven by the lighting business.

Rahul Gajare — Haitong Securities — Analyst

Sir, my last question is on the fan. Yes, sir, you were saying?

Rakesh Khanna — Managing Director & CEO

Carry on, carry on.

Rahul Gajare — Haitong Securities — Analyst

Sir, in the fans business, it’s Star Rating being effective from January ’23. What do you think is price rise, which is expected, because of this transition? And your thoughts on inventory, how that typically will move because of this? I’m doubtful if there would be pre-buying in this transition, but just would like to hear your thoughts. And also, if you can finally comment on your market share in fans right now? That’s all from my side. Thank you.

Rakesh Khanna — Managing Director & CEO

In terms of fans, market share, there has not been much movement. We’ve been tracking it, it remains anywhere between 18% to 20%. Difficult to have any kind of a syndicated data to say, but that’s our estimate. Now in terms of the transition to the Star Rating, there are different views how it will transition. Some believe that there will be a lot of pre-buying by the channel of the announced Star-rated at a lower price and some believe that people will actually not take that risk and start buying the Star-rated.

We are trying to assess the mind of the market. It will all depend on how much is the cost difference finally between the Star-rated fan and the non-Star rated fan. There are enough efforts going on how the cost difference between the Star-rated and non-star rated can be minimized and everybody in the industry, I’m aware is working in that direction. So if the cost difference can be minimized, it’ll possibly go in favor of the Star-rated fans. So, we’re keeping an eye on the ball, we’re constantly working hard towards minimizing the cost difference. We will know it another two, three months how the swing will happen.

Rahul Gajare — Haitong Securities — Analyst

Sure. Thank you, very much.

Operator

Thank you. [Operator Instructions] The next question is from the line of Akash Jhaveri from Perpetual Investment Advisors. Please, go ahead.

Aakash Javeri — Perpetual Investment Advisors — Analyst

Hi, good morning and thank you for the opportunity. Just extending the previous participant’s question, that out of the entire fan market, how do you see this evolving in terms of the BLDC penetration over the next three to five years? And would this technology be easily accessible to unorganized players or would organized player gain more market share over time?

Rakesh Khanna — Managing Director & CEO

So, Akash, first of all the BLDC is a very simple technology, there is no great thing about it, it’s a fairly simple technology. The transition is dependent on the cost difference between a normal induction plan and the BLDC fan. In any electronic product, the cost continues to come down as the scale increases and we believe even in BLDC, the cost will continue to come down with the increase in scale because a significant part of the cost lies in the PCB. So, my own estimate is that there will not be an immediate swing. There are pros and cons between both of them.

The BLDC fan has all the advantages. There is no sound, it is power-efficient, all those advantages are there. But the technology is not fully stable as of now. The failure rate between induction and the BLDC the failure rate difference is there today, mainly because of the power quality. But if the prices keep falling down, it will move anywhere from 30% will be BLDC to 50% or we move to 70% depending on over a period of time, but it will definitely move in favor of BLDC because the technology will stabilize, the PCB qualities will stabilize. So, it will move in that direction.

Aakash Javeri — Perpetual Investment Advisors — Analyst

Sure. Thank you so much for that. And all the best.

Operator

Thank you. The next question is from the line of Praveen Sahay from Edelweiss Financial. Please, go ahead.

Praveen Sahay — Edelweiss Financial — Analyst

Yeah, hi, sir. Thank you for taking my question. So, related to the fan, as you had mentioned there is a — second half, there is a slowdown in the demand. Can you give a color on the premium versus the economy, how is that?

Rakesh Khanna — Managing Director & CEO

Praveen, no difference change. It continues the same way. Though the mix is similar, there is no special shift that you’re seeing. There is a consistent movement towards more of decorative and premium, but at the same time, as more and more is moving from unorganized to organized, all that movement is coming from the economy side. So, the economy is growing because there is a movement from unorganized sector and the premium and decorative is moving because customers are steadily moving towards premium and decorative. So, both of them are expanding.

Praveen Sahay — Edelweiss Financial — Analyst

Okay. Second, on the ECD price hikes, so have you taken the entire whatever inflation in the raw material, you have taken the price [Technical Issues] absorbed in the term?

Rakesh Khanna — Managing Director & CEO

Praveen, whatever could be taken has been taken. But going forward, as the material pricing has started easing out, the need for price increase is not there. In fact what we need to work now on is how quickly the high cost inventories can be cleared and we take advantage of the cost reduction and that’s how the margins will get on to improvements.

Praveen Sahay — Edelweiss Financial — Analyst

Okay. Thank you, sir.

Operator

Thank you. The next question is from the line of Vrat Kala [Phonetic] from JM Financial. Please, go ahead.

Unidentified Participant — — Analyst

Hi, good morning. Thank you for the opportunity. Sir, two questions from my side. One is in the opening remarks, you spoke about working with a consultant on your e-comm initiative, cost reduction and distribution. So, you have touched upon a little on the distribution side, but it would be great if you can talk a bit more on the initiatives in each of these identified areas? That is number one.

And second is more of a bookkeeping question in terms of what would be the split — revenue split for FY ’22 of each of the key categories of water coolers, air coolers, et cetera.

Rakesh Khanna — Managing Director & CEO

So, what we’re doing in each one of them, I have not fully understood your question but let me try to answer as much as I have understood. In e-commerce, we have — we have a very clear view that e-commerce is going to be very important going forward for us and it’s critical that we establish ourselves quickly in e-commerce. Therefore, there is a roadmap drawn for all our products, how we are going to increase our presence in all the platforms, be it our own brand.com or be it all the marketplaces and the new coming platforms, how do we improve the backend system, et cetera, and how do we improve digital presence in terms of marketing on digital, the share of spends on digital, share of visibility on digital. So, there is a whole game plan around it. Goes along with talent on-boarding and making a very strong team around that.

When it comes to cost reduction, you are aware that we already have a very strong program called Sanchay, which is highly institutionalized and digitized with a very high visibility of every single cost reduction initiative we are taking with a clear measurement, which goes to finance team. And we now giving it up further thrust of putting big speed to this and we are very hopeful that we will be able to drive the cost down much faster than ever before. The third, go-to-market, we have taken these new states and we are building up a model go-to-market system, which will be highly digitized. And we do target high market shares and this particular model which will then be replicated across the country.

I’ll leave the second question to Saibal to answer.

Saibal Sengupta — Chief Financial Officer

Sorry, the second question part once again. The second part of it.

Unidentified Participant — — Analyst

So, sir, just a broad breakup in terms of the key categories we have in terms of their contribution to revenue for FY ’22?

Saibal Sengupta — Chief Financial Officer

Can you be specific which categories you’re talking about?

Unidentified Participant — — Analyst

Sir, say fans — you can say fans, air coolers, water heaters, kitchen appliances and lighting switchgears.

Saibal Sengupta — Chief Financial Officer

First, we do not give so much of detail. Maybe I can discuss separately, but let me give you an idea. Normally, fans will be roughly around 60% of the total business and with slight depression right now, a couple of percentage points swing. Lighting switchgear, as we have seen, it already covers a good 26%, 27% of total revenue, out of which switchgear is just about 2% of the total share of business and lighting is about 25%, 26%. That’s how it [Technical Issues]. So, that is a trend that remains with little bit of quarter these SKUs, which happens on quarter-to-quarter basis.

Unidentified Participant — — Analyst

Yeah, yeah. Thank you, sir. I’ll just get in touch separately for the other categories. Thank you for answering my questions.

Operator

Thank you. [Operator Instructions] 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 and thank you for the opportunity. Sir, if we look at the annual report and the Sanchay program, it says that we’ve saved about INR45 crores in FY ’22. Now this is a big number. So, just wanted to know how sustainable is the savings and if you can sort of elaborate on a couple of areas where we have sort of extracted such a huge saving?

Rakesh Khanna — Managing Director & CEO

Great. Hi, Bhargav. So, few things. First of all INR45 crores is not a very big figure when we consider that most of the good companies they aim to take off 2% to 3% every year from the cost. So, it’s not a big, big figure. And so we have to also work in the same direction. As I mentioned a little while back, Bhargav, Sanchay is completely end-to-end digitized platform. It’s called an idea bridge where every single cost reduction idea is put in place, there is a proper team which works on it, follows it through.

The cost reductions are measured, finance approves and recognizes these ideas. It’s a culture that we have built into our organization where everybody is constantly working towards how do we optimize the design by using the latest in the technology and by working with the most optimum design, negotiations, et cetera. So, it’s fully sustainable. As I said, Bhargav, going forward, we would want to increase this further our capability in this direction and we believe that this is something that will help us to maintain our prices and guard our market shares in increasing competition.

Bhargav Buddhadev — Kotak Mutual Fund — Analyst

Understood. The second question is on the B2B lighting side of the business. Is it possible to broadly elaborate how big this business would be within the lighting business? And what we understand is that the pipeline is now sort of getting built up again, especially on the street and facade lighting and a lot of innovations are also being made herein, which are more tech savvy. So, if you can throw some light on this side of the business and this would be my last question.

Rakesh Khanna — Managing Director & CEO

See, Bhargav, to say at an industry level, B2B will be close to 50%, I’m saying the range. Okay. But wherever — whereas our own business is in the range of 15% to 20%. So we are, we have a long journey to go in B2B business and we see it as a great opportunity because the success we have made in B2C business gives us confidence that we are capable of delivering the similar success in B2B business also. The recent success in the B2B business, especially when we look at facade and the kind of orders we have been execute and build the confidence of our customers, we believe that we should be able to constantly increase our share of B2B business in the total business.

Bhargav Buddhadev — Kotak Mutual Fund — Analyst

Okay, great, sir, and all the very best. Thank you.

Rakesh Khanna — Managing Director & CEO

Thanks, Bhargav.

Operator

Thank you. The next question is from the line of Anirudh Doshi from ICICI Securities. Please, go ahead.

Anirudh Doshi — ICICI Securities — Analyst

Yeah, thanks for the opportunity. Sir, during COVID, expansion of distribution was bit impacted. So, what are our strategies for FY ’23 and ’24?

Operator

Mr. Joshi, I would request you to speak on the handset. Your voice is not audible.

Anirudh Doshi — ICICI Securities — Analyst

Yeah, I’m speaking on handset-only. Yeah — I will try — is it better now?

Operator

It’s better. Please speak little softly.

Rakesh Khanna — Managing Director & CEO

Anirudh, can you keep the mic a little away from your mouth. I think so.

Anirudh Doshi — ICICI Securities — Analyst

Yeah. Is it better now?

Operator

Yes.

Rakesh Khanna — Managing Director & CEO

Much better. Thank you.

Anirudh Doshi — ICICI Securities — Analyst

Yeah. Sir, what is the strategy to expand distribution over the next two years? I guess during COVID, expansion of distribution was relatively tougher, but now what is the strategy in FY ’23 and ’24? And lastly, we have seen some of the durable companies are doing special effort to penetrate more in rural market. So, what is our strategy on that also? Yeah, thanks.

Rakesh Khanna — Managing Director & CEO

Anirudh, the distribution expansion is in two parts. As I always say, one is the reach and one is the reach, which is, which we can influence. Today, our reach is fairly high. We are available in more than 100,000 outlets that we have the reports, which are even four years back we were available at 135,000 outlets. So, our reach is good. What is important is the quality of the reach and our ability to influence that reach. The programs that we have taken up with the implementation of DMS and SAP across, the objective is to start gaining visibility and influence on our reach so that we can start extracting higher counter share from all the — all the important counters. We had started this exercise sometime back. We have gained quite a few — quite some strength in this. Now, what we’re doing in the go-to-market states, we are building a very clear zero-based structure, which we believe will be a role model for all other states and all other businesses.

Having said that, our Connect program with the retailer continues to gain traction. Today, we have more than 50,000 retails on Orient Connect already connected with completely geo-tagged. On the other side in sales force automation, also, we have another more than 50,000 retailers who are clearly geo-tagged today with full visibility. So, we’re progressing on that. Our target is to reach out to a visibility level of more than 80% in the market so that we are able to clearly influence the retailers where we are there. This will include rural penetration because our new distribution is going district-wise micro markets mapping and therefore, we will be covering all the rural penetration also.

Anirudh Doshi — ICICI Securities — Analyst

Yeah, thank you. Thank you, sir.

Operator

Thank you. [Operator Instructions] The next question is from the line of Aditya Bhartiya from Investec. Please, go ahead.

Aditya Bhartiya — Investec — Analyst

Hi, good morning, sir. Sir, you have started engaging with dealers in the last couple of quarters directly. While we understand the long-term rationale of the move, is it something that is creating some near-term disruption in the business as well?

Rakesh Khanna — Managing Director & CEO

Well, yes, it is, in those markets, as I said, these are transition markets. If you’re referring to the same markets, UP, Telangana, Karnataka. Yeah. So, of course during the changeover time for two to three months, there is a disruption because the previous distributor is on his way out, the stocks have to be adjusted, the accounts in the markets have to reconciled. I’m very happy that in the two markets where we completed the transition there have been no bad debts, no loss of money, no loss of sale and we have very beautifully transitioned to the next model and we will aim to do the same thing of very smoothly transitioning from one particular distributor to set of the next distributors, so that the health of the market relations remains in good condition. But yes, in the process, there is the delay, because there is a blackout period when we will not sell and we will only do the account reconciliations and collection and stock adjustments. But thereafter, it picks up at a very good pace.

Aditya Bhartiya — Investec — Analyst

Sure. And this disruption is mainly on the primary sales side that there is inventory correction that takes place in the system or even on the secondary side we end up losing market share on a transient basis?

Rakesh Khanna — Managing Director & CEO

The attempt is only to limit it to the primary and to a large extent, we are sure that we have been able to limit it to primary but a few slips here and there during the transition period cannot be avoided. But after the transition the games are so healthy that they’ll make up for any such kind of a small aberration here or there.

Aditya Bhartiya — Investec — Analyst

Understood, sir. Sir, my second question is on the performance when we compare it with some of the other electrical companies on a three-year basis. For the ECD segment, we are having roughly flattish revenues on a three-year basis and that follows an already kind of a weak fourth quarter inventory in the system for Orient who is on the lower side. Conversely some of the other electrical companies have delivered somewhat better numbers on a three-year comparison basis. So, where do you think — what really has impacted the performance of Orient? And how would you see that to be improving over the next few quarters? Thanks.

Rakesh Khanna — Managing Director & CEO

So, instead of three years, go to four years and you will see the difference. What happens is there are movements quarter-on-quarter and if you’re taking a cut-off point normally I would do it at a different levels to see the difference because in that year of 1920, we had grown by more than 30% whereas the peer group had grown by a very small number. So, as I said some time back that if you see the CAGR growth of last five years, Orient Electric, you would find is one of the highest CAGR in the last five years. So, so just have a look at cutting the number of years at different levels. So, look at four years and you will find a different story.

Aditya Bhartiya — Investec — Analyst

Absolutely. I completely agree. So, we had very strong growth in one of the years and since then it has kind of tapered off. So, just wanted to understand whether that growth that we had was some of — has kind of taken into account the growth that could have followed in the next few years as well and it’s a normal kind of correction that has taken place, or do you think something has gone wrong, especially during the COVID period, maybe some of the larger companies doing something differently? Just want your perspective on that. On a four-year, five-year, basis, I completely agree.

Rakesh Khanna — Managing Director & CEO

Two ways to look at it. One is the five-year and second is the full five years. So, if you see both ways, you will find that Orient Electric is doing fairly well with respect to the peer companies. So, the quarter-on-quarter variations are little — I don’t spend too much time on them, but when you see overall year-on-year, you will find that there is a steady performance. It happens that sometimes a particular brand takes a correct — price correction at one time, the second brand takes a little later. It all evens out, a quarter here or there, it all evens out. But you have to see that way, take five years and take four years, full years and check it out, you will find the performance is absolutely in line or better than the peers.

Aditya Bhartiya — Investec — Analyst

Understood, sir. That’s helpful. Thank you so much.

Operator

Thank you. The next question is from the line of Ashish from Infinity Alternatives. Please, go ahead.

Ashish Kumar — Infinity Alternatives — Analyst

Thank you, sir. I just wanted to kind of take a slightly longer-term view or medium-term view. We’ve seen a five-year growth rate of mid-teens. There been bad years and good years, as you rightly said. But let’s say going forward in the next three years, if I were to look at forward, what is the aspiration level from a company perspective in terms of growth rate and in terms of the operating margins? Where do you think can we kind of hit the mid-teens kind of margins or do you think will continue to be at the low-teens?

Rakesh Khanna — Managing Director & CEO

Ashish, once gain, if I could have seen tomorrow, I would be doing many better things in life then my job here. I cannot see tomorrow.

Ashish Kumar — Infinity Alternatives — Analyst

No, I agree with you, sir. Absolutely, true for all of us. I’m just saying it from an ambition perspective.

Rakesh Khanna — Managing Director & CEO

Our aspirations are definitely much higher. We want to do a lot more, but at the same time, we will always be prepared for how the market — market moves and therefore are we prepared for the, for the downside and upside, both. We stay grounded at all times. We will take decisions based on the best possible estimates, while we keep our aspirations very high. All the actions that we’re taking for example, the kind of initiatives which I spoke to you a little while back are all to actually support the great aspirations that we have built up for our sales organization and we think there are, there are great opportunities in front of us. And if we work hard, there’s a lot of success for all of us there. We will be working in that direction. But I refrain to say any numbers there.

Ashish Kumar — Infinity Alternatives — Analyst

Okay, then maybe I’ll just maybe focus, in terms of the short-term, do you see any challenges because commodity prices seem to be easing off, COVID seems to be behind us? Do you see any challenges over the next short-term as you stand today or do you think it’s time to be aggressive in the marketplace?

Rakesh Khanna — Managing Director & CEO

There are definitely challenges. For example, the entire industry today and I will talk about the industry not for only us, entire industry is sitting on a high cost inventory. Okay. And one of the reasons why industry is sitting on a high cost inventory is because there were, there were early summers and people — the costs were constantly going up, people booked, people produced the material and then suddenly, the commodity fell down and also the demand fell down, and everybody has inventory at hand.

On the other side, as the commodity starts trading down, the trade will not pick up more quantity because the trade will anticipate price corrections and therefore, trade will start cleaning up the inventory. Therefore, it may take time for the entire inventory of high cost right from the manufacturers and brands up to the trade for all to get cleaned up before we can start the benefit of lower commodity prices start showing in the P&L. So, there is that challenge. How does the navigate this particular time. I do see that the pressure will last during this particular quarter for the industry, but towards the end of the quarter we will possibly start seeing favorable traction and start taking advantage of the commodity price corrections. But future looks to be good with all the price corrections that are happening, fingers crossed.

Ashish Kumar — Infinity Alternatives — Analyst

Okay, that’s helpful. Thanks a lot and wish you all the best.

Operator

Thank you. [Operator Instructions] The next question is from the line of Achal Lohade from JM Financial. Please, go ahead.

Achal Lohade — JM Financial — Analyst

Yeah, good morning, sir. Thank you for the opportunity. You have mentioned 18% to 20% market share in fans. Is it of the total market? Is it of the organized? And would it be possible to give some more color in terms of the deco and premium, how much would be our market share in that segment?

Rakesh Khanna — Managing Director & CEO

Achal, this is of the organized market and we continue to remain a higher player in the premium and decorative. We never been aggressive in the lower end, although with the growth in the lower end, we feel it is important that we cannot be ignoring that lower end also, and we have made significant efforts in the last few quarters to start improving our presence in the lower end also. So, as a brand positioning, we always remain towards the higher end. Our positioning has been there, our strength has been there, our market shares have been there in the top-end quadrant, which we call — at constantly keeps on moving, which we now call more than INR4,500 fan, we would be at around 40% plus of market share in that quadrant. Decorative, also remains to be high. We are the lowest market share in the economy.

Achal Lohade — JM Financial — Analyst

Right. So, this 40% market share in the fan segment, which is selling more than INR4,500 per fan, right?

Rakesh Khanna — Managing Director & CEO

Yes.

Achal Lohade — JM Financial — Analyst

Understood. And how much of the total market is organized as per your estimate, sir?

Rakesh Khanna — Managing Director & CEO

How much is total organized?

Achal Lohade — JM Financial — Analyst

Of the total fans market, how much is organized? Is it 70%, 80%, 90%, 60%?

Rakesh Khanna — Managing Director & CEO

Anybody’s guess, but we believe it is close to 70% to 75%.

Achal Lohade — JM Financial — Analyst

Understood. And have you also seen given the way things are playing out, have you also seeing the unorganized or the smaller appliances, players have come back in the market or they are still struggling with the supply chain and stuff like that?

Rakesh Khanna — Managing Director & CEO

We’ve not seen much coming back to the market. The struggles have been too many.

Achal Lohade — JM Financial — Analyst

Understood. Second question was pertaining to the lighting business. You mentioned that for you, the B2B is relatively small. I just wanted to understand in terms of the sales channels for this particular business, is it the same? Do you require to establish a separate channel? What’s the right to win here?

Rakesh Khanna — Managing Director & CEO

So, it’s a completely different channel. It’s a completely different team. The team’s skill levels are completely different. The back-end is completely different. Selling B2C is a commodity selling, selling B2B is solution selling. It’s completely different and the right to win is because we have very strong R&D team, our ability to give solutions is very good. We have a very strong design team and we have been able to put together a very strong, the sales team. We have started getting very good empanelment in many, many accounts. So, it’s a whole journey. It’s completely different kind of a business and it’s taken us time to build capability there but we are seeing very good traction now.

Achal Lohade — JM Financial — Analyst

Right. And would you be able to give some more color in terms of the total market size of lighting and how much is B2B in that?

Rakesh Khanna — Managing Director & CEO

B2B is 50% of the total market. That’s how, sometimes 40%, sometimes 55%, somewhere there.

Achal Lohade — JM Financial — Analyst

Right. But in terms of the total industry size because we tend to get very different numbers. So, would you be able to throw some more color in terms of what is the market size, either for B2B or for the total? We can derive the others.

Rakesh Khanna — Managing Director & CEO

So, if the total market size is considered to be anywhere between INR12,000 crores to INR13,000 crores of organized market, close to INR20,000 crores, including the unorganized market put together out of the INR12,000 crores to 13,000 crores, 50% would be close to that would be the B2B. These are ballpark figures. There is no syndicated data around this. But these are very ballpark figures.

Achal Lohade — JM Financial — Analyst

This is very helpful, sir. And one more question I had with respect to the cost deflation. Like you rightly pointed out, in terms of, it will take some time to adjust to the new prices. What I wanted to check, is if you were to look at the top three, four cost items within the bill of material, they would I presume copper, aluminum, steel, plastic, would that be 60%, 70% of the BOM or could that be lower or could that be higher, sir? Any color you can provide on the same?

Saibal Sengupta — Chief Financial Officer

Achal, it is a difficult question, because you have to see some parts they come in from of components, but they are also steel, aluminum and copper. Okay. So very difficult to put that. Finally, when you look at a particular thing, what is there. Any of the ECBs when you look at it, if you look at motor inside, you would find steel and copper, if you find the body, it is either steel, aluminum or plastic or ABS. So, by and large everything moves around that and rest is your cost of conversion or the cost of electronics or the cost of electronics.

Achal Lohade — JM Financial — Analyst

Right. Where I was coming from…

Operator

Mr. Lohade…

Achal Lohade — JM Financial — Analyst

I’ll come back in the queue. No problem. Thank you. Thank you so much, sir.

Operator

The next question is from the line of Amit Mahawar from Edelweiss. Please, go ahead.

Amit Mahawar — Edelweiss — Analyst

Sorry, can you hear me now?

Operator

Yes.

Amit Mahawar — Edelweiss — Analyst

Hi. I just have two quick questions. First is, Mr. Khanna, the share of fans with INR2,000 and more range, what is the share that we have in our revenue? And within that what is the Aero series contribution now vis-a-vis last year? And the second question is on switchgears, how has the market share moved vis-a-vis last year in switchgear? Thank you.

Rakesh Khanna — Managing Director & CEO

Amit, both your questions are very tough and I will separately have to answer the questions. You’re asking specific numbers in INR2,000 plus and with asking share of Aero, I wouldn’t have immediately at hand. Maybe you can call me later, I’ll try and or maybe Saibal can later give you some details on that. In switchgear, our market share is very, very small. We’re still scratching the surface. So, I don’t think we’re seeing it in form of market share as of now, we’re only seeing it our internally how much are we growing because in such a small base, we should be growing very, very fast, very high and that’s the effort.

I’m happy to say that we’ve been consistently now it has been in the profitable range and it’s growing very well. The new range is getting accepted very well and we’re getting more and more confident of now building up on this business. Given by the industry norms, this is a highly profitable business. And so we have a lot of expectation from this line of business in the coming time.

Amit Mahawar — Edelweiss — Analyst

Got it, got it. Thank you.

Saibal Sengupta — Chief Financial Officer

Amit, were you asking the share of business for the INR2,500 plus fans? Did I heard you right? Or are you talking about the market share?

Operator

Sir, he has been — he is not no more in the queue now, he is gone.

Saibal Sengupta — Chief Financial Officer

Okay, no problem, I will talk to him later. Please, go ahead.

Operator

Ladies and gentlemen, due to time constraint, that was the last question for today. I now hand the conference over to the management for closing comments.

Rakesh Khanna — Managing Director & CEO

Thank you. Thank you everyone for joining. It’s great to see your support towards Orient Electric and the kind of involvement that you have in our business. Many of your questions are thought-provoking and they help us to work further on some of the points that are raised by you and they all help us to improve more and become better. Once again, thanks to Ambit team, Dhruv and everybody in Ambit for hosting this session and making it so well. I do hope all of you are keeping safe and I wish all of you and your families all the safety and good health. Thank you all.

Operator

Thank you. On behalf of Ambit Capital, that concludes this conference. Thank you for joining us. And you may now disconnect your lines.

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