Orient Electric Ltd. (ORIENTELEC) Q2 FY23 Earnings Concall Transcript

Orient Electric Ltd   (NSE:ORIENTELEC) Q2 FY23 Earnings Concall dated Nov. 04, 2022

Corporate Participants:

Deepak Agarwal — Assistant Vice President Research

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

Mr. Saibal Sengupta — Chief Financial Officer

Analysts:

Rahul Gajare — Haitong Securities — Analyst

Ankur Tewari — HDFC Life — Analyst

Mara — Kotak Mutual Fund — Analyst

Manoj Gori — Equirus Securities — Analyst

Rahul Agarwal — InCred Capital — Analyst

Pardo — Kotak Mutual Fund — Analyst

Achal — JM Financial — Analyst

Keyur — from Prudential Life Insurance — Analyst

Nikunj Gala — Sundaram AMC — Analyst

Ashish Kacholia — Lucky Investments — Analyst

Unidentified Participant — — Analyst

Chirag Lodaya — ValueQuest — Analyst

Gopal Nawandhar — SBI Life Insurance — Analyst

Presentation:

Operator

Good morning, ladies and gentlemen. Welcome to the Orion Electric Q2 FY ’23 Earnings Conference Call, hosted by PhillipCapital India Private Limited. [Operator Instructions] [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 — Assistant Vice President Research

Thanks. Good morning, everyone. On behalf PhillipCapital India Private Limited, I welcome you all to Orient Electric Limited Q2 FY ’23 Earning Call. Today, we have with us senior management represented by Mr. Rakesh Khanna, Managing Director and CEO; and Mr. Saibal Sengupta, Chief Financial Officer. Without taking more time, I would like to hand over the floor to the management for their opening remarks, post which we’ll open the floor for Q&A.

Thanks, and over to you, sir. Thank you

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

Thank you, Deepak. Good morning, everyone. [Foreign Speech] A very warm welcome to all of you, and thank you for joining us for our second quarter results discussion for the financial year 2023. COVID, now evidently behind us continued global tensions, volatility of commodities and currency, sporadic severity of monsoons and prevailing high inflation. The quarter has seen it all. The quarter under review has seen a decline in revenue and margins. However, a little deeper understanding of underlying reasons gives the confidence of a bright future ahead.

To start with, the revenue decline is mainly in ECD segment. Even though we have continued to improve our share in sand segment in every channel, our primary sales took a beating due to following factors: Firstly, there was destocking by trade channel. This had an industry-wide impact and the underlying reason was expectation of downward price correction by the trade, unpredictability of product mix after the targeting implementation from Jan.

Second reason was our initiative of going direct in a few states, which led to sales reversals of MB stock and blackout period in the big states of AP and Telangana. We facilitate a smooth transition to direct distribution. The good part is that in the states where we have started to stabilize the operations, we have witnessed a growth of more than 40% during the quarter, which keeps increase in market share. We’re confident that the other states will also stabilize well with good trend by the end of Q3, and good positive results will be visible by Q4.

In exports, some markets experienced economic and political instability impacting the revenue. [Indecipherable] being the basic necessity, we are confident that the demand will come back very soon. Moreover, our initiative of developing new markets is staying off well with significant gains coming from these new markets. In H1, coolers has grown by more than 140% and water heaters have grown by a modest 14%. In lighting and switchgear segment, we continue to outperform the industry average, both in revenue growth and margins.

The lighting and switchgear segment reported a revenue growth of nearly 15% for Q2 financial year ’23 and 38% for H1. We continue to expand our B2B bids, registering a 40% growth in revenue during the quarter in H1. Revenue from consumer luminars grew by nearly 17% and 45% in H1. OEL is fast emerging as a front runner in high-growth facade and smart lighting space with steady new influx of orders, and the company remains optimistic about its prospects going ahead with a healthy inquiry pipeline.

OEL won the contract for Sinagal Smart Lights project under the Smart City program. Company was awarded the prestigious contract to design and provide faqade lights for decorating the Kanso Dana Bharat to celebrate India’s 75th year anniversary. In lighting and switchgear segment, OEL continued to post exceptional growth with three year CAGR of 10% for Q2 and 9% for H1. During the quarter, we have launched health wires with limited geographies and have received very encouraging initial response from the trade.

For Q3 financial year ’23, our EBITDA dropped by 2.3% year-on-year. Lower volumes with high cost inventory and competitive pricing pressure post stress on margins. Lower sales volumes led to a reduction in production and purchases, which had a cascading impact on unabsorbed manufacturing overhead. All this resulted in an adverse impact on the contribution margins, causing lower leverage of the fixed overheads.

However, the execution of long-term strategic plans continued unhindered and incremental investments were made in the quarter towards additional spends Y-o-Y on account of advertisement and brand building and consultancy expenses, which has an impact of 4% of revenue for Q2 and resulting in 34% growth of other expenses. After correcting these additional investments, the normalized EBITDA would have been around 6%, which is stand higher than pre-COVID levels.

Our working capital has been reduced from 44 days last year to $41 billion in current year from 34 days in June ’22. In lighting and switchgears — sorry, at an entity level, for the quarter ended 30th September 22, for year posted revenues of INR511 crores with a growth of 17.5% compared to the pre-COVID year financial year 2020. Adjusting for the extraordinary onetime loss of revenue due to destocking, transition to direct distribution in France, destocking and trade and disrupted key markets and exports, normalized growth revenue would have been around 31.5% versus financial year 2020.

On an overall outlook in France, the current vacuum in trade channel created due to destocking is likely to result in strong uptake by trade in coming quarters. Moreover, there is likely to be increased spending by all major brands and government to create awareness about power consumption, thus leading to a trigger to replace the high-power consuming plant pushing the growth further. The onetime corrections for distribution restructuring in select states will be at [Indecipherable] Lighting and switchgear business is well placed to continue the growth journey and outperform industry.

We are focused on our long-term strategy of increasing market reach and market shares, profitability, better cost management and margin improvement. Our strategic part project is still ongoing to revamp our processes in GTM, cost excellence and digital business. Our new Green City Hyderabad factories construction is in full swing [Indecipherable] at lower capacity of delivering top-quality products with better managed costs. Our fundamentals of innovation and consumer centricity is continuously fortified. We are dedicated to deliver top quality innovative products to our consumers. I assume that you all must have read the investor release. On this note, I hand back to Deepak. Thank you, Deepak, and team.

Thanks, PhillipCapital for organizing the call.

Operator

Should we open up for questions?

Deepak Agarwal — Assistant Vice President Research

Yes.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, we will now begin with a question-and-answer session. [Operator Instructions] The first 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 two specific questions, one on revenue and one on profitability. On the revenue front, you did indicate the three reasons why the revenue was invested in this particular quarter. Export restructuring and the PE transition. Typically, second quarter would be low on fans. So I was just wondering, do these reasons have such a large bearing on the entire ECD or 26% growth.

That is the first part of — and connected with this, when you were talking about the distribution, you started these distributions for a quarter or so. So how much of — in terms of sales, how many states — the states that you’ve covered, how much of that sales is covered in the states that you’ve already covered — and therefore, what is left. So we get a sense of this restructuring will take how much time and impact on the revenue.

Mr. Saibal Sengupta — Chief Financial Officer

Rahul, Rahul, can you please repeat the — only the question part of it, we understand your query on the redistribution. We just missed out on your question on

Rahul Gajare — Haitong Securities — Analyst

So the specific question we hear was with respect to the distribution change that has happened and which has impacted the revenue you’ve covered some states already. So how much in terms of percentage of sales of fans is coming from the states that you have already covered in the distribution revamp? That’s the question.

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

So the stake that we have cold account for approximately 25% of the market potential.

Rahul Gajare — Haitong Securities — Analyst

Okay. And that’s what you’ve covered, which basically means you have a — it’s a two year journey is what I understand from our earlier conversation. So you expect large part of this to be covered in this particular year? Or you think it is going to be spread through this year and next year.

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

No, Rahul, we have not said it’s a two year journey. For every state that we have taken, we are saying it’s a 2-quarter earnings. The that 5% of market potential has been covered. We have no intentions of covering 100%. We will only address those markets where the market share is low — and through the existing structure, we are not able to penetrate deeper. And that’s where we have taken calls of completely reshaping the redesigning the distribution. So we will not touch the state where we are very strong because we believe that we have great strength in many states. Only in the weak states, we will take these calls.

Rahul Gajare — Haitong Securities — Analyst

Okay. On the profitability, you have indicated your normalized EBITDA would have been 6%, which is about INR30 crores of profit in this particular quarter, and the reported number is closer to INR11 crores core — so there’s a gap of about INR20 crores a patient — can you help us identify the larger part of this cost or this difference? You have indicated there is a consulting cost and some other cost overruns, including RM. — which are the larger part which has impacted your EBITDA margin in this particular quarter?

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

May I request Saibal to please take over this question.

Mr. Saibal Sengupta — Chief Financial Officer

Hi, Rahul. I will answer that question. So basically, despite the implications on the profitability, we did not relent in terms of getting through more investments for long-term strategic investments One of them, the critical one is on the brand investment. So the advertising and promotion, we have significantly strength in the quarter, especially on some of the new product interventions we have done mainly in the lighting segment. And so that was one significant part of that number that you are likely stating.

And the second part is, of course, as you know, we have engaged Mike for some of our very critical strategic initiatives which obviously is also we see as an investment because there are two, three levers that we are partnering, they’re partnering with us — and that’s where also the cost ecotech does not — was not present in the base. So these are the two major strategic investments of course, travel and others have obviously come back to normal on a y-o-y there, but we are not related to that. These are the two majors, which has impacted that, which you are into the market.

Rahul Gajare — Haitong Securities — Analyst

This is something which one can expect to continue through the year, is it?

Mr. Saibal Sengupta — Chief Financial Officer

Yes, it will, but it will not be on a linear fashion because you can understand like advertisement, we have stepped it up. because of the festival period. So there’s a good amount of traction in sales in varying proportions on quarter-on-quarter, but Music continue and across the categories

Rahul Gajare — Haitong Securities — Analyst

So, my last question is on the other income. We’ve seen significant spike in other income both in the fourth quarter and the second quarter, given the cash balance that we have. So I just want to understand what is transpiring in the other income? That’s my last question.

Mr. Saibal Sengupta — Chief Financial Officer

Other income is essentially some of the litigations that we do and basically, they come in terms of the past provisions, which get reinitiation in few — I’d say a few of the items rate. That is the reason from an accounting perspective, they get to other income. This is obviously not a trend that will continue on being a fashion quarter-quarter basis.

Rahul Gajare — Haitong Securities — Analyst

Sure. That’s very helpful. Thanks

Operator

Thank you. We’ll move on to the next question. That is from the line of Ankur [Phonetic] from HDFC Life. Please go ahead.

Ankur Tewari — HDFC Life — Analyst

Yeah, hi, so, good morning. Thanks for the time. A couple of questions. One, on the fans side, you did highlight about this whole dealer destocking given the upcoming transition and as dealers expect price cuts by companies to clear inventory. Just trying to understand a little more because this is pretty well known, right, that starting January this was the transition happened.

So I’m assuming companies would have cut down their production already, right, and maybe moved over to the new rated fans. So do we really see a big price cut in December to clear inventory? That’s one — and b, when do you see the restocking happening? Would it be more like a Q4 driven restocking as the summer comes and the channel restock? Is that the way we should look at it?

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

Yes. Ankur, it’s really difficult to exactly predict how it will go — you are right that all organizations are aware about the change and all organizations must have been sequeling. I can talk about us. We have prepared well for changeover to the new staff. Most of the production from November, December is one stat. And however, because of the cost of Monsta is higher, since such time the Zero star is selling, many retailers would want to continue to buy and sell the HERO star. The expectation during such time of changeover is that there would be some who may not plan well, etc. Will the prices crash, — do they not crash the customer buy Zero star, we customer by one star — given that the retailers have to wait and watch kind of a trend I agree that they will have to take a call.

Operator

Our members of the management team, we are unable to hear you. Ladies and gentlemen, please see the audience from the to reconnect them. Ladies and gentlemen, thank you for patiently holding. We now have the lines of the management reconnected. Over to you, sir.

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

Ankur I answer your question complete? Or was it I think we lost you — you’re talking about the star being cleared by dealers, and I think then we lost you after that. So I’m sorry, if you could So we’re not really sure will the restocking happen at the end of quarter three or the beginning of quarter 4, but it will definitely happen. — we have to just see how the overall market trend happens. We are prepared from our side with the stocks should the restocking happen at all quarter 4, we have prepared both ways.

Ankur Tewari — HDFC Life — Analyst

Okay. Fair. Okay. And secondly, you did also in your comments talk about higher competitive intensity in this segment. So just trying to understand, are you seeing higher competition from existing players? Is it new players who’ve come in over the last year or so, if you could just help us on this one?

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

Sure. You see, whenever the volumes go down, the competitive intensity normally tends to increase because everybody struggles for gaining and perfecting volumes. During this time, as the volumes fell down, the competitive intensity, therefore increases. I believe this will be shortly because the volumes will soon pick up and restocking will happen in the volumes we come back.

Ankur Tewari — HDFC Life — Analyst

Okay. So it’s just a temporary thing, right, because of weaker volumes in the quarter?

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

Okay.

Ankur Tewari — HDFC Life — Analyst

And lastly, sir, on the margin outlook.

Operator

May we request that you return to the question — ladies and gentlemen, in order to enter to the management to be able to address questions from all participants in this conference. [Operator Instructions] The next question is from the line of Mara [Phonetic] from Kotak Mutual Fund.

Mara — Kotak Mutual Fund — Analyst

So my first question is on this distribution — just wanted to know how many more states are under the consideration in terms of distribution Rejean if you can also get some sense in terms of timing and how much this shale contribute in terms of percentage of revenues for us

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

So. In terms of distribution leading, we have taken these states, and we would want to stabilize these states 100% before we pick up the next — there are definitely some more states where our market shares are low. We are definitely trying to improve the market share within the existing system as of now by implementing the good practices that we are placing in these new states.

But should the market share not improve, we will pick up the new states. As of now, we have clear plans that till the end of this financial year, we will focus 100% to stabilize these states and gain significant market share in the state before we pick up the estate. And the potential, as I said, is these markets have a potential of around 25% on an all-in day basis.

Mara — Kotak Mutual Fund — Analyst

And a related question to this is that is the model of implementation very similar across all these states or each state has their own nuances and hence the timing in terms of rollout could also extend beyond six months?

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

This is exactly the same. This is a complete white paper-based designing of the distribution system, 100% same across — all of them are digitized from day one if all distributors who come on board on DMS on day 1. All the sales teams are on Salesforce automation from day one — so that’s the way we are going ahead for this.

Mara — Kotak Mutual Fund — Analyst

Okay. And my last question is that.

Operator

Mr. Pat may we request that you return to the question queue. The next question is from the line of Manoj Gori from Equirus Securities.

Manoj Gori — Equirus Securities — Analyst

Yes, thanks for the opportunity — so my first question would be like in the opening remarks, if I’m not wrong, you highlighted like we have gained market share across channels. At the level, however, the primary fields were impacted. Is that correct?

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

Yes.

Manoj Gori — Equirus Securities — Analyst

So I would just like to understand like if we look at like most of the peer companies have reported the numbers. So while there was a lag when we were gaining market share, so obviously, others should have been impacted more with us. So can you throw some light over there?

Deepak Agarwal — Assistant Vice President Research

Set.

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

So as I said, in our numbers, first of all, there is a reduction because of some specific reasons. One, there is a negative sale that we had to recall because of shifting to the new states where we have to take back the stock from the trade. We had blackout period. So these are the reasons why our revenue is less — that’s number one. Number two, our pipeline inventory in the rest part, which is 75% of the market, our pipeline inventory is much longer than any other player. – Because we have an MD structure. And therefore, during any such time, when the stock correction happens, our stock correction is actually one of the highest, and that’s a lag. So these are the reasons why the reported number or primary sales would be lower than the other peers good company’s numbers.

Deepak Agarwal — Assistant Vice President Research

Right, sir.

Manoj Gori — Equirus Securities — Analyst

So secondly, if you look at — I just want to get sense on a directional basis. So obviously, we have lagged because of the initiatives that the company has been taking into various states on the distribution side. Should we expect the outperformance versus players — other players in the industry, probably Q4 or probably in FY ’24 from the first quarter itself, and that should be a significant outperformance.

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

I wouldn’t really comment on that part because you are asking with respect to other capable players. All I will say is from our side, there would not be any such kind of thing holding us back. we will be gaining all the advantages of the new states by that time, by quarter four end, we should be completely enjoying healthier market share in all these new states. So that’s on the positive side, you will see good results in q4.

Deepak Agarwal — Assistant Vice President Research

Right.

Manoj Gori — Equirus Securities — Analyst

Sir, lastly, on the wire side, can you share some thought process over there, like what we are targeting, what would be the manufacturing strategy over there, whether — so can you throw some license what’s the longer-term thought process over there?

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

Initially, we will be outsourcing till such time the volumes are small. We will reevaluate as we gain significant volumes. We do not intend to play very big in wires as a category, but we definitely want the portfolio to be complete, considering that in between influencers like electricians and traders would want a complete portfolio. And therefore, presence of wires seems to be important. We will be playing with that perspective and initial response from the trade is very good. And we have, therefore, started with a select range only. We are not going all out to the company than to go in to the selector, select geographies. We will learn and then take a final call.

Manoj Gori — Equirus Securities — Analyst

Does it have any negative impact on the overall operational profitability as of now? And how do we expect any impact — possible impact on the operating profit in the coming year. So I just wanted to understand from an investment point of view for building brand

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

No negative impact. In fact, what happens is it is the same infrastructure which can actually put the wires also. Therefore, it does not come with any incremental cost. It only comes with incremental revenue and margin. That’s point one. But two, because that we are now giving a complete portfolio to the partners, it helps to push the rest of the products also. So this is a category which will only give us a positive, and I do not see any negative.

Deepak Agarwal — Assistant Vice President Research

Okay.

Manoj Gori — Equirus Securities — Analyst

So that was very helpful thanks a lot and issue all the mass

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

Thank you.

Operator

We’ll move on to the next question. That is from the line of Rahul Agarwal from InCred Capital. Please go ahead.

Rahul Agarwal — InCred Capital — Analyst

Hi, sir. Good Morning and season greetings to everybody at Orient. Sir, first question was a clarification on the distribution reset you mentioned. So, should I assume that by March ’23, we’ll be done with the states you mentioned within UP Kanataka AP and Telangana? And then over time, we’ll realize and we’ll figure out what really happens with other weaker states and we’ll take it up sometime in first half of next year. Is that correct?

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

The first part of the question, yes, you are correct. By the quarter four end, we should be done with these days. We will evaluate the next step if required, thereafter.

Rahul Agarwal — InCred Capital — Analyst

Got it. Sir, could you give any indication like number of — at least the number of weaker states left apart from these, which you have already named? There could be like another five or there could be a two?

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

I would hope that we do not have to do anywhere else if we are able to gain our significant market shares as targeted in the other weaker states also by then.

Rahul Agarwal — InCred Capital — Analyst

Got it, sir. And my last question is, sir, on the fan inventory. Total inventory, obviously, we have in the balance sheet is INR290 crores. If it’s possible, could you share what is the split between non-rated and rated inventory right now? And should I assume that maximum by Jan end, assuming that the panel [Indecipherable] destock, by then and one the entire non-rated fan is out of the channel and we’ll start buying rated fans because there’s no option anywhere because the summer 2023 will be very close.

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

Given our inventory in terms of mix, we have already collected most of it, and non-star’s a very small quantity left anyway. The non-star being manufactured is only what we are 100% confident that we will be able to sell and the trade really wanted during this period. Otherwise, non-star will not be manufactured. In terms of the total quantity- total inventory, I don’t think it will make a significant shift because inventory is based on how much inventory we require for the future sales, exactly based on that. I really do not see a link between these two things. On this, that our inventory is healthy-answer is yes, inventory is healthy. There is a very small quantity of non-star available with us now, which will easily get cleared in this month and the next month.

Rahul Agarwal — InCred Capital — Analyst

Perfect. Thank you so much and best wishes for the next year.

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

Thank you so much.

Operator

Thank you. [Operator Instructions] The next question is from the line of Pardo [Phonetic] from Kotak Mutual Fund. Please go ahead.

Pardo — Kotak Mutual Fund — Analyst

Yes. Thank you for the opportunity, again. Sir, given that you mentioned you have very limited inventory of zero-rated fan, fair to say that discounting intensity will only reduce as the year December- and bulk of the discounting has already been done?

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

Pardo [Phonetic], yes. As far as we’re concerned, it will depend on how the competition is well prepared and how much stock the overall industry is carrying that will decide how much discounting happens. From our side, our stock is fairly low, and we have very little pressure to sell the stock at any price.

Pardo — Kotak Mutual Fund — Analyst

And the last question is, is there any risk that the upcoming summer season- maybe a washout, given higher inventory with the channel of zero-rated fans and they may not want to sort of stock the new energy rating in Q4?

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

No, I do not see any such challenge because it is only until such time that the previous inventory gets over-that people have a wait and watch to me. Once that is done, it’s over. It all depends on how much is the consumer demand. I personally believe from whatever figures that we are reading, in terms of be it the travel and the kind of investments people are doing in terms of the housing sales, etc. I have a very strong belief that coming summer will be good. Consumers will be out there to buy, and- you all should be happy.

Pardo — Kotak Mutual Fund — Analyst

Okay, sir. And all the very best

Operator

The next question is from the line of Achal [Phonetic] from JM Financial. Please go ahead.

Achal — JM Financial — Analyst

Yes. Good Morning, team. My first question was in terms of the manufacturing- is it fair to say that the non-star is almost negligible now and all the fans, what we are currently manufacturing haven’t start rating?

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

No, Achal. We are manufacturing significant amount of non-star still because the trade wants it till the December period. But only very fast moving to the extent that the demand is there only to that extent is being manufactured, a very rigorous planning process is in place so that we do not get stuck with any of the non-star as the transition happens.

Achal — JM Financial — Analyst

Got it. And in terms of the cost impact of the non-BLDC fans will see a cost impact when they are converted into one, two, three, four starts — can you help us understand what is the impact in terms of the cost?

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

It depends on different fans. For example, a fan which already has a higher number of pulls or is a very strong fan do not have as a percentage, very high cost of converting from 0 star to one star. But a very low-cost fan, which is not very efficient, we’ll have a higher cost. If you want percentage, you can take anywhere between 10% down to 3%, 4% is the kind of cost increase.

Achal — JM Financial — Analyst

Right. In the process, do you see that there would be an impact on the demand from at least in the low end- and also, the move from unorganized to organized players at the industry level?

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

Some shift may happen. But I personally believe that as the awareness will start going up, people will start understanding the price that they pay by buying a lower cost product over a period of time. The awareness will significantly grow in terms of power efficiency. And I believe that more and more people will instead start shifting towards more power-efficient fans, which will tend to take the average selling price higher.

Achal — JM Financial — Analyst

Got it. Just another question I had on the distribution rigid [Phonetic] part. What I wanted to check is, is it fair to say that the states where you are weak in terms of the market share because of the current distribution structure you are changing it to a direct dealer-if you can give some color as to what exactly are these changes?

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

I have not understood your question actually.

Achal — JM Financial — Analyst

In terms of the rigid [Phonetic] what does it mean? Are you moving to a direct dealer channel or our exclusive distributor and so on and so forth?

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

So in this state, we go back to the drawing board. We look at the stake, we divide the stake in districts, in Talukas, etc. And then we decide how much of the geography can be optimally distributed by a distributor and thereby we divide the stake. Then in each of those pockets, we go and look for distributor whom we call a map market distributor for that particular geography. This distributor for fans is an exclusive distributor and is a non-retailing distributor. Apart from this distributor is responsible from day one to put a DMS system that is 100% visibility. [Indecipherable] should be on SFA along with our team. And it’s clearly understood how many shops this person is responsible for and what share is in that place.

So this way, we complete the entire state and a point multiple distributors. Apart from that, there are some very large dealers who would want to buy directly from the company, and we also appoint those very large dealers as the direct leaders. So this is the process by which we do and we’re gaining very good traction due to this. The retail is very happy because of this. The stock availability is very good. The service levels have gone tremendously up — and therefore; we are seeing a very steep increase in the market share in these states.

Achal — JM Financial — Analyst

Perfect. If you could just help us with the market share for FY ’22-in each of the categories.

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

We don’t have very syndicated data on the market share. Therefore, I will stay away from quoting market shares.

Achal — JM Financial — Analyst

Got it. Thank you so much and wish you all the best.

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

Thank you.

Operator

Thank you. The next question is from the line of Keyur [Phonetic] from ICICI Prudential Life Insurance. Please go ahead.

Keyur — from Prudential Life Insurance — Analyst

Hi, team. First of all, greetings of the Diwali. Sir, I just want to ask when we implement this star rating, any thoughts or discussion with the authorities how strictly or how it will be monitored or implemented? And basically, just one period that if this is not implemented properly, then there will be a must be a [Indecipherable] fake targeted sands, which are not compliant, but it would be lower in the price and that may lend the organized players. So I just want to understand industry’s efforts or your discussion with the authority, how this will be implemented.

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

KU, this star rating fortunately for sand is not being implemented for the first time. There are many other categories where the authorities have gone through the process of learning how to implement. The implementation challenges are there and will remain. However, there are strong processes which the government has in terms of ensuring regularly picking up the stocks of the market, checking, reaching out to the manufacturer and taking actions with the manufacturer where it is not as compliant. But yes, there would be challenges, but the government has done a very good job in ensuring that these star are well implemented across the country.

Keyur — from Prudential Life Insurance — Analyst

Okay. Okay. And second question, so started, basically, it is mandatory to have a star rating. So star rated one and two or star rate one, two, three, all this will be similar to what our current fans are, and it will require lower technical? Is that the correct understanding?

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

K.U., in fact, most of the fans in the market today do not qualify for single star. Most of the industry fans will have to be the specifications will have to be up to make them at least one star or two star. For 5-star, my own understanding is that as of now, only the BLDC fans will qualify for five star.

Keyur — from Prudential Life Insurance — Analyst

Okay. So some technical changes are required, but still 4-star industry motors can be used, but for 5-star, they will need a different motor and [Indecipherable] Okay.

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

Till now, yes.

Keyur — from Prudential Life Insurance — Analyst

Okay. Okay. Thanks a lot and all the best. Thank you.

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

Thank you.

Operator

The next question is from the line of Nikunj Gala from Sundaram AMC. Please go ahead.

Nikunj Gala — Sundaram AMC — Analyst

Yes. Good morning, everyone. Sir, I just need one clarification, like two comments which you made on the call. At one side, how we are saying there are already star inventory lines with the tenders. And we also don’t know how the competition are positioned in terms of [Indecipherable], and that can be a case of we might have to give some discount or the competition might have to give discount. And in one of your other comment, you mentioned you are still producing 0 star brands just the dealers are asking for it. So like my main question is, why are we producing human [Indecipherable] today? And these two comment seems to be contradicting. So just need clarification there.

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

[Indecipherable] See, till December 31st, all the manufacturers can sell the 0 star, okay? The star plan, the price is lower today, okay? So if some part of the trade wants to purchase the 0 star and do not want to start with one star because that the price is higher, one has to continue to supply what the market requires. This will come to an end because if by the end of December, we want to be exiting with 0 inventory of 0 star and so would anybody else want to exit that, most players would try to ensure that there is lesser of 0 star produced. As I said, there is a strong process in place a rigorous thing going on in planning so that the transition is well managed. It’s about managing what the market wants versus that we should not end up with any leader start.

Nikunj Gala — Sundaram AMC — Analyst

So like in few of the markets that you mentioned, where there is a requirement for the 0 star, but where there is inventory which is the two states where 0 star are not required, that that is not possible to move those inventory to there. Just I’m trying to understand this is the case which happened in the other sector also, whether in auto when [Indecipherable] got addition happened the OEM two, three months ago, started not producing those kind of vehicles and not one to the dealers. So maybe at the industry level, some kind of arrangement that we won’t produce at all. And why to have those kind of debt inventory when we are going into Q4. I just want to understand that process.

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

Because what you’re saying is perfectly right. And the target is that we should not have any kind of a dead zero star inventory. That’s the target. And that’s where a very rigorous planning process is being put in place. We will ensure that we are not having any pressures of repeating any of the non-star invention. We will be very clear on that.

Nikunj Gala — Sundaram AMC — Analyst

Sir, thank you for [Indecipherable]

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

Thank you.

Operator

[Operator Instructions] The next question is from the line of Ashish Kacholia from Lucky Investments. Please go ahead.

Ashish Kacholia — Lucky Investments — Analyst

Good morning to you, team. And my question basically, sir, this change in the distribution model that we have kind of implemented? Is it going to be for our entire portfolio of products and across the entire country? Or is it going to be like in pockets?

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

The distribution through a master distributor is only in France. And therefore, it is only in fans that we are making this change. Invest in the products, we anyway do not have the master distributed content.

Ashish Kacholia — Lucky Investments — Analyst

So this — basically it will be the same distribution model across our entire product portfolio or will have different distribution models, different product categories?

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

Like what, I have not understood your question.

Ashish Kacholia — Lucky Investments — Analyst

Sorry, is master-distributor model, what you mentioned? I mean, no, I’m just asking a simple question. Is our distribution model now uniform across the entire product rate or it’s going to be different from the central opinions?

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

When you say product — so within fans, you’re talking product rates?

Ashish Kacholia — Lucky Investments — Analyst

No. Only to lightings.

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

The lightings, we have already redirect.

Ashish Kacholia — Lucky Investments — Analyst

Okay.

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

We do not any–

Ashish Kacholia — Lucky Investments — Analyst

So everything comes to a direct platform. Is that what you’re saying?

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

In these states, yes.

Ashish Kacholia — Lucky Investments — Analyst

Okay. And the rest of the states?

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

So where we have the NV structure that will continue.

Ashish Kacholia — Lucky Investments — Analyst

Okay. One country, one distribution model, is that the objective eventually?

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

No. I mentioned this a while back that we have taken these state states. We are stabilizing in these six days. We are not planning to take up any new state till we completely stabilized. Thereafter, we will evaluate if any state our market share consistently is not improving despite the efforts. We will choose to rejig in that particular state, but we have not taken any decisions at a plant. But definitely, we value our market distributor structures hugely because it’s a phenomenal strength that we had. Some of the states we have excellent market shares and the strength in our monstributor, we would not want to touch statistics.

Ashish Kacholia — Lucky Investments — Analyst

Okay. Got it. All right, sir. All the best. Thank you very much.

Operator

The next question is from the line of Rahul Agrawal from InCred Capital. Please go ahead.

Rahul Agarwal — InCred Capital — Analyst

Thanks for the follow-up. Sir, one question on exports. You highlighted some issues there. My understanding is our best years have been about INR100 crores plus sales in exports and largely fan, almost like 70% of total time sales which is the largest geography facing this issue right now? And how long does it take to recover? Or is it already done with in 3Q, 4Q should be normalized?

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

These are some states in the African markets, where there is the political and economic turmoil. And we — from whatever we see some part of the market may take a little longer, but the larger part, we have already started getting those orders back now. So the reason is that fans is a very basic kind of a product. even if there is an economical political turmoil, the basic necessity will remain. And therefore, even if the demand goes down, it will not go abruptly down, it will tend to come back.

Rahul Agarwal — InCred Capital — Analyst

Got it, sir. And lastly, assuming that by March 23, which you alluded earlier that we are done with most of the states you’ve already named — and the B rating has a clear picture by that point of time. We obviously enter the summer season stocking. — channel has settled down. Raw material prices are in favor and your new factory also comes up somewhere around April, May, everything put together, do we see next year margins going back pre-Covid levels? I’m talking about EBITDA margins going back to 8%, 9%. I mean, should fiscal ’24 be a stable year. That’s the question.

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

Yes.

Rahul Agarwal — InCred Capital — Analyst

Okay. Thank you, sir. Best wishes. Thanks

Operator

Thank you. The next question is from the line of Venold [Phonetic]. Please go ahead.

Unidentified Participant — — Analyst

Yeah, hi, thanks for the opportunity. So you mentioned that the entire — I mean all manufacturers will carry 0 inventory of the 0 rated fans by December 31. In your view, what is the likely channel inventory on December 31? How many days do you think the channel will be carrying at that point of time?

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

We know it’s very difficult because in case the channel picks up ahead of time and the full restocking happens end of quarter 3, the channel will very large inventory — and in case the restocking doesn’t happen and the restocking happens in initial quarter 4, then they will enter with a lot of vacuum. I do not have a clear visibility on that. We will see how the year ends. But I can only tell you, currently, the channel has a huge value and channels will fill up before the season. It will either be end of the quarter three or the beginning of quarter 4.

Operator

Vanold [Phonetic] are you done with your question? Ladies and gentlemen, we seem to have lost the line for the current participant. We’ll move on to the next, that is from the line of Chirag Lodaya from ValueQuest. Please go ahead.

Chirag Lodaya — ValueQuest — Analyst

Yeah, thank you for the opportunity. Sir, I have only one question. So, in the states where you are moving from master distribution to direct distribution. — what would be the impact on margins because of this change in that particular state, if we want to understand

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

Chirag, we would not be any major impact on the margins because you understand that there will be increased cost of reaching out to the trade. We do not see any gain in margin. That’s likely to be neutral, but we do see significant gain in market shares in the areas where we’re going and we see a very strong increase in retailer recommendation rate, the service level increase, that’s what is going to be the main differentiator.

Chirag Lodaya — ValueQuest — Analyst

Got it. Sir, sir, sir, I just wanted to know if there is no material change in profitability eventually? And you see increased service levels and improvement in market share, then why not take a whole of India gradually, step-by-step, why you want to just focus on states where you have low market share at this moment?

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

Because in some of the states, we already have very high market share, very good service levels. There is no reason to discuss that.

Chirag Lodaya — ValueQuest — Analyst

Okay. Okay. Got it. Thank you

Operator

Thank you. We’ll move on to the next question that is from the line of Manoj Gori from Equitas Securities. Please go ahead.

Manoj Gori — Equirus Securities — Analyst

Thank you, sir. Sir, just one thing I need to understand is if with regards to the transitioning from your 0 rating fans to one, two, three and other star ratings. So how do you actually envisage the demand moving probably — how is your production planning — how do you see the behavior of channel? And what should be the price differential within Star ratings? And accordingly, on a blended basis, how do you expect the realization to move up?

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

So, Manoj I addressed this at length earlier. I will repeat it for you. First of all, we will stop manufacturing these fans, stop selling these fans from 31st December. We are aware that there has to be a transition, and there is a very strong process in place for planning and ensuring that the transition is smooth, and we are not stuck with any zero star rated. As far as the trade is concerned, the trade can continue to sell the non-star rated products until such time we have the stock.

There is a cost advantage in the non-Star fans. — and that cost advantage is to the extent of anywhere between 3% to 10%, depending on the kind of fan — it is still to be seen how the consumers will react to this star versus non-Star rated? Would the consumers prefer a low-priced non-star fan– or will the consumers prefer a star rated fans even at a high price. This all will be seen once the consumer comes into the market, we will understand it by the quarter 4, and that is where the unpredictability is there. And that’s one of the reasons why the trade is playing the week in watching as of now.

Manoj Gori — Equirus Securities — Analyst

Right, sir. That’s all from mine, sir.

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

Thanks, Manoj.

Operator

Thank you. Ladies and gentlemen, we’ll be taking the last question. That is from the line of Gopal Nawandhar from SBI Life Insurance. Please go ahead.

Gopal Nawandhar — SBI Life Insurance — Analyst

Thanks for the opportunity, sir. I’m not sure whether you talked about this, as industry taken any price cuts during the last quarter because of the decline in the raw material prices?

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

Yes. Yes, there are continuously price corrections being given, not exactly as a price change, but in terms of schemes, etc, some benefits have been passed on — and there would be some price corrections, which will come now as the commodity prices have come and earlier high-cost inventory is getting liquidated. There will be some price corrections, which will come

Gopal Nawandhar — SBI Life Insurance — Analyst

Can you quantify?

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

Difficult to say. because would vary a lot based on different categories, different fans.

Gopal Nawandhar — SBI Life Insurance — Analyst

Okay, sure. And what kind of price increase one should expect because of the changes in the star rating? And do you — because considering the raw material prices are falling, Will it be required to take any price increase or it can still offset that?

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

The price, you are right that there will be some price drops and some price increase, you’re absolutely right. What I can say is that the difference between the non-star and star-rated plans, there will be a price difference of anywhere between 3% to 10%.

Gopal Nawandhar — SBI Life Insurance — Analyst

Okay. Sure, sir. Thanks a lot.

Operator

Thank you. Ladies and gentlemen, that is the last question. I now hand the conference over to Mr. Deepak Agarwal for his closing comments.

Deepak Agarwal — Assistant Vice President Research

Thanks, everyone, and thanks, management for giving us this opportunity to host this call. Any closing remarks that you want to make?

Mr. Rakesh Khanna — Managing Director and Chief Executive Officer

Thank you, Deepak. Thank you for hosting, and thanks to all the participants for joining your continued interest. We are very bullish going forward. We believe that the season is going to be good I want to wish all of you happy festive season and the coming year. Looking forward to a good quarter 3. Wish you all the best.

Operator

[Operator Closing Remarks]