Orient Electric Ltd (ORIENTELEC) Q3 FY23 Earnings Concall Transcript

Orient Electric Ltd (NSE:ORIENTELEC) Q3 FY23 Earnings Concall dated Jan. 31, 2023.

Corporate Participants:

Rakesh Khanna — Managing Director & Chief Executive Officer

Saibal Sengupta — Chief Financial Officer

Analysts:

Deepak Agarwal — PhillipCapital India Private Limited — Analyst

Aniruddha Joshi — ICICI Securities — Analyst

Bhargav Buddhadev — Kotak Mutual Fund — Analyst

Nitin Arora — Axis Mutual Fund — Analyst

Rahul Gajare — Haitong Securities — Analyst

Nikunj Gala — Sundaram Asset Management Company — Analyst

Rahul Agarwal — Incred Capital — Analyst

Achal Lohade — JM Financial — Analyst

Balasubramanian A. — Arihant Capital — Analyst

Ashish Kumar — Infinity — Analyst

Saptarshee Chatterjee — Centrum PMS — Analyst

Aakash Javeri — Perpetual Investment Advisors — Analyst

Nikhil Upadhyay — SIMPL — Analyst

Presentation:

Operator

Ladies and gentlemen. Good day and welcome to the Orient Electric Q3 FY ’23 Earnings Conference Call. Hosted by PhillipCapital India Private Limited. [Operator Instructions]

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

Deepak Agarwal — PhillipCapital India Private Limited — Analyst

Thanks, good morning everyone. On behalf of PhillipCapital, I welcome you all to Orient Electric Limited Q3 FY ’23 Earnings Conference Call. Today we have with us senior management represented by Mr. Rakesh Khanna, Managing Director and CEO; Mr. Saibal Sengupta, Chief Financial Officer.

Without taking much of time, I will 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.

Rakesh Khanna — Managing Director & Chief Executive Officer

Thank you, Deepak. Good evening everyone. A very warm welcome to all of you and thank you for joining us for our quarter three financial year ’23 results discussion. I am Rakesh Khanna and with me I have our CFO, Mr. Saibal Sengupta.

We are pleased to share that the company registered record high revenue for the quarter with a growth of 8.9% year-on-year to INR739 crores in quarter three financial year ’23, owing to growth in the ECD and lighting and switchgear segments.

Our three year CAGR for quarter three performance is 14.2%, while the five-year CAGR is 16.4%. The gross margin was 28.6% improving by 234 basis points quarter-on-quarter and 102 basis points year-on-year, driven by better cost savings initiatives. The EBITDA margin registered a decline of 237 bps year-on-year, partly due to one-time costs on account of investments in growth, but grew by 515 bps quarter-on-quarter in Q3 financial year ’23 to 7.4%. Although pricing pressure and high-cost inventory [Indecipherable], better operating leverage resulted in expansion of the EBITDA margin on a sequential basis. Excluding onetime costs, the normalized EBITDA would have been 9.1% in quarter three financial year ’23, a modest decline of 17 bps compared to quarter three financial year ’22 normalized EBITDA.

The profit after tax margin was 4.4% in Q3 financial year ’23 compared to 5.6% in Q3 financial year ’22. Our working capital improved to 20 days in the quarter from 34 days in Q3 financial year ’22. The increase in revenue to a substantial extent was supported by 11.9% YoY and 73.8% Q-on-Q growth in the ECD segment led by fans and air coolers. The fan segment recorded the highest Q3 sales ever, which increased by 15% year-on-year following aggressive restocking by trade channel ahead of BEE star rating implementation from January 2023.

The current [Technical Issues] of fans combined with severe cold weather in the north may cause some temporary blips in trade take-off in the coming months, but we expect the trade to normalize, as soon as consumer offtake starts in February, March.

The EBIT margin for the ECD segment was 12% for Q3, registering an increase of 755 bps quarter-on-quarter and an increase of 89 bps on a year-on-year basis. The company has been able to sell its entire non-star rated fan inventory amidst BEE transition.

Presently, we have upgraded 350 plus SKUs from non-star to star-rated fans and have attained BEE rating certifications for 400 plus SKUs. The company has [Technical Issues] position in the BLDC fan segment with its established product portfolio, further supported by planned rollout of new SKUs in quarter four. In quarter three, air coolers registered a 2x sales growth YoY, while water heater sales grew by 21% YoY supported by a 2.5x sales growth in e-commerce compared to last year.

We’re happy to share that our direct distribution strategy has generally stabilized in states of Bihar, UP, Orissa, and Karnataka and has started yielding positive results as sales in these states grew by 60% in Q3 financial year ’23. Andhra Pradesh and Telangana, the two states, which came in later, still has to stabilize and yield positive results, and we expect them to stabilize by quarter four financial year ’23. Our focus is on the expansion of distributors, direct dealers, and retail touchpoints in these states.

The lighting and switchgear segments recorded year-on-year revenue growth of 1.6% for quarter three financial year ’23. The overall lighting growth was stagnant in quarter three financial year ’23, due to the preplacement of demand in Q2 FY ’23, GST increase and the diversion of liquidity towards stock-filling of non-rated fans by trade channels.

The growth in the B2C segment remained flat due to subdued demand and high base of last year. The B2B segment grew by double digits year-on-year, driven by infrastructure spending and robust growth in the facade lighting space. Further EESL restructuring is complete and we expect tender business to improve, in line with government’s infrastructure push towards highways, airports, railways and smart cities.

The professional luminaire space saw record revenue growth with high teens year-on-year growth and improved margins over last year. The company has successfully executed multiple projects for NHAI in Chennai and Chhattisgarh, UP street lighting, HPCL, Jaipur Development Authority and Delhi PWD. Further, the inquiry at execution levels in the building facade lighting segment remains healthy.

The company has successfully completed three projects, the Ganga Barrage project, the Varanasi Cantt railway station and the Puducherry Smart city project. We continue to make progress on Srinagar Smart Lights project, and our company has been awarded the prestigious contract to design and provide facade lighting for Baroda Bhawan in Delhi.

The switchgear segment continues to grow with healthy traction in the mass premium segment. We have also launched house wires in six states, namely Rajasthan, Haryana, Delhi, UP East, Bihar and MP during Q3 financial year ’23.

The company’s exports grew by double digits, despite the ecopolitical challenges in key markets, Sudan, Sri Lanka, Ghana, and moderating demand because of monetary tightening in the western markets. We remain focused on driving the growth through lighting and switchgear portfolio, increasing the digital revenue, go-to-market strategy and cost reduction initiatives. We have augmented our leadership across various functions to expand our market, brand and segment outreach.

On the Sanchay project, we have achieved INR37 crores in cost saving till December ’22. Our new greenfield Hyderabad factory’s construction is on track and we have incurred INR38 crores in nine months financial year ’23 out of the budgeted INR175 crores till date, that is being funded out of internal generation.

We continue to expand our digital revenue which witnessed 3x growth in quarter three although on a low base. In the quarter, the lighting category in e-commerce witnessed improving traction on the platform. In the quarter, we were awarded the CII Supply Chain and Logistics Award for 2022 along with the Fame India Safety Excellence Award and the Fame India Environment Excellence Award in the Consumer Goods Electrical Sector category.

With this, I would like to open this forum for question-and-answer. Thank you.

Questions and Answers:

Operator

[Operator Instructions] The first question is from the line of Aniruddha Joshi from ICICI Securities. Please go ahead.

Aniruddha Joshi — ICICI Securities — Analyst

Yeah, thanks. Thanks for the opportunity. Sir, now considering the direct-to-market route, what is the total sales of the company coming via direct-to-market route and what is the total potential left, means what is the total scope to do the investment in expanding the depth and width of the distribution for the company? And again, secondly, what are the total savings that the company has achieved from the direct-to-market route?

Rakesh Khanna — Managing Director & Chief Executive Officer

Well, Aniruddha, as we said last time also, the total potential that we have addressed through direct-to-market is around 25%. We announced significantly gaining in that side, we are coming closer to our average all-India market share, in some parts of the market now, we are even higher than the average all-India market share that we have. The kind of experience that we have gained in the direct-to-market, is a great experience and we feel that we can continue to further expand and take the market share in these states to the highest market shares that we have in any of other states. So it’s a great experience that we have.

Idea is not to do cost savings, there are no cost savings involved, but there are no extra costs also. It’s cost neutral by and large, it is only about setting the best ground rules from zero base in these new states and creating the best practices, that’s what we are gaining.

Aniruddha Joshi — ICICI Securities — Analyst

Okay. Okay. Thank you, sir. And sir, second question, considering the entire industry has seen good sales in Q3 itself on non-rated fans. So, do you see any likely impact that the industry itself may have relatively muted growth in Q4 as well as Q1?

Rakesh Khanna — Managing Director & Chief Executive Officer

There would be some kind of an impact, but I see this to be a small impact. Really speaking, if you see the entire industry, the growth in quarter three is not so great that it’s likely to impact Q4 and the coming Q1 and the season. It’s a small growth that has happened. It’s a small trade pickup that has happened. We should not forget that the channel was also reasonably empty in the last few months and maybe two quarters. And therefore so much of pickup is not likely to seriously impact the trade going forward and I personally believe that as soon as the consumer offtake will start, the trade pickup will again become normal very quickly.

Aniruddha Joshi — ICICI Securities — Analyst

Okay sir. Thank you. Thank you sir. Very helpful.

Operator

Thank you, ladies and gentlemen, in order to ensure that the management is able to address questions from all participants in the conference, please limit your questions to two per participant. We have the next question from the line of Bhargav Buddhadev from Kotak Mutual Fund. Please go ahead.

Bhargav Buddhadev — Kotak Mutual Fund — Analyst

Yeah, good morning team and congratulations on a good performance. Sir, my first question is on the fact that wherever you have seen direct-to-market, you’ve also rolled out DMS and SFA. So, what are the key benefits of this which you are seeing, and is there a probability of this seeing a pan-India launch also in the fan market for us?

Rakesh Khanna — Managing Director & Chief Executive Officer

Yes, Bhargav, what the digital DMS and SFA allows us is to have a complete visibility. Our objective is to reach the last mile, where the consumer buys from the — from the retailer and we would want in every state to have retail [Indecipherable] of at least 2,000 to 2,500 every state, that’s the target. How this helps us is to ensure that the countershares on each of these addressed retailers are well managed and well influenced. Retailer is an important customer for us in that sense, and we would want to ensure that the retailer is very well serviced and this visibility helps us to ensure that every retailer is well serviced and our reach is correct. And finally, that is what leads to good market shares. We will be rolling out similar DMS in the other states also, but let me clarify, we will roll out the DMS and SFA for the transparency in other states, and not necessarily the direct-to-market.

Bhargav Buddhadev — Kotak Mutual Fund — Analyst

Sure, sure. Understood. Secondly sir, just wanted to know, how has been the pricing for these star-rated fans. What we’re hearing is that, the same have been priced very competitively compared to the erstwhile non-star-rated fans and hence the consumer demand may not be significantly impacted, is that assessment correct?

Rakesh Khanna — Managing Director & Chief Executive Officer

Yes, you are right. Although the cost increase is there, we are working hard to ensure that the impact is minimized through cost reduction initiatives, through pricing initiatives and we understand that we do not want the consumer to get significantly impacted.

Bhargav Buddhadev — Kotak Mutual Fund — Analyst

Okay. And sir last, this data-related question, you mentioned adjusted EBITDA margin of 9% plus. What was this one-time cost and can you quantify this? That’s my last question.

Rakesh Khanna — Managing Director & Chief Executive Officer

So there are a few one-time costs…

Saibal Sengupta — Chief Financial Officer

So, Bharghav, I will take that question. Basically, there were one-time costs around, as you have seen, our employment costs have gone up. So there were a lot of Senior Management Recruitments which has happened, the onetime recruitment costs have gone up. Then we are doing this McKinsey project, which was not there on the base, that has added to the increase in the costs, and as well as — though it is not one time, but still in terms of advertisement promotion, we have significantly upped it on a year-on-year basis.

All that put together has caused this impact. I’m not talking about the other normal expenditures which have rolled back to pre-COVID levels, including international travel and all that, I’m not regarding that. But yes, one-time comprises of the McKinsey consultancy and recruitment costs, those were the bigger ones plus together with the BF1 [Phonetic] brand investment. So all these we look upon it as an investment for long-term sustainable growth.

Bhargav Buddhadev — Kotak Mutual Fund — Analyst

So sir, can you quantify the McKinsey cost and the ad spend as a percentage of revenue?

Saibal Sengupta — Chief Financial Officer

We don’t give that kind of a detail, all that put together, if you can estimate around 1.7%, 1.8%, all this put together.

Bhargav Buddhadev — Kotak Mutual Fund — Analyst

Okay, sir. This is helpful, and all the best. Thank you very much.

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. Sir, can you talk about a little on the secondary sales, how it has moved? Because the large part of your volumes and large part of the ECD portfolio is still fans where you’ve done the inventory addition, plus there was a change in states direct-to-marketing, which could have also resulted in the higher inventory and pushing the volumes to the dealers. Can you talk about more on the secondary sales and as we are closer to the Jan end, how the secondary sales is moving, if you can throw some light on that?

Rakesh Khanna — Managing Director & Chief Executive Officer

Yeah. The secondary sales are in line. They are quite satisfactory from whatever we understand, the market also. The secondary sales have — there is no growth, that one can talk about, but it’s not small. So, secondary sales are going well consumers are buying, we are just waiting now for the summer to come up, when we will see a spike in the segment, the next level of sales going up.

Nitin Arora — Axis Mutual Fund — Analyst

Getting it. And the change in the distribution, which you have done, any other states which you will be taking going ahead or is it largely done, the first four and — four, five states, which you have gone through.

Rakesh Khanna — Managing Director & Chief Executive Officer

See currently, we will be focusing on just putting these states absolutely right. And we will be putting the learnings in the other states. As I said, there are some great learnings that we’re coming across. However, we will always be open to taking any decision anytime. What is important is, whatever is most suitable in a given state, those actions will be taken in the interest of the market shares in the state.

Nitin Arora — Axis Mutual Fund — Analyst

Getting it. Just one clarification on this cost element. So the employee cost which is INR57 crores now, generally we have been in the range of INR46 crores to INR47 crores or INR45 crores. In that, how one should take the recurring cost on the employee side? Because you said there is some recruitment cost. I didn’t understand what is this one-time recruitment cost, I mean it should get normalized, right. So can you throw some light, what is the normalized employee cost one should assume?

Rakesh Khanna — Managing Director & Chief Executive Officer

I think Saibal can take this question.

Saibal Sengupta — Chief Financial Officer

Yeah, hi Nitin. Basically, the employment cost which has gone up, you should see this as a recurring cost, because now most of the — quite many of the senior management team members have already been onboarded, their costs are coming, one or two will get added in the current quarter as well. So what is published is the recurring cost, that will slightly increase as well. The recruitment costs which I talked about is the one-time recruitment for the — not only senior management for at all levels. A lot of vacancies are also getting filled up at junior levels as well. All that put together, it’s one-time recruitment costs.

Rakesh Khanna — Managing Director & Chief Executive Officer

Okay. Let me also add, where you need to see it, is that all of these are upfront costs for the future growth. And as we start growing, you will start seeing the advantage of these costs. So you can see them — the increase in the cost is an upfront cost, which we are putting in in building some part of the organization, which is a growth lever of the organization. For example, we are building a very strong e-commerce team. Now we know that this is an area where we want to significantly grow. So in future as a percentage of revenue, you will start seeing it coming down.

Nitin Arora — Axis Mutual Fund — Analyst

Sir, that’s a well point taken sir. I was just trying to understand that where this 170 bps coming from one-offs. It doesn’t look like a one-off, it’s the recurring cost and I understand the future benefits will come as a percentage of sales. So on an absolute basis, I was just trying to understand, that we should assume this number or not. So then it doesn’t look one-off, that’s what I was trying to understand.

Rakesh Khanna — Managing Director & Chief Executive Officer

One-off is one office other recruitment costs which is in other costs and not in the salary costs.

Nitin Arora — Axis Mutual Fund — Analyst

That would be INR8 crores, INR10 crores roughly?.

Rakesh Khanna — Managing Director & Chief Executive Officer

Difficult to say.

Nitin Arora — Axis Mutual Fund — Analyst

Difficult to say. Got it, got it. Thank you very much sir. I’ll come back in the queue. Thank you.

Operator

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

Rahul Gajare — Haitong Securities — Analyst

Yeah, good morning gentlemen. Sir, I have a question on fans. Now you did indicate that fans have grown by about 15%. Could you clarify the volume growth that you’ve seen in this quarter and for the first nine months for the fans business?

Rakesh Khanna — Managing Director & Chief Executive Officer

Volume growth, value growth are nearly similar.

Rahul Gajare — Haitong Securities — Analyst

Okay, fair enough. Now lighting, I was looking at similar volume growth in the lighting business, because we’ve been flattish in this particular quarter. But the full year, in the first nine months, we’ve seen a 20% plus growth. So just want to understand the volume growth in lighting business?

Rakesh Khanna — Managing Director & Chief Executive Officer

In lighting, it is very difficult to give volume growth. It’s comparing two, three very different products. On one side you have street lights on the other side you have a bulb. So very difficult to put volume to value. I think one has to see only value.

Rahul Gajare — Haitong Securities — Analyst

Okay, let me put it in a different way. I understand there is some decline in the realization in the B2C lighting some large part of the lighting is a significant decline in the realization that we’ve seen in the B2C lighting?

Rakesh Khanna — Managing Director & Chief Executive Officer

No.

Rahul Gajare — Haitong Securities — Analyst

Okay. Sir. My last question is on the demand scenario and what you’ve done on the e-commerce, where we saw a [Phonetic] significant jump up. That’s the last question. Thank you.

Rakesh Khanna — Managing Director & Chief Executive Officer

Sorry, your question is not understood.

Rahul Gajare — Haitong Securities — Analyst

So, I’m asking on the demand scenario, for last two, three quarters, we were talking about the slower demand that is being seen in the consumer side. So, I want to understand what is happening on the demand side on both ECD business and the lighting business?

Rakesh Khanna — Managing Director & Chief Executive Officer

So the demand is, it’s not a high-growth demand. I would not call it that way. But also there is no kind of reduction. We are not seeing the demand is going down, I think it’s fairly stable demand and going forward, we are more hopeful about the demand to further pick up.

Rahul Gajare — Haitong Securities — Analyst

Thank you.

Operator

Thank you. We have the next question from the line of Nikunj Gala from Sundaram Asset Management Company. Please go ahead.

Nikunj Gala — Sundaram Asset Management Company — Analyst

Yeah, good morning everyone. Sir, just want to understand, in the last one month, what are the consumer behavior, we have seen in the fan category like still people are preferring buying one star, two star or three star and above. Can you just help us with your understanding from the ground, what is the higher contribution from which star?

Rakesh Khanna — Managing Director & Chief Executive Officer

So currently, this will be a lot influenced by the trade, and in the trade since there is a zero-star material, the trade will continue to push the zero-star fans. But going forward, as this inventory will deplete and the awareness of the star-rated fans will increase, it’s very clear that the consumers will start going for the star-rated fans.

Nikunj Gala — Sundaram Asset Management Company — Analyst

So in the last month, we haven’t seen any like pattern of people moving from like zero-star to three-star or something? Like, see you must be having some order backlog for the coming months?

Rakesh Khanna — Managing Director & Chief Executive Officer

No significant shift as of now, as I said, and this is largely also driven by what the trade has stocked. Because the consumer first has to go to the retailers and speak there, and the retailers will show the stock that the retailer is carrying and therefore not a significant shift.

Nikunj Gala — Sundaram Asset Management Company — Analyst

Okay. So, as of now, just want to understand from your production perspective, how the contribution will be from your production side, like large chunk would be still — you would be producing zero and one star?

Rakesh Khanna — Managing Director & Chief Executive Officer

No, there is a legal requirement and effective 1st January, the manufacturers cannot manufacture or sell the zero star.

Nikunj Gala — Sundaram Asset Management Company — Analyst

Yeah, I mean for one star and two star sir. I’m saying large chunk of your production still will be one star and two star sir?

Rakesh Khanna — Managing Director & Chief Executive Officer

Okay. Still will be — large will be one star.

Nikunj Gala — Sundaram Asset Management Company — Analyst

Okay, thank you. And just one clarification on your comment, when you mentioned in the nine month period in fans your volume and value growth are equal. Sir, in the last nine months considering the kind of inflation we have seen, is there an understanding that we haven’t taken any price increase in the first nine months?

Rakesh Khanna — Managing Director & Chief Executive Officer

A lot happened because of the mix change during this time, because there is a lot of stocking that takes place — that has taken place. A lot of it has been on the lower price side, so it’s a mix change.

Nikunj Gala — Sundaram Asset Management Company — Analyst

Okay, thank you. Thank you, sir.

Operator

Thank you. The next question is from the line of Rahul Agarwal from InCred Capital. Please go ahead.

Rahul Agarwal — Incred Capital — Analyst

Yeah, hi. Good morning Rakesh ji and Saibal Ji. So, two questions. Firstly our interactions during last quarter with the trade essentially indicated some kind of higher discounts and schemes for liquidating zero star. Your one-time costs, whatever you mentioned doesn’t include any kind of cost related to that. Could I understand a bit more, exactly how has your experience in terms of liquidation, did you — did this discounting actually impact margins? And what would be the receivables really because I heard — if I heard correctly, you said net working capital is actually better YoY? So just these two things please.

Rakesh Khanna — Managing Director & Chief Executive Officer

Yeah. So, the good thing that happened with us is, that we cleared the inventory and we planned well ahead of time. Therefore by December itself, we had sold most of the inventory that we had. We were not under any pressure to discount to liquidate our inventory, we were much better off. And in terms of the credit, you would have seen our working capital, the stocks have improved, receivables have improved. I think we have done very healthy selling. We are happy for that.

Rahul Agarwal — Incred Capital — Analyst

Got it, sir. And second question essentially was on margins, it looks like obviously 3Q has been better based on past history, purely because of channel filling on fans side, but the gross margin and operating margins have not really reverted to long-term averages, obviously that’s a function of some one-time costs incurred right now. But any — how should we look at margins over next 12 months? Any indication, any direction will be really helpful. Thank you so much.

Rakesh Khanna — Managing Director & Chief Executive Officer

So in terms of gross margins, we have improved our gross margins. Of course, pressure continues, there is a lot of competitive pressure in the market, but we have improved our gross margins. Going forward, we do hope that our gross margins will further come up. There are lot of cost-saving initiatives that we have worked — in the pipeline. They will help us to improve our gross margins going forward. And we have not put any separate one-time liquidation costs. You see the entire pricing is a part of the total pricing in the gross margins. So there is no separate thing called that there is a liquidation cost for those, and is sitting somewhere else — there is nothing else that’s sitting anywhere else. It’s the total gross margin earned is what it reflects, which has improved.

Rahul Agarwal — Incred Capital — Analyst

So, the EBITDA should improve to 9%, 10% or will it take like real time, because we are investing quite a lot on e-commerce, on people — in a lot of other things, right?

Rakesh Khanna — Managing Director & Chief Executive Officer

Yes. So we expect that whole thing to start giving results fairly quickly. As you noticed, when we took the call on go direct to the market, our lesson was that we recovered this — the whole thing came back in a matter of two to three quarters. So the whole GTM is a three quarter cycle. Most of these also should start showing results fairly fast. We are already seeing in e-commerce 2x and 3x growth, which is already coming, I’m sure this this will stabilize and will continue to give us the benefits.

So the Spark projects, in which we have McKinsey working with us, is also a two years project out of which one year is going to get over soon and we are already seeing the kinds of benefits that it is bringing in, and that is what is helping us maintain our margins and with that confidence, I am saying that the margins will further grow, because these kind of — very scientifically done cost reduction initiatives are really showing good results. So, we should be seeing the profit margins improving in the times to come.

Rahul Agarwal — Incred Capital — Analyst

Thank you so much for answering my questions. All the best.

Rakesh Khanna — Managing Director & Chief Executive Officer

Thank you.

Operator

Thank you. We have the next question from Mr. Achal Lohade from JM Financial. Please go ahead.

Achal Lohade — JM Financial — Analyst

Yeah, good morning, sir. Thank you for the opportunity. In terms of the mix, can you help us with respect to the fans mix in terms of premium and non-premium for nine months or one year?

Rakesh Khanna — Managing Director & Chief Executive Officer

See, I have always maintained that the premium, the way we define is very different than the way industry defines. For us the premium is the top 10%, is what we call premium and we continue to change the definition of our premium. Our premium is not a fan which starts at INR3,000, at one time it was INR3,000, today is INR5,000. Anything less than an Aero series, we don’t call it a premium.

All I can tell you is that the premium is continuously increasing, it is in the range of 10% and with the new five-star now coming in, the definitions will once again change. A lot of premium will come in the decorative segments for us and the premium will once again move upwards. But in the premium category, as we define, we are clearly a dominant player with more than 40% market share in this particular segment. I’m glad to say that, when it comes to aspirational products, Orient is by far the leader in the aspirational products.

Achal Lohade — JM Financial — Analyst

Right. If I were to ask in a different fashion, if you were to categorize fans in terms of three or four buckets, what would they be and what their mix would be, as we speak?

Rakesh Khanna — Managing Director & Chief Executive Officer

So, the way I would look at is, one is the basic white and brown fans and we call them the base fans. The second would be the decorative fans, which have the trends [Phonetic], metallic colors, etc. The third will be the premium fans and the fourth will be the BLDC fans. And then will be the TPW FAN and the exhaust fans. So, it’s a little different way of looking at the product category, but I think coming out of pure trade-based, price-based categorization, I think if we see it from the consumer perspective the buckets will change and that’s the way we place our buckets.

Achal Lohade — JM Financial — Analyst

And what would that mix be sir, approximately?

Rakesh Khanna — Managing Director & Chief Executive Officer

The basic fans, the white and brown fans will still constitute approximately 50% of the total business, and then will be — 10% for us will be the premium fans and today the total BLDC will be in the range of another 10% and the balance would be the decorative fans.

Achal Lohade — JM Financial — Analyst

Right, understood. The second question I had was in terms of the seasons; A, is there any possibility of price change whether upward or downward for these two categories; and B, any new SKU or differentiated product which — or new product in this particular category?

Rakesh Khanna — Managing Director & Chief Executive Officer

Which category?

Achal Lohade — JM Financial — Analyst

Fans and air cooler, sir.

Saibal Sengupta — Chief Financial Officer

In view of the season.

Achal Lohade — JM Financial — Analyst

From the season perspective, yeah, from the upcoming season perspective?

Rakesh Khanna — Managing Director & Chief Executive Officer

So the pricing is already announced, the pricing there is not likely to be in a [Phonetic] change, and in new products, yes, in fans, there is definitely a strong rollout that’s happening, and in coolers, we have a very strong lineup. So yeah, in both of them the lineup is strong and prices have already been announced.

Achal Lohade — JM Financial — Analyst

Got it. And just one last question if I may, with respect to the gross margins, you said the cost savings initiative, I think you mentioned INR37 crores. I don’t know if pertains to only raw material costs at the gross margin or the other costs as well. So, what is the target here, is there any particular number in mind, what you aim to achieve every year or is this just a one-time thing?

Rakesh Khanna — Managing Director & Chief Executive Officer

Yeah. So, the target is in 12 months-time including this, we should be able to save INR100 crores, that’s the target and we will be moving fast towards that target.

Achal Lohade — JM Financial — Analyst

And how much have we saved for nine months, sir?

Rakesh Khanna — Managing Director & Chief Executive Officer

As we said, INR36 crores.

Achal Lohade — JM Financial — Analyst

So, you are saying the fourth quarter alone have INR60 crore plus savings? Have I got this number right.

Rakesh Khanna — Managing Director & Chief Executive Officer

No, no. We talk of 12 months — rolling 12 months.

Achal Lohade — JM Financial — Analyst

Rolling 12 months, okay, okay, sorry, my bad sir. Understood, understood. And just in terms of market share, if you could help us in terms of fans, lighting and air cooler?

Rakesh Khanna — Managing Director & Chief Executive Officer

Actually, we normally do not talk much about market share, because there is no very reliable syndicated data on market share. So if you ask me my understanding of market share, depending on which brands and how many players do we take in, counting that bucket, I think if I take all the known, well known brands into account, then our market share in fans would be in the range of around 18%.

Achal Lohade — JM Financial — Analyst

So, I presume you’re talking about 18% of the organized market, right, effectively?

Rakesh Khanna — Managing Director & Chief Executive Officer

Yeah. So let’s not get into market share, because there is no syndicated data, and it’s very difficult to define what is an organized, what is an unorganized player, they have different perspectives to them. What’s important is, this is our market size and you can compare with the market — the size of other peer group and arrive at your conclusion.

Achal Lohade — JM Financial — Analyst

Got it sir. Thank you, I’ll come back in the queue for follow-ups. Thank you.

Operator

Thank you. Ladies and gentlemen, we request you to please limit your questions to two per participant. The next question is from the line of Balasubramanian A. from Arihant Capital. Please go ahead.

Balasubramanian A. — Arihant Capital — Analyst

Good morning, sir. Congratulations for good set of numbers. I have one question on lighting and switchgear segments. Sir, like we are doing projects, Srinagar Smart City project and sir, how we are selecting the projects, what is the minimum criteria in terms of margin IRR and the other criteria. Would you please explain the same? Thank you.

Rakesh Khanna — Managing Director & Chief Executive Officer

Yeah. So when we select the projects, basically, we are looking at margin and payment securities and payment terms. So, if the payment terms are secure and the margins are good, we take up the project.

Balasubramanian A. — Arihant Capital — Analyst

Sir, any particular minimum criteria, like…

Rakesh Khanna — Managing Director & Chief Executive Officer

I would not be able to answer that question, because that’s competitively sensitive, you can understand, but yes we want healthy margin and we want to ensure that our payment is well secured.

Balasubramanian A. — Arihant Capital — Analyst

Fine, sir. Sir on the ECD segments, could you please share breakup for fans, water heaters, air coolers, so that would be really helpful?

Saibal Sengupta — Chief Financial Officer

So, basically the fans, as I already mentioned earlier, it feet occupies around 61%, 62% of the business and that is continuing. The water coolers and water heaters, again the same trend as I have mentioned earlier between 10% to 12%, that trend continues. As you can understand there will be seasonal blips into this. And then as far as lighting switchgear is concerned 27%, 28%. So, organically this is a trend, which has continued and the same trend continues in the quarter three as well.

Balasubramanian A. — Arihant Capital — Analyst

Okay, got it sir. Thank you so much sir. That’s it from my side.

Rakesh Khanna — Managing Director & Chief Executive Officer

Thank you.

Operator

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

Ashish Kumar — Infinity — Analyst

Thank you, sir, for taking my question. Sir, couple of questions, sir. One is that as the transition happened and the dealer reshuffling inventory happened, do you believe that some of the sales this quarter were one-off kind of — or do you not there’s anything there?

Rakesh Khanna — Managing Director & Chief Executive Officer

If you see the total sales in the quarter, it is not very high. Therefore, I don’t think it is wise to say the sale is one-off. Yes, the retailers, depending on the geography have tried to overstock a few fans, models, specifically the lower end, where they expected the price — the fans are highly price sensitive. But the total stocking is not very high, and therefore I do not see much impact in the coming quarter.

Ashish Kumar — Infinity — Analyst

Right. And secondly, sir, in terms of the slightly longer term and more on medium term, where do you think our EBITDA margins could stabilize? Could we get back to a double-digit low teens kind of margins, or maybe in a year or two years, or do you think that — because we went through a lot of pain in the last two years in terms of market disruption, commodity prices, etc, I presume a lot of that is behind us.

Rakesh Khanna — Managing Director & Chief Executive Officer

Yes. And if you see — if you take out the one-time investments that we are putting, we are already fairly close to the double-digits. So yes, we are very clear that we will be hitting the healthy teens in some time, as these one-time costs will go away and leave behind the benefits that these one-time costs will give us. All the benefits that the one-time costs are going to give us, are going to be ongoing basis, long-term benefits, and once the cost is removed, you will see healthy EBITDA margins.

Ashish Kumar — Infinity — Analyst

Sure. And secondly, sir on the other income side, is this a sustainable or is there a one-off in that other income?

Saibal Sengupta — Chief Financial Officer

No, other income has a one-off, which you would have seen the disclosure that we have given, there is a past due, which was already fully provided for earlier four, five years back from one of the distributors for which we were into a litigation. That has got close to a one-time settlement and that is a provision reversal, which has got done, which is from an accounting perspective, it has been disclosed as other income. So, that’s a one-off. So out of the INR8.5 crores that you see, INR5.75 crores is a one-off, which has been disclosed separately in the results.

Ashish Kumar — Infinity — Analyst

Sure. Okay, thanks a lot, sir, and wish you all the best.

Rakesh Khanna — Managing Director & Chief Executive Officer

Thank you.

Operator

[Operator Instructions] The next question is from the line of Saptarshee Chatterjee from Centrum PMS. Please go ahead.

Saptarshee Chatterjee — Centrum PMS — Analyst

Good morning, sir. Thank you for the opportunity. My question is on the direct-to-market. Our contribution — revenue contribution from these four markets would be closer to 10% or it would be around mid to high teens?

Rakesh Khanna — Managing Director & Chief Executive Officer

It is more. As I said, we have — we have addressed nearly 25% of the potential and now we are fairly close to the average market shares across the country.

Saptarshee Chatterjee — Centrum PMS — Analyst

Okay. Actually the reason I’m trying to understand is, basically if I back calculate, then for the rest of the markets is like it is kind of a single digit kind of a growth. So what would be the reason for the same, and if that is a case, then is it not good that we — where we accelerate our pace and do this direct-to-market across other states?

Rakesh Khanna — Managing Director & Chief Executive Officer

First thing, you will have to double-check on your calculation, because I have also said that AP and Telangana today have not given us the growth. The growth that I said 60% is without AP and Telangana. Having said that, you are right, that the growth that we would expect from direct-to-market states is high. But at the same time, we have some — the states where we are already very strong, and they are normal MD operations.

I have maintained that our MDs are very, very strong strength and a great asset that we have with us, and we really value those relationships. Will there be some other states with low market shares where we may take advantage of the learnings of this, answer is yes. We will see as and when it is required. However, we will also be implementing the learnings from these direct-to-market states into the MD states and try and further pick up the shares in the MD states also.

Saptarshee Chatterjee — Centrum PMS — Analyst

Understood sir. Very, very helpful. And can you please give the breakup of revenue mix between B2B and B2C in lighting?

Saibal Sengupta — Chief Financial Officer

B2B is around 10% to 15% of the total lighting portfolio.

Saptarshee Chatterjee — Centrum PMS — Analyst

And what would be the margins differential between B2B and B2C?

Rakesh Khanna — Managing Director & Chief Executive Officer

Margin differential is nothing, because it’s at par, because we do not have investments and other costs sitting. There would be a small delta in the gross margin, but that trickles down to the EBITDA, which is at par in both B2C, B2B.

Saptarshee Chatterjee — Centrum PMS — Analyst

Understood, very, very helpful and thank you so much.

Operator

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

Aakash Javeri — Perpetual Investment Advisors — Analyst

Good morning and thank you for the opportunity. My first question is that once destocking is complete of non-star-rated fans at the trade level and we stock the channel with star-rated fans, is the market changing, especially with respect to BLDC penetration and how does that change our profitability as a company?

Rakesh Khanna — Managing Director & Chief Executive Officer

Difficult to say how the market will behave, but we can draw parallel from other products that have moved similarly from non-star to star-rated product categories, water heater being one of them, air conditioners being another one of them. We see that the consumer tends to settle between the two sides. On the lower side is the price sensitive side, and on the higher side is the savings side or the efficiency side.

Similarly, in this fans category, we see the one star will be the price sensitive side and the five star will be the [Technical Issues], and somewhere in between two, the consumers will settle, fans being more price sensitive product, upfront cost is critical for a customer, a significantly large portion of customers will tend to settle for the upfront low price product category, which will be one star. But a significant size would also move towards the five-star, we will all see how the market pans out.

But the current growth in five star is very healthy, it’s moving at a fast pace. There are some states which are already showing the BLDC fans in the rate of 25% to 30% market share already, whereas there are many other high-volume states which are slow starter, they have not picked up the five-star fans very fast. So we will see how the total grows.

Aakash Javeri — Perpetual Investment Advisors — Analyst

Got it, thanks.

Rakesh Khanna — Managing Director & Chief Executive Officer

[Speech Overlap] with good portfolio.

Aakash Javeri — Perpetual Investment Advisors — Analyst

Sure. And what would be the impact — what can impact — sorry, what impact can companies like Atomberg and Superfan, who focus mainly on BLDC, what impact would they have on the industry as a whole?

Rakesh Khanna — Managing Director & Chief Executive Officer

So, you’re right that for some time, there was a unique position for a few of the players and they were enjoying a separate space for themselves. But as the whole space opens up and all players will tend to come in that space, it will become crowded, it will take different shape. So we will see how it goes, but I can tell you one thing, the margins are more or less similar as a percentage. What you can be expecting, is the market to grow in revenue terms, because if the average selling price of the fan goes up by even 10%, we will see that kind of revenue growth, and also if we start seeing replacement happening because of awareness of high efficiency that will also give us growth. So these BEE star rating change is very likely to give a growth to fans and give it a new life, give it more involvement from the consumer side and we all should see a very healthy fan industry in time to come.

Aakash Javeri — Perpetual Investment Advisors — Analyst

And do you see the cost of BLDC fans coming down? And if yes by how much can it come down?

Rakesh Khanna — Managing Director & Chief Executive Officer

Anybody’s guess, but I can tell you, electronic products have the tendency of constantly coming down in cost. BLDC would be categorized as an electronic product because a significant part — the cost of the product is electronics and this will continue to come down. Over the last two, three years, we all have seen a significant reduction in the cost of the BLDC fan, and that’s going to be another reason for BLDC adoption to go up, because the price difference between induction and BLDC is likely to continue to narrow down, and we will therefore see an upswing in this and that will lead to replacement demand going up and the average selling price going up.

Aakash Javeri — Perpetual Investment Advisors — Analyst

Got it. And if I could just squeeze in one more question, what are the advantages of keeping manufacturing for fans in-house versus outsourced?

Rakesh Khanna — Managing Director & Chief Executive Officer

The make versus buy decision is based on a few things. Number one, how critical is the quality and cost in that particular product category. If we believe that technology is important and it requires investments, then this should be in-house. If we believe that there is — the technology is can be very simply duplicated, then it can be outsourced. The organization has to see where the organization wants to put the bandwidth of the organization. If it can be — whatever can be purchased can be purchased at a low cost from outside without affecting the design or the quality or the cost capability, then it can be outsourced. Otherwise, it has to be in-house. So it’s a little complex decision, but we constantly keep on evaluating and taking the decision.

I can also add that manufacturing is definitely very important and it is reflected in our decision for setting up a completely greenfield project in Hyderabad. What we want to achieve from Hyderabad project, is a top-class manufacturing facility, which will give us technical ability to produce high quality products, with high reliability at an economical cost. So we will continue to take make versus buy decision. It’s a great question that you asked.

Aakash Javeri — Perpetual Investment Advisors — Analyst

Thank you so much for answering all my questions and all the best for the future. Thank you so much.

Rakesh Khanna — Managing Director & Chief Executive Officer

Thank you.

Saibal Sengupta — Chief Financial Officer

Thank you, sorry to interrupt. Before taking the next question, I would just like to correct I mentioned B2B as 10% to 15%, at the end of December, it is 25%. I just would like to correct that. Sorry for that. Please continue.

Operator

Thank you. The next question is from the line of Rahul Agarwal from InCred Capital. Please go ahead.

Rahul Agarwal — Incred Capital — Analyst

Just one question on this Hyderabad greenfield project. My sense is it’s going to come in phases. We’re spending about INR175 crores, could you just give us some kind of understanding, when does it start and some idea on phase one, phase two, what are the kind of asset turns or sales contribution or products? I think you’ve explained in the past, how do you want to ramp up fans, it’s all premium top-class low production but just phase one, phase two, what kind of products should we see, what kind of sales should we expect from this INR175 crores investment?

Rakesh Khanna — Managing Director & Chief Executive Officer

So the initial investment. I would say the large part of the investment of course goes in the plant building etc and then is, in terms of equipment. The equipment because the tail-end is — will come in smaller phases, but that doesn’t really define the phases of the whole project. Initially, we will pick up all our TPW fans there and we will significantly reduce the Calcutta production and take them here. One of the reasons for taking TPW here, is that we would like to focus on the export market with TPW product, and we believe that market is large and in India, the ability to produce TPW at that cost and quality is low. We have to fight with China as an alternate and this factory will give us the footing to deliver that kind of a product at that cost.

We will also be looking at manufacturing the BLDC fans over there, although we have the capability within Faridabad factory also. But we foresee that BLDC fans as a percentage will start expanding, and that’s what is going to grow more, that will also come there. This is about the phase one where we’re talking about the fans. There will be a phase two, in which we will decide to start manufacturing other categories beyond fans and that we will share as soon as we finalize. But there is significant space left for that.

Saibal Sengupta — Chief Financial Officer

Just a clarification, that phase two which Mr. Khanna talked about is not part of this INR175 crores. This INR175 crores is exclusively for fans, both TPW and ceiling.

Rahul Agarwal — Incred Capital — Analyst

Okay, got it sir. So, Phase one essentially is FY ’24, right. Next 12 months we’re all talking about phase one. Phase two will come, like two, three years afterwards, is that the right understanding.

Rakesh Khanna — Managing Director & Chief Executive Officer

Difficult to say two, three years. As soon as we take a call, we will share with you. But currently we will be seeing the phase one which is [Technical Issues] and we expect the commercial production to start from June onwards. And with that, we will see the manufacturing of the TPW fans and some ceiling fans in that factory.

Rahul Agarwal — Incred Capital — Analyst

Sir, just a related question, since it starts in June and again, this will be after the season, we will obviously have the new plant costs coming into the P&L. Will that by any standard impact our margin trajectory, which we are expecting to recover going into next year, or could we see some kind of pressure from that as well?

Rakesh Khanna — Managing Director & Chief Executive Officer

The whole objective will be, how do we taper down the other factory and reduce the costs there and bring the cost here. There would be a little part transition cost, but our objective will be, how do we minimize the transition costs.

Saibal Sengupta — Chief Financial Officer

The whole aim is to gain in terms of gross margins and cost excellence, as far as Hyderabad is concerned. Those efficiencies will bring in the margin benefits in terms of gross margin and COGS. The only point is that obviously, it does not happen from day one. There’ll be a little stability [Phonetic] period which is difficult to comment at this point of time. Yes, there could be a momentary few months of impact, but that — our aim is to neutralize that through improvement of COGs and the margins.

Rahul Agarwal — Incred Capital — Analyst

Perfect sir. Best wishes for 2023 sir, thank you so much.

Rakesh Khanna — Managing Director & Chief Executive Officer

Thank you.

Operator

Thank you. We have the next question from the line of Nikhil from SIMPL. Please go ahead.

Nikhil Upadhyay — SIMPL — Analyst

Hello.

Operator

Yes sir. Go ahead sir, you are audible.

Nikhil Upadhyay — SIMPL — Analyst

Yeah, hi, thanks for the opportunity. I have one question, you mentioned during the discussion that eventually the company should operate at a double-digit kind of EBITDA margin. And for that we have been doing a lot of investment both, on the ad spend side as well as the employee addition, which we have done.

Now, if we look at from angle of the categories, so fan we have a pretty strong strength, but the other categories like coolers and all, which are still probably sub-scale. So, if you had to achieve that double-digit kind of EBITDA margin, would it be necessary for the sub-scale categories to become a larger part or would it be more driven by the growth in the fan category. And how are you looking at eventually, the mix for these categories and what you see addition of few more segments in our P&L, or largely we will operate around these segments and try to scale up segments which are sub-scale. So how are you thinking over a three, five year — our mix of P&L and our direction for achieving double-digit margin

Rakesh Khanna — Managing Director & Chief Executive Officer

So, if you see even as of now. If you remove the one-time exceptional costs, we are close to the double-digit margin. We have in the past delivered double digits, we are now investing in some development projects, if you remove those costs we are close to double digits. So, double digit is not a big concern for us, that will happen. Will it be — how will it be driven? Fortunately in all the segments we are in, the growth possibility is huge. In fans itself, the growth possibility is high, because we still are not the market leader and we do believe that we are — we have all the capabilities to be the market leader, be it from the brand perspective or from the product perspective. The other categories coolers, water heaters, yes, they are — a lot can be done over there and once again we have a strong brand, we are getting a good traction.

As I said just now in quarter three, the coolers have really grown very, very well. They did it face a headwind because of the unfortunate two years where COVID hit during the peak season and the entire industry got hit, but I think coming years are going to be great years for coolers as a category. Water heater is showing a very good traction for us and we have good plans for water heater growth again. Lighting, you would see, it is one of the fastest growing in the industry, we are continuously growing very well with very good margin. So, lighting also is a high growth area for us.

So, because of the low base of these categories, obviously, the shares will start growing more and we will see an organization, which is not only fan dependent, but has a large share of other products, but within that we can do wonderfully good job, margins are likely to continue to grow in all of them.

Nikhil Upadhyay — SIMPL — Analyst

Okay. And just, I’m not asking for any direction or guidance, but if we look at companies in the consumer durable brown goods segment. The kind of scale which company achieve, say INR3,000 crores or INR4,000 crores, where would you say a company should operate at, should it be like a 13 to 15 kind of a margin which — with the scale that business has, a company can easily achieve, then the management can always take a call of investing to grow and all, but if we have to get a sense of where can a company or where company has operated at a scale of say INR3,000 crores to INR4,000 crores or INR5,000 crores. What’s your sense, where should, as a company, you would say that we should be at least operating at?

Rakesh Khanna — Managing Director & Chief Executive Officer

See, the rate of growth that we’ve been talking about, barring some period of COVID, otherwise constantly been talking of a high growth rate. We should be reaching this kind of a terrain that you are talking about INR3,000 crores to INR5,000 crores, we should be soon reaching and in terms of profit as I am saying, we’ve already been demonstrating double-digit profit if you remove the exceptional costs. So — and it’s all contextual to time zone, by the time we will be INR3,000 – INR4,000 crores, I’m sure the aspiration will be to reach INR7,000 crores and INR10,000 crores. So it’s all within the time zone.

Nikhil Upadhyay — SIMPL — Analyst

Okay, fine. Sure, thanks.

Operator

Thank you, ladies and gentlemen, that was the last question for today. I now hand the conference over to Mr. Deepak Agarwal for closing comments. Over to you.

Deepak Agarwal — PhillipCapital India Private Limited — Analyst

Thank you. We’d like to thank management for giving the opportunity to host this call and also would like to thank all the participants for joining this call. Management, do you have any closing remarks. Thank you.

Rakesh Khanna — Managing Director & Chief Executive Officer

Yeah. Thank you, Deepak. Thank you so much for hosting and thanks to all the participants for continuously taking interest in Orient Electric. I would like to just reassure you once again that we are doing our best to ensure that we deliver the best performance in the coming period, our investments are going to be giving us great results and a great trajectory going ahead and we’re very confident about our performance in the coming years. We do take up the kind of questions that come from you, giving — telling us that there is a lot of expectation about the growth and aspiration. We do take those aspirations and we will want to deliver the best.

Thank you so much. All the best.

Saibal Sengupta — Chief Financial Officer

Thank you, Deepak. Thanks to all the participants.

Operator

[Operator Closing Remarks]