Bajaj Electricals Limited (BAJAJELEC) Q2 FY23 Earnings Concall Transcript

Bajaj Electricals Limited (NSE:BAJAJELEC) Q2 FY23 Earnings Concall dated Nov. 08, 2022

Corporate participants:

Anirudh Chaukse — Investor Relations

Anuj Poddar — Managing Director and Chief Executive Officer

E.C. Prasad — Chief Financial Officer

Analysts:

Manoj Gori — Equirus Securities — Analyst

Achal Lohade — JM Financial — Analyst

Rahul Gajare — Haitong Securities — Analyst

Arun Agarwal — Kotak Securities — Analyst

Dhruv Jain — Ambit Capital — Analyst

Chirag Lodaya — Valuequest — Analyst

Nikhil Kale — Axis Capital — Analyst

Amit Kumar — Determined Investments — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to the Bajaj Electrical’s Q2 FY23 Conference Call hosted by ICICI Securities. [Operator Instructions] I now hand the conference over to Mr. Anirudh. Thank you and over to you.

Anirudh Chaukse — Investor Relations

Yeah, thanks, Mike. On behalf of ICICI Securities, we welcome you all to Q2 FY23 results conference call of Bajaj Electricals Limited. We have with us senior management represented by Mr. Anuj Poddar, Managing Director and CEO; and Mr. E.C. Prasad, CFO. Now I hand over the call to the management for their initial comments, and then we will open the floor for question-and-answer session. Thanks, and over to you Anuj sir.

Anuj Poddar — Managing Director and Chief Executive Officer

I’ll just make a few headline comments then pass it back to all of you for questions. Clearly, from a demand environment and from an economic position, it has been a tough quarter. Given the situation of the external environment, we believe we’ve delivered a decently good performance with which we are satisfied. I’ll just call it a few data points. In a while we’ve had a slight degrowth on our top line revenue level. If I look at a three-year CAGR trend, particularly for consumer business, you’ve had a 14.3% growth on a three-year CAGR basis.

If I look at the three segments, by the way the headline call out right now is we restructured the segmental reporting as we had announced earlier. So now we have three segments, the consumer product segment, the lighting solutions segment and the EC segment. The consumer product segment is what I first spoke about, we have a CAGR of 14.3%. The lighting solution segment is the highlight for this quarter. That’s intentionally carved out as a separate BU to create more focus and growth for us in that segment. The first sign, the performance that you’re seeing there is the margin expansion and growth in EBIT that you’ve seen for that business.

Going forward, we are very bullish on that business, driving growth and performance for us. And third is on the EPC front too, EPC after many quarters of losses. Last quarter was a moderate breakeven. This quarter we’ve delivered profitable EBIT on the EPC front. Lastly, on the cash flow front, we remain positive. Headline there again for you is that actually this quarter we’ve had very low collections from EPC. Despite that we’ve added constant cash from operations. We have had significant cash collections from EPC posts 30th September, which I’ll be happy to talk about during the call.

So having said this, on an overall basis, we are reasonably pleased with our performance relative to industry. And more importantly, strategically we continue to focus on our direction that we’re taking as a company including premiumization, stepping up our product offerings and a brand repositioning which we’ve done very recently. And I’ll be happy to talk about that. With that back to you. Thank you.

Questions and Answers:

Operator

Thank you. We will now begin with the question-and-answer session. [Operator Instructions] We have the first question on the line of Manoj Gori from Equirus Securities, please go ahead.

Manoj Gori — Equirus Securities — Analyst

Yes, thanks for the opportunity. Sir, just a couple of questions. So historically we’ve been talking about market share gains and filling up our presence into larger cities and lowering our dependence on rural markets or probably smaller cities and towns. However, when we look at the numbers, probably even like most of the peers have reported that numbers, probably we should have ideally done better on the consumer side. So probably can you highlight because especially in your first quarter con call also at that point of time, the demand was far better in rural markets. So probably where we actually slipped versus what you guys were internally expecting?

Anuj Poddar — Managing Director and Chief Executive Officer

So, if I may be candid, I don’t think we’ve slipped. The rural economy, tier 2, middle class, even in urban, the nonpremium segment is continuing to be very weak demand. That is a common comment you’ll see across our industry and other sectors or other industries as well. Clearly Bajaj is not a premium brand today and therefore our contribution from nonpremium is much higher from a product category consumer segments and from a rural is much higher given that both of these, the nonpremium and rural is seeing weaker demand, it is natural that our impact to us or the headwinds for us are higher. So if you factor that in, I don’t think we’ve done badly.

Number two, there’s anecdotal data points we look at different cards, for example, fans, if you look at, our fans degrowth is about 7%. If you look at industry, most of industry has seen the growth in Q2 for the reasons of conversion to mandatory star rating regime et cetera. But within that, the qualitative data points that they’re tracking is, for example, in fans are — contribution from premium fans is about 6% of our revenues, in the past to date is up to about 19%. We’re seeing the traction in the marketplace in counter share, et cetera, in segments or categories or counters where we are not able to [Indecipherable]. Similarly, on mixers, we look at certain cities, we’ve seen that expansion.

So when you look at various primary research reports that we track, we are seeing positive momentum on market shares on this journey towards premiumization and on our counter shares across urban India. But the way that math adds up, given the softness and the weightages that we have, that’s the only impact that you’ve seen. But we are not really seeing that at a qualitative level.

Manoj Gori — Equirus Securities — Analyst

So based on this, should we assume that probably whatever quarters we have gone by, Q1, Q2 and probably next couple of quarters as well this should be considered as a very soft base or a favorable base for next year. And accordingly, the growth next year should be extremely strong. Probably the efforts that we are taking at the company level and also the favorable this like at some point of time entry level demand should pick up?

Anuj Poddar — Managing Director and Chief Executive Officer

Again, three things I would make, one is, in the shorter term, which is starting Q3, margins should improve because this quarter even on margin, we’re seeing the impact of some of our legacy higher cost inventory. The first pickup that we’ll see is margins starting in Q3. I think Q4 onwards, they will be slightly more bullish on demand and consumer situation et cetera, as that happens, we should start seeing more growth in general. And more than that next fiscal, the results of all the various things that are doing including the product expansion, beneficial into premium segments, et cetera, that should add further delta to us. I think all of these are three tailwinds that we see in our favor.

Manoj Gori — Equirus Securities — Analyst

So, should we take like, if you look at the consumer product segment, where margins actually has contracted by roughly around 300 basis points. So probably from 3Q onwards, we can expect some improvement over there on Y-o-Y basis, and obviously on sequential basis, and accordingly, margin should move northwards from the current level?

Anuj Poddar — Managing Director and Chief Executive Officer

Yes, so margins will move northward to that point that you mentioned that our margins have contracted 300 basis points. If we compare that to our peers, our contraction is least I would say, okay? That’s because we managed to hopefully navigate that slightly better. Though on absolute, say, it may catch up but the gap has become narrow versus competition. So that’s both a mix of not focusing our costs better, but also starting to realize slightly better FLM. So therefore, I think going forward, where I see margin expansion has been for us is for certain FLM expansion, FLM in gross margin. So as the cost structures become better of our goods, we do see those margins come down, clearly a northward movement in that.

Manoj Gori — Equirus Securities — Analyst

Sir, last question, if I may squeeze in. Just to understand on the fan side, like how things are shaping up with regards to the change in energy norms. So probably what would be the overall impact on Bajaj Electricals given that we have lower exposure on the mass premium and on the premium side? So what would be the overall thought process and strategy for next probably 12 to 15 months if you can highlight?

Anuj Poddar — Managing Director and Chief Executive Officer

So firstly, I think the next, this quarter, which is Q3 and next quarter, Q4, we will see a lot of volatility in the fans industry, okay, because of this conversion to star rating regime. It is — while it is rolled out and notified from 1st July, ’22, it will be enforced strictly from 1st of January ’23 in terms of no more sales, I think any of us branded manufacturers from 1st of January ’23. To that extent, you will see a certain strategy, movement of all the non-star rated fans getting liquidated or sold by 31st December. And to that extent, some of the impacts in the trade channel which you’ve seen in Q2 also will continue in Q3. Different players will, what should I say, respond differently or react differently.

So there is certain amount of destocking happening in the channels et cetera. And there will be some amount of discounting as that goes on to 31st December. We’ll see how each player deals with that, including ourselves. We are going to be very dynamic on that front. From 1st of January when the star rating kicks in, there will be a certain price enhancement. So the star-rated fans will come at a slight higher cost. I do think that while all of us will move to star-rated fans selling on primal sales basis, for another 6 months thereafter the market will see both of these continue. There will be non-star rated fans that are existing in the marketplace that price-sensitive or certain consumers will continue to buy, and there will be a large chunk of consumers that will gradually move on to star-rated fans and be willing to pay that premium.

In that layout, I think you will continue to see some volatility and distortion into how the fans market behaves in the coming summer season. But your question of 12 to 18 months, I think all of this should start stabilizing by around June 23. And there on, I think you will see greater consolidation in favor of the top 5, 6 organized players, including Bajaj. We are very much prepared for the shift to star-rated fans. Our products are ready and this is also along with our journey of premiumizing. So you are seeing that happen across, like I already mentioned in my opening comments, our contribution of premium fans is enhanced. We will continue to see a greater value gain for us, market share gain for us, and an increase in ASPs and therefore margin expansion for us in the fans category. So all of these three or four metrics will improve for us.

Manoj Gori — Equirus Securities — Analyst

That was very helpful. Thanks a lot and wish you all the best sir.

Anuj Poddar — Managing Director and Chief Executive Officer

Thank you very much.

Operator

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

Achal Lohade — JM Financial — Analyst

Yeah, good evening. Thank you for the opportunity. My first question was, would it be possible to break the consumer products in terms of volume and pricing, what has been the volume decline and the price increase or decline if you could for the consumer product?

E.C. Prasad — Chief Financial Officer

So Achal, we can’t give that out. But if you see total consumer ex-lighting is about 2.8% decline. So clearly the volume decline is more because this is after factoring in price increase. And that’s the general commentary we’re saying, that volume declines across consumer sectors has been that case here.

Achal Lohade — JM Financial — Analyst

Understood. Second question was with respect to what is the extent of cost reductions we have seen until now? How much has cost passed on or as you speak. So how do we look at that? Because if the cost in getting reduced, which is getting passed on, it can impact the revenue growth and therefore volumes are — you are able to offset that through volume increase. If you could give some clarity on the same?

E.C. Prasad — Chief Financial Officer

So my personal view is, firstly, the cost reduction is fairly healthy. So all of us have benefited or will benefit from that as our inventory churns out across commodities, except for oil, which is in paper which is not that much lower, but most of our core metals, et cetera, is lower. In Q2, I believe all of us could have had slightly higher margins, but there are 1 or 2 players that took some pricing decisions to reduce price and pass on that cost reduction, which I’m not sure was the right decision to take, okay? And the reason is because I don’t think that has — in this environment is not seeing demand elasticity, where you’ve taken a cost reduction that has not translated to volume growth.

Therefore, I think there will be a lesson in that. Hopefully, in Q3, et cetera, we will not now pass on further price reductions. At least Bajaj will not be passing on further price reductions, et cetera. We would rather protect margins in a situation where price reduction is not leading to volume growth. So I think that’s the balance that we have to strike, but we will be slightly more cautious on passing on any price reductions at this point in time. I don’t think industry also has — like most of the Q results that you see across the industry, I don’t think industry also has the wherewithal to reduce prices. So I think that will be a healthier direction for all of us to follow.

Achal Lohade — JM Financial — Analyst

That will do it.

Operator

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

Rahul Gajare — Haitong Securities — Analyst

I just have one question. We understand that the entry-level products have seen the worst intensity of demand due to inflation. And apparently the mid and the premium range have not done so badly apparently. When I see, your market reach have actually seen a sharper 25% drop. So just want to understand what is really transpired in this specific category and your thought process on this entire placement that you intend to do? So that’s my first question. Thank you.

Anuj Poddar — Managing Director and Chief Executive Officer

So Rahul, I’ll try and explain that. You’re correct on asking this question. You have to understand also leading brands was a long-tail brands, okay? So if I take — if you’re an overall large brand who has a more premium position and premium range of offerings, those are the ones that are secure in this market because they are yet the once in a weak market environment that are getting stored and then getting purchased. Morphy Richards is a premium brand with a more niche brand, and therefore a relatively longer tail brand. So that’s not the one that typically is the first point of stocking for retailers, et cetera. That’s a generic answer I will give it to you.

Number two, more strategically for us in Morphy, like I’ve explained in the past, we’ve just signed in the recent past, a 15-year license renewal deal that runs into 2037. Till this point of time, Morphy was a more tactical approach for us as far as product offerings, product development was concerned. We were not really creating a strategic product road map and developing our products that are catered specifically for the Indian market. With this deal in place, we are now on a journey where we are creating a very tailored self-developed Morphy product road map that you will see play out over the next 2 years out.

So from 1 year out to about 2, 3 years out you’ll see that play out. As that starts happening, I think we’ll have a far more targeted range of products under the Morphy brand that are yet premium but customized for the Indian consumer and distinct from the Bajaj brand. As that happens, along with that, we’re going to have a far more targeted Morphy brand strategy. Some of that you’ve seen play out right now. We’ve got a first new identity campaign of Morphy Richards that’s Happiness Engineered.

We’ve included 1 slide on that in the Investor Day. So that’s just setting the stage for us to look at the Morphy brand very differently strategically, both at the product and at the brand level. So that journey for Morphy will be different. Today, Morphy is caught between both the things. It does not have a strategic footprint or road map or direction for it, and is a niche, premium but niche plant that does not get the benefit of this current environment. I don’t know if I — you got what I’m saying.

Rahul Gajare — Haitong Securities — Analyst

Yes. And is it right to expect that Morphy Richards will cut across all the categories that Bajaj is catering to? Is that something that?

Anuj Poddar — Managing Director and Chief Executive Officer

Not — so there will be, without revealing it all, it will not be all, but Bajaj will cater to more categories, but there is a higher overlap today going forward, the overlap will reduce over the next 2, 3 years as we come out with this product roadmap that we are working on. So there will be some unique categories in Morphy’s that do not exist today either from Morphy or Bajaj. I’ll give quick examples, and I think we’ve shown the garment steamer in the Investor Day, that is there, coffee maker. These are currently 2 really categories to Morphy. But just to give you an example of categories that Morphy will more focus on and grow out, which Bajaj may or may not do.

Rahul Gajare — Haitong Securities — Analyst

Got it. The last question, I just wanted to touch upon the lighting business. I see that you’ve done well on the lighting business, there is limited decline. And I think very good improvement on the operating performance. Are there any stops which are sitting over here or these are the kind of margins that you would expect in the lighting business.

Anuj Poddar — Managing Director and Chief Executive Officer

So what has been the lighting business, it is a separate BU now that consolidates the consumer lighting and the professional lighting. The consumer lighting actually has degrown in Q2, but I’m not worried about that because that’s part of the transition where we’re changing the sales team go-to-market, creating fresh — some fresh distribution partnerships, et cetera. So there’s a little pullback because of that. I think that should normalize by December. Post that, you’ll see strong growth in the consumer lighting business also, both on the back of new products, some of which we’ve showcased and on this whole restructuring of the distribution stabilizing and falling in place. So once consumer lighting also kicks into growth, you’ll see even faster growth.

Right now — the numbers right now, despite the degrowth of consumer, but back side of professional lighting growth, that’s in the top line of lighting. On the margins, et cetera, we expect margin expansion both in consumers and professional lighting and therefore overall basis also we will see healthy margin. Our ratio currently is a mix of professionals to consumers, slightly more professionals. Therefore, the blend is slightly lower. As I think professional will continue to expand margins, but as consumer lighting grows over the next 1, 2 years, that will kick in with healthy double digits.

So from here on, our margins in that should keep growing also. So just to summarize, you will see top line growth from Q4, I would say, in lighting business. Along with that, as the mix gradually changes towards consumer, you will see margin expansion in both. And with the mix becoming favorable, you will see more exponential margin growth in overall lighting. I just want to add a statement, that’s one core reason why we carved out lighting as a separate BU, to bring lot more focus and growth in that tier. And it will be a valuable driver for us going forward.

Rahul Gajare — Haitong Securities — Analyst

That’s very helpful all the way back.

Anuj Poddar — Managing Director and Chief Executive Officer

I just want to add a statement. That’s one core reason why we’ve carved out lighting a separate view to bring a lot more focus and growth in that area. It will be a value driver for us going forward.

Rahul Gajare — Haitong Securities — Analyst

This will be very helpful, for us also to understand exactly what part of the businesses doing better and where is the improvement factor. Thank you very much, and all the best.

Anuj Poddar — Managing Director and Chief Executive Officer

Thank you Rahul.

Operator

Thank you. [Operator Instructions] We have the next question from the line of Arun Agarwal from Kotak Securities. Please go ahead.

Arun Agarwal — Kotak Securities — Analyst

Thanks for the opportunity sir. Sir, could you just also touch upon how the appliances demand is panning out at this point in time? And also could you just help out how your festive season this time has been as compared to last year?

Anuj Poddar — Managing Director and Chief Executive Officer

So, no, appliance demand is a mixed bag, like I said in earlier commentary, Q2 was a tough quarter. I think Q3, because of the festive part, has started off well. But I think on both sides of the festive, I think, is relatively slightly a little mixed bag that we’ve seen. I’m yet hopeful that you will start seeing or your bottoming out on the demand scenario and yet hopeful from here start seeing an improvement in demand situation.

One of the best data points that I have seen recently is the CMIE jobs data, I think this morning that I read that they’ve come out yesterday. And that’s important because a lot of the demand right now, like I’ve been saying is being run by the premium, which is the upward affluent class that is not impacted, but it’s important for middle class salary job segment to kick in on the consumer demand side. With jobs data looking good, I think that segment middle class should kick in, so I think that will be a big boost to demand going forward. Finally, is the rural boost. So I think demand situation should look good going forward. The tailwind to that will also be the margin expansion.

Arun Agarwal — Kotak Securities — Analyst

Alright, thanks. My second question, sir, is on the EPC collection you touched upon at the start of the comments. So could just help on how they have kind of post October and what would be a CapEx plans?

Anuj Poddar — Managing Director and Chief Executive Officer

So EPC collection in Q2 was very low, while there’s been some reduction in receivables as we put out was very low. So our current performance is despite that.

But post that, in the month of October, we’ve collected close to further INR100 crores on the EPC side, which a healthy collection, and that’s both brought down our receivables and enhanced our cash flow also. And finally, on CapEx, I think we continue to maintain current trajectory of CapEx. There’s no big large ticket CapEx. There is CapEx towards IT systems, molds, tools, dies, certain capacity expansion will debottlenecking at our existing plans, but not any big ticket CapEx in the immediate, near future.

Arun Agarwal — Kotak Securities — Analyst

Thank you. That’s it from me.

Operator

Thank you. We have the next question from the line of Dhruv Jain from Ambit Capital. Please go ahead.

Dhruv Jain — Ambit Capital — Analyst

Alright. So I had a question on margins. So in your opening remarks you touched upon realization and also you’ve done some changes in the private front. So last 4 quarters, we’ve seen a margin sequentially in the results but that in this year we’ve seen a lot of volatility in the industry. But say in FY ’24 or ’25, how are you looking at margins in the consumer business? Any thoughts there because you’ve given a very clear road map on the revenue side. So how should we think about the margins?

Anuj Poddar — Managing Director and Chief Executive Officer

So Dhruv, our margins will continue to expand. Traditionally you’ve always said you should have 1 percentage point expansion in margins if I were to put my neck — I were to stick my neck out at this point of time. If commodities stay benign, if there’s no sharp volatility or adverse volatility in commodities, I think we should comfortably beat that 1 percentage point margin expansion over the next 2 years till FY ’25 at least here because there will be certain normal expansion through our internal initiatives and a certain catch-up expansion because of the commodities cooling off, et cetera. So I think without putting a hard number there, to read between what I’m saying, we should see healthy margin expansion by FY ’25 or

Dhruv Jain — Ambit Capital — Analyst

Sure, sir. And if you could just talk about the brand change that you are looking to do? How should we think about it? And is there any significant change in the go-to market strategy?

Anuj Poddar — Managing Director and Chief Executive Officer

So firstly the brand, and I’ve alluded to it in the past call, that we have been working on our overall brand architecture for the company in each of the brands. And the latest brand campaign that is still your Bajaj Built for Life is not a regular brand campaign, et cetera. It’s a fundamental recreation of the new Bajaj that we are building out for the next many years to come. It’s far more younger, far more aspirational, far more focused, far more sharply targeted and far more premium look, feel, attitude, et cetera, to that. And that runs across the gamut of creative, TVC, the digital campaign, the print campaign, et cetera. What is — why it’s taking time, why we are doing this? It’s not just a brand campaign, our products will talk this language.

So if you look at the products, et cetera, they’re all reflecting the new Bajaj, which is far more better designed setting, but even on performance and engineering, et cetera, there’s a lot of that has gone into that. For the next many quarters that you’ll see, all our products will now mirror — all the products under the Bajaj band will now reflect this new brand identity and in terms of the consumer promise, okay. As we do that, I think that’s going hand-in-hand with our journey towards premiumization. So I think the emotional connect of the brand with the urban affluent premium consumer will be much better with this new brand positioning. And the product both aesthetically and the performance engineering that has gone into these products.

And you will see that roll out category by category, starting with water heaters. You’ll see the water heaters campaign rollout in the next few days to a couple of weeks. And this will all build from this platform of Bajaj Built for Life, give you a younger, more aspirational Bajaj. As we start doing that, that’s why we’re confident both on our top line growth and margins as [Indecipherable]. This is only Bajaj that we’re talking about. When we’re talking overall brand architecture, we will be an organization, a house of multiple brands.

The second brand that you will see that we positioned, which is the first flavor of that is the Morphy Richards one that like I spoke earlier, over the next 2 years, we’ll have a product road map that will play out for Morphy Richards also. The third brand, I think some of that action you should see by end of next year, we’ll be on Nirlep, how we reposition Nirlep and the product offering that will come out under Nirlep. And from there on, we’ll build on that. So the next 2, 3 years, we’ll see significant action from us on brand and on product care.

Dhruv Jain — Ambit Capital — Analyst

Thank you, sir. Wishing you all the best.

Operator

Thank you. We have the next question form the line of Chirag Lodaya from Valuequest, please go ahead.

Chirag Lodaya — Valuequest — Analyst

Yeah, thank you for the opportunity. Sir, my first question was on demerger status. If you can just help us understand what is the status?

Anuj Poddar — Managing Director and Chief Executive Officer

So Chirag, demerger is taking time, we are waiting approvals. [Indecipherable] we expect SEBI approval to come very soon. Once that’s in when we’ll be filing for NCLT. Our initial target was our expectation or hope was that we will get it in the windy quarter. Now it looks more likely that you should have it by March. That’s our best estimate at this point of time.

Chirag Lodaya — Valuequest — Analyst

If we get it by March, so by Q2 next year, demerger can happen?

Anuj Poddar — Managing Director and Chief Executive Officer

No, it can happen immediately right after that. Effective date will remain 1st April 2022. The appointed date, when does it actually happen will be immediately after we get approval. So it could be as early as 1st April 23. I’m sorry to reverse, my team correctly. Read my point effective dates the other way around.

Chirag Lodaya — Valuequest — Analyst

Got it. And so second question was on consumer lighting. You mentioned that, by Q4, we should expect growth to kick in in consumer lighting business. If you can just help us understand what kind of product introductions we are doing, what kind of range expansion we have done and what kind of trajectory we could expect?

Anuj Poddar — Managing Director and Chief Executive Officer

Consumer lighting traditionally, we had lost our space in terms of the LED condition. And then we had largely become a lamps layer, et cetera. We have not created value-added products which we’ve been doing in the last two, three quarters, which is adding more patterns, adding more panels, downlights, et cetera, and also upgrading or adding more value-added lamps. Again, we’ve showcased a few examples of that and I invested across this house, we are rolling out more value added products and targeted products in consumer lighting. I do think we have some more catch ups to do on the product front and consumer lighting, even post this post Q2 and Q3 also rolled out some new products as recently as last week.

I think that journey of rolling out new products in consumer lighting will continue over the next two, three, four quarters. In as that keeps happening, I think our growth in consumer lighting will outpace the market or industry and our margins will continue to expand on the go to market front also, that’s the reason we carved out that business effective July more is a preparation for all of these product launches that we’re doing. We are you know, a team’s took time to create the sales team and go to market team for consumer lighting, I think 85% there in order therefore to go to market in terms of on the ground in the field. I think by December that should be fully stabilized.

So you will see an improvement in Q3 over Q2 on our go-to-market and revenues on consumer lighting. But we’ll see the full benefits of that from Q4 on the go-to-market. And as we continue expanding products, the benefits of production range expansion will continue thereafter.

Chirag Lodaya — Valuequest — Analyst

Very clear sir. Just extending this, what is driving confidence on margins, because earlier expectation was maybe high-single-digit kind of margins in lighting, but we have significantly surpassed that number. If you can just give, what are the drivers which are putting this margin at 10 percentage [Indecipherable]?

Anuj Poddar — Managing Director and Chief Executive Officer

One is consumer lighting, as we are upgrading our products and getting better traction on that there is a little bit of confidence in that. But then bigger confidence where the change in mindset has happened is in professional lighting. Traditionally professional lighting till two years ago, we were losing money. FY22 is just about broke even my guess was you know, we will not be to four or 5% margin in professional lighting. But we have been innovating on professional lighting also on products. And despite it being a tender based business, which is typically, you know, low on margins. I think it’s because of innovations technology superior proposition that we have managed to actually crack the margins slightly better on that. That said, I would put a little caveat to professionalizing margins because it’s a B2B tender based business. For that to get to double digits will always be difficult as long as we maintain healthy single digit on professional lighting. And top it up with you know, consumer lighting growth infractions will foster. Hopefully like blended margins from being the high-single-digit, we should start inching towards a double-digit margin on a aggregate basis.

Chirag Lodaya — Valuequest — Analyst

Got it. Very clear. Thank you.

Anuj Poddar — Managing Director and Chief Executive Officer

I’ll just add to that, to give an example on my previous point on professional lighting, and we’ve given one slide as an example of the stadium lighting that we’ve done. You know, we really innovated on that today, we do believe we have the best product technologically and from a financial cost proposition on stadium lighting and that is something where we’re able to deliver a better price point a cost point to the customer, but actually with a higher margin to ourselves. If we can crack more such sweet spots. We’re doing that across smart street lighting. We intend to do that across indoor commercial lighting et cetera. As we target industry verticals, hopefully we’ll try and get the balance right.

Operator

Thank you. We have the next question line of Nikhil Kale from Axis Capital. Please go ahead.

Nikhil Kale — Axis Capital — Analyst

Yeah, thank you for taking my question. The first was a housekeeping question. If I look at your other expenditure, including the subcontracting expenses, on a Q-o-Q basis we’ve seen a decline, 8% decline, whereas sales are broadly flat. Is there anything to call out here?

E.C. Prasad — Chief Financial Officer

Let me just check, one second. I think that’s add spend. Last quarter was about 3.5%, this quarter is 2.3%.

Nikhil Kale — Axis Capital — Analyst

Okay. From a annual basis, what kind of number are we looking at? Sustainable, should we be somewhere around 3% or so on an annual basis?

E.C. Prasad — Chief Financial Officer

On add spend you mean?

Nikhil Kale — Axis Capital — Analyst

Yeah.

E.C. Prasad — Chief Financial Officer

The 2.3% is low, typically we always guided that will be 4%-plus, it will vary quarter-on-quarter, Q3 will see a jump up also for us, you will see a jump up in Q3 because we’ve done the brand relaunch. As we do that, that is something we’ve done [Indecipherable] launch campaign on. Q3 and Q4 you will see a jump up in ads spends, both because a brand launch in Q3, and Q4 typically is at the cusp of summer, so you do have the fans and cooler campaign that kicks in.

Nikhil Kale — Axis Capital — Analyst

And the second question is more on your comment, I think there is a call you mentioned that going forward, your stance will be not to really pass on price reduction. In case you’re not seeing any improvement on the volume side. But I’m just coming from I mean, the current situation that you’re looking at, at least especially on the fan side, which will be a deeper category for us, as you rightly mentioned, it could be you could see a lot of volatility, you could see varying strategies taken that clear. So in that context, in the context, that we’re really still not completely sure of how the demand kind of picks up. Do you think that maybe for some time, more container machines, volatility margin, and the margin improvement could get maybe slightly pushed out?

Anuj Poddar — Managing Director and Chief Executive Officer

To your question, one, for fans, I do expect some volatility, volatility on sales, volumes and margins, margins on France, but that will will be a little more tactical and dynamic on a response to market conditions and competition moves. You know, I would think like I said, to repeat what I say, from the lessons of Q2, we will all learn that price is not the way to you know, compete there are many other ways to compete, okay, but we will have to be tactical, in that segment. That said, my comment on price or more at a broader level across product categories across that we do not see the need to take price cuts. And we will maintain that at least for most other categories in sizes, the smaller category for us. Despite all of this, even if there’s a fan, you know, price war of some sort, etc. We do think margins will improve despite that, because of the cooling of commodity and the benefits on inventory. So I think that is secured for us. We don’t see any risk to margin expansion.

Nikhil Kale — Axis Capital — Analyst

Thank you.

Achal Lohade — JM Financial — Analyst

Thank you. [Operator Instructions] We have the next question line of Achal Lohade from JM Financial. Please go ahead. Yeah, thank you for the follow-up. Sorry I got disconnected earlier. What I wanted to check was, if you could help us with the ANP spend specifically for the first quarter and the second quarter of FY23? And like-to-like for the last year?

E.C. Prasad — Chief Financial Officer

Sure. Our spends in Q1 was INR35 crores and spends in Q2 is INR23 crores. In last year, Q2 was also INR23 crores.

Achal Lohade — JM Financial — Analyst

Understood. The second question I had, with respect to the EPC margin, how do we look at this now, it is now very much comfortably in positive territory, but the margin in this quarter we saw it closer to 8%, 9%. How do we look at the margin from?

E.C. Prasad — Chief Financial Officer

Analytically looking at a different consumer, there will not be linearity in that and margins at 8%, 9% it’s on a very low revenue base sector. I think the business has bottomed out, we are now going to get into a build phase for EPC. So most of the legacy projects operationally closed. All the legacy problems are done. From here on the you know revenues and margins of EPC business will depend on the total business order book size. If you look at the order book size also I think March is about seven On the margin minus so much is about INR800 crores this excluding elimination, which is now up to about INR1,350 crores because we’ve got a fair number of orders in the power transmission business, I think directionally over the next two, three years we’re aiming to build a consistent revenue run rate audiobook size, [Indecipherable] and INR0.5 crores and I think that is achievable from what we built out now, the issue will have over the next one or two quarters because we’ve just secured some of these orders the next one or two quarters the revenue will not kick in it will take in my let’s say Feb March 23 and into Q1 of next fiscal till that point of time, you may see a certain softness on margins because we do not believe that revenues to take into contribute to margins there. So there will be some lumpiness, low revenues and profitability in Q3 Q4, but bounced back healthy me from Q1 next year. The important point all these new orders that we’re getting an order book that we’re building now, they’re very constrained from how we bid for it cost and price strategies et cetera, they will be healthy margin orders. Coming back to your original question, I do think these orders in these projects will deliver you eight to 10% margins, but on a higher base and therefore on a total absolute number this look very healthy from Q1 next year.

Achal Lohade — JM Financial — Analyst

And it also means that there won’t be any further capital allocation to EPC business given the revenue?

E.C. Prasad — Chief Financial Officer

While margins have been carefully calibrated in these bidding, but also working capital and payment terms et cetera, that has been very carefully calculated on all of these things. So plus minus INR100 crores is fine, but this will not go to a very high INR1,000 crore kind of a capital employed.

Achal Lohade — JM Financial — Analyst

Got it. And just one more question if I may, if you could talk about — is there any change in thought process with respect to the TOC, the way we have been selling? Is there any change in thought process? Is it more tactical? Is it more structural medium-term change we’ve seen?

Anuj Poddar — Managing Director and Chief Executive Officer

I think there are many layers to that okay I think TOC as a concept in terms of you know, managing inventory replenishment ROI for our distributors and stocking levels that hygiene we will maintain where we are starting to become more flexible and tactical in certain product categories or certain market sub segments et cetera requires certain different approaches. And where we find this constraining us, we are being a little more flexible on that two examples that I will give you. One is lighting business lighting business, even on consumer site site was not conducive for TOC and was hampering us and therefore we revisited TOC and relax some of those norms. And we will see the growth benefit of that we saw some of that in Q4 FY22. And as Pillai said, as I go to market changes, we will see the benefits of lighting outside of a TOC approach. The second thing we are start seeing that isn’t the fans business as this change happens to you know, regime of star rated et cetera these are points where use normal rules don’t apply. So, you have to be far more tactical in go to market when we will take those calls. So, the guiding principle for us finally will be what is better for business and what will drive growth for us we will not be constrained by anything on that front where we will not let go the benefits of TOC the penetration that it has given us reach that has given us so that is benefits that are there that are secure and will continue to have the benefits of that internal model of directory super counter. But other tactical elements of that will be flexible on that. So net net what we’re seeing we keep the benefits of that secure that but whether the tactical go to market on certain categories on certain urban centers that we will not like to see come under way often.

Achal Lohade — JM Financial — Analyst

Understood. Thank you. Thank you so much. Wish you all the best.

E.C. Prasad — Chief Financial Officer

Thank you.

Operator

Thank you. We have the next question from the line of Anirudh, please go ahead.

Anirudh Chaukse — Investor Relations

Sir now Mahindra Logistics almost, I guess two years are over. So if you can indicate the actual benefits received by the company in absolute terms means even if you indicate the P term benefit that the company would have enjoyed or any additional benefit in terms of that qualitative benefit that you would like to share. Point one and secondly, if you can indicate the market share across categories for the company at the end of September?

Anuj Poddar — Managing Director and Chief Executive Officer

So first on logistics, I’ll keep my comments very brief. I don’t think we’ve realize the full benefits of on the logistics months. I’ll keep my comments limited to that, but we are working at that. We keep working on that. Hopefully in the coming one or two quarters, we’ll have more specifics to share with you on that frontier. I’m sorry, the second part of the question, you mentioned something about categories, I didn’t catch that?

Anirudh Chaukse — Investor Relations

Market shares of key categories?

Anuj Poddar — Managing Director and Chief Executive Officer

While we don’t publish market share, we do believe in gain market shares continue to gain market share in fans in particular, I call that out in the past, we have been getting market share particularly premium fans, which is important for us. And appliances too. When we look at a sub segmental level, geographically, we are getting shares. Because of the mix our mix of urban versus near one, two towns versus rural, it optically seems that we’re not versus a couple of years. But if we look at a three year CAGR, that’s why I call that out, you know, a consumer business has grown at 14.3% on a three year basis, to compare that to competition, overall, an aggregate basis, we have been gaining share.

Operator

Thank you. We have the next question line of Amit Kumar from Determined Investments, please go ahead.

Amit Kumar — Determined Investments — Analyst

Just one question. You’ve talked about the EPC business, now you’ll be looking at new business. This will be primarily focused on India? Are you looking at instead of international markets here as well, how does this play out?

Anuj Poddar — Managing Director and Chief Executive Officer

This will be a mix, it will be predominantly India, but there’s a certain amount that we’re doing in Africa, we’ve done over the last one or two years, we’ve had a good experience in Africa, primarily East Africa, we could experience both in terms of you know, project execution, closure ourselves with our team, and with the subcontractors we’ve got a good experience there and got a good fix on that. Secondly, even on terms of payment, realization, et cetera, we’ve had a positive experience in some of these geographies. In third in terms of profitability, these projects have been closed profitably nonprofits for us, that gives us the confidence to bid a little more for that. So we are doing that in the international markets, but predominantly in the same regions where we had the good experience and we have some teams on the ground. Now ability to execute that. That said, you know, beyond the point, we do not want to scale that up, you want to keep that as a certain finite absolute value. So that’s a Saturday but we believe that is the value accretive to us the only other element we may look at an interest in Korea international market is your supply so pure supplies we think we can supply to wider geographies, even though we may not execute and that is something we’re starting to explore we’ve not yet you know formed up a specific plans on that, but supplies we believe I disagree compared to project execution. Coming back to India I think India will remain probably 80 or 90% of our total business business contribution for the PC business within India also we are being very strategic in terms of projects that we accept either in client or particular states that we work with are just the terms of the project and the bidding that we enter into.

Amit Kumar — Determined Investments — Analyst

Thank you for this. Just one small follow-up. When you sort of — supplies you were talking about [Indecipherable]?

Anuj Poddar — Managing Director and Chief Executive Officer

In this case I was answering in the context of EPC, so it’s polls or some of those things, towers et cetera, but it’s a supply. There’s a risk-free contract,. I don’t have to worry about geography so much, and I get paid and I supply. Execution in the international market, then I need to be more confident that I have the execution ability on ground and the quality of subcontractors and how long it will take so therefore in execution we are going to be very focused and limited on supplies with this they’re more speculative from it we are open to exploring that but we’ll see what opportunities come our way.

Amit Kumar — Determined Investments — Analyst

Okay, thank you.

Operator

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

Manoj Gori — Equirus Securities — Analyst

Just a follow-up question. You just mentioned about the pricing that you were required of 15% to 20%, but when we go through the commentary from some of the peer, few players have been talking about 5% to 8%, few guys have been talking about around 8%. Can you throw some light like what exactly gives this change within commentaries, especially the organized space on fans category?

Anuj Poddar — Managing Director and Chief Executive Officer

I’m not clear if you’re talking on price hike or the cost differential between star rated and non-star rated fans. The 5% to 8%, I don’t think anybody would say the cost differential is only that. Cost differential on a like-for-like similar specification product that is star rated will be between 15% to 20%. So that’s I’m trying to differentiate. The price hikes, I’m not talking 15%, 20%. It’s like, my view is, you will not see price hikes in our industry or the next coming few months. The 15% to 20% that I referred to is the cost impact and implication or impact of this move to star rating for fans in particular there that was you know, nobody can escape that that is the price differential between a high star rated fan also legacy non energy efficient trends. There again, there will be tactical moves where not everybody will gravitate. When I say everybody wins, consumers gravitate to paying 15%, 20% more, so we will have no fans Use of various technical specifications that will not give you the maximum energy efficiency and will compromise on or be able to manage lower prices to run like for like to give you that is what my answer was a 15%, 20% Delta on the technical costs of delivering that sign with a bill to clarify price hike is a different aspect, this is a cost impact of a conversion to star rating. Right? Right, right. That was that was buying a premium fan today, which is known star rated, if you buy the same premium plan, the price cost impact to be 15% to 20%. But you could provide that person a slightly or say, say stripped down slightly less a premium fan, and therefore answer 15%, 20%, you know, cost impact to that person, he may settle for a 10%, you know, incremental price, with slightly less a decorative feature, but higher on the star rating. So there’s many blends, that will happen.

Manoj Gori — Equirus Securities — Analyst

It should be somewhere around 5% to 10% for the industry from player to player, there would be some difference?

Anuj Poddar — Managing Director and Chief Executive Officer

So there’ll be many things that forces that play. I do think and that’s my commentary, till June 23, you will see a lot of volatility in all of these areas. Consumers also, the government and we may move to start rated on 1st Jan. Not all consumers will shift to that. So there will be stocks of non-star rated fans in the marketplace that consumers will continue to buy. But for the medium to long term, that shift will be 100%. In the short term, it will be a blended market.

Manoj Gori — Equirus Securities — Analyst

Right sir, understood sir. That was very helpful. Thank you.

Operator

Thank you. That was the last question. I will now hand it over to the management for closing comments.

Anuj Poddar — Managing Director and Chief Executive Officer

So actually my closing comments were meant to be, strategically we are very firm on where we are going directionally we are delivering on all of these things. From an action point we are, as you see, constantly taking those actions and meeting those — should I say matching up to the direction that we are promising. I did elaborate on some of that and my response to [Indecipherable] so therefore I’m not repeating that. But I will just wrap it up by saying that in a tough environment, we remain very focused on execution and on delivering on our performance and we are confident about to continue to do that. Thank you very much. [Operator Closing Remarks]