V-Guard Industries Limited (VGUARD) Q2 FY23 Earnings Concall Transcript

V-Guard Industries Limited (NSE:VGUARD) Q2 FY23 Earnings Concall dated Oct. 28, 2022

Corporate Participants:

Mithun Chittilappilly — Managing Director,

V Ramachandran — Chief Operating Officer

Sudarshan Kasturi — Chief Financial Officer

Analysts:

Aditya Bhartia — Investec — Analyst

Aniruddha Joshi — ICICI Securities — Analyst

Rahul Agarwal — InCred Capital — Analyst

Sonali Salgaonkar — Jefferies India — Analyst

Nirav Vasa — Anand Rathi — Analyst

Dipak Saha — Savart — Analyst

Pranjal Garg — ICICI Securities — Analyst

Rushab Choksi — AC Choksi Share Brokers Private Limited — Analyst

Aniket Mittal — SBI Mutual Fund — Analyst

Keyur Rachchh — ICICI Prudential Life Insurance — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to Q2 FY ’23 Earnings Conference Call of V-Guard Limited hosted by ICICI Securities. [Operator Instructions]

I now hand the conference over to Mr. Aniruddha Joshi from ICICI Securities. Thank you, and over to you.

Aniruddha Joshi — ICICI Securities — Analyst

Yeah, thanks, Yashashree. On behalf of ICICI Securities, we welcome you all to Q2 FY ’23 results conference call of V-Guard Industries. We have with us senior management represented by Mr. Mithun Chittilappilly, Managing Director; Mr. V Ramachandran, Director and Chief Operating Officer; and Mr. Sudarshan Kasturi, Senior Vice President and Chief Financial Officer.

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, sir.

Mithun Chittilappilly — Managing Director,

Thank you, Aniruddha and ICICI Securities for hosting this call. A very warm welcome to everyone present today on the call. My best wishes for the festive season and wishing all of you a very prosperous year ahead. Thank you for joining us today to discuss the operating and financial performance of our company for the second quarter of FY ’23.

We reported revenues of INR980 crores in Q2, which represent 8.6% growth YoY and 16.6% CAGR over a 3-year period, it was fairly strong performance in YoY terms considering the high base of the corresponding quarter of last year. We witnessed some slowdown in consumer demand in the latter part of the quarter, but for which we would have had seen a higher top line growth. On a segmental basis, the Consumer Durable segment reported strong growth in this quarter. The Electronics segment has sustained its improved growth trajectory. The Electrical segment was nearly flat due to price reduction in wires and related to the dip in copper prices.

During the quarter, South and non-South markets delivered YoY growth of 2.6% and 17.8% respectively. With consistent growth in non-South markets we are — we have a more balanced geographic portfolio today. Contribution from non-South region rose to 42.7% of total revenue in Q2 FY ’23 from 39.4% in the last year. We are attaining scale in all the regions and this will deliver benefits of operating leverage going forward.

Gross margins for Q2 FY ’23 was at 29.2%, a drop of 210 basis points YoY. A&P spends were higher at 2.2% vis-a-vis 1.5% in Q2 FY ’22. As a result, EBITDA margin dropped to 7.4% from 10.5% last year. There was INR16 crore impact due to the copper price movement as we had to reduce selling prices, while carrying higher cost inventory, but for this commodity-related impact, we would have been close to 9% EBITDA margin for the quarter.

Apart from the wires impact, there is continuing margin compression in durables due to pricing gaps compared to the inputs — input cost increases. We expect the gross margin in Europe is to improve from Q3 and to reach pre-COVID levels by the end of Q4.

As we have shared before, our shift from outsourcing to in-house manufacturing impact, certain line items in the presentation as per accounting standards. As own manufacturing increases, there is a shift from material margin to other expenses line. Some volume related costs like slide [Phonetic] and warranty are also classified under other expenses. This has a significant impact as the turnover has increased by 36% in the first half.

We remain positive on improved margin performance going ahead. The recent softening of input prices meant that further price increases won’t be required. As the existing inventory flows through the pipeline, the pricing gap will reduce, We expect the gross margin to revert to the normative levels by the end of the financial year.

COVID related disruptions had led us to hold higher inventory than normal. With the risk of supply chain disruption diminishing, we intend to reduce our inventory holding. Due to lower sales than forecast during September, the inventory reduction has proceeded slower than anticipated. While it may take longer than planned, we will revert to normative stock levels in the coming months.

With that, I conclude my opening comments, I would like to thank the team at ICICI Securities and Aniruddha Joshi for hosting this call and we would like to request the moderator to open the floor for Q&A. Thank you.

Questions and Answers:

Operator

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] Ladies and gentlemen, we will wait for a moment, while the question queue assembles. We have our first question from the line of Aditya Bhartia from Investec. Please go ahead.

Aditya Bhartia — Investec — Analyst

Hi, good afternoon, sir. My first question is on the consumer durable verticals. When we look at some of the other companies in the ECD and FMCG segment, we saw their revenue growth actually being muted while we managed to deliver 20% plus book. So just want to understand is growth in South also being fairly strong or is this growth being driven largely by non-South India for this segment in particular?

Mithun Chittilappilly — Managing Director,

So I think for V-Guard, the consumer durable segment has a lot of categories. Some categories that are faster growing than our peers. For example, we have kitchen appliances which is small and growing fast. We have a fan segment again, that is small compared to some of the market leaders, but growing fast for us. So some of these would have contributed to higher growth.

Aditya Bhartia — Investec — Analyst

And would it be possible for you to share sir, how large the fan business would have become now and given that we had made operational new clients facility sometime back, how is that contributing to overall set?

Mithun Chittilappilly — Managing Director,

We don’t give out product wise numbers. So once we complete some milestones, we will give out some information, but today, nothing to speak.

Aditya Bhartia — Investec — Analyst

Understood. And the second question is somewhat related, which is the margins for this particular vertical, how would gross margins for this segment be different from electricals or electronic segment and what do you get to see are low EBIT margins for the segment, is that a reflection of lower gross margins or is it overexposure to maybe the economy segment or is it just that overhead costs that currently not getting properly exhausted given the smaller scale and as we keep building scale, you again see margins heading towards high single-digits to low double-digits in this segment?

Mithun Chittilappilly — Managing Director,

So in the Consumer Durable segment, both the fans and water heater business unit and their margins are impacted. They are largely on account of pricing gaps in the sense, the commodity prices have gone up to some degree and the players in the market due to whatever reason maybe hyper-competition, poor season, whatever it is, are not passing on the full effect into the market.

Second is in the fan segment especially, there is also some flux in terms of changeover into new BE norms. So there has been some slowness in the market in that sense. So I think the commodity prices have come down and I think — which also meant that we — no company has been taking any price increase since April. Also it is not required with the current level of commodity prices. So I think as soon as the older materials get consumed and we will be buying fresh materials — raw materials, I think the gross margins should revert back to normal and we expect this to happen in Q4.

Regarding the gross margin percentage for consumer durables pre-COVID, Sudarshan do you have the number. What are the normal cost margins for CD?

Sudarshan Kasturi — Chief Financial Officer

It is higher a bit.

Mithun Chittilappilly — Managing Director,

CD, overall gross margin is higher than the company average. That is at 20,000 steady state. Currently, we are going through a phase where there is a margin compression.

Sudarshan Kasturi — Chief Financial Officer

So I think, to answer your question, the CD margins were actually higher than the company average gross margins pre-COVID.

Aditya Bhartia — Investec — Analyst

Understood. So it’s mainly about an absorption of some of the overhead costs and as the business scales up, on a steady basis, we can see significant margin expansion at the headline.

Sudarshan Kasturi — Chief Financial Officer

Yes that is happening and also the commodity price inflation has not affected all the products in the same way. Something like a fan, this has been more sharper because aluminum is one of the key components and aluminum prices have gone very high because of the war situation.

Aditya Bhartia — Investec — Analyst

Understood. And sir, the last question from my side is on the BE rating stance, which you just referred about. Are you expecting significant pre-buying to be happening just before these new norms become applicable and once these norms become applicable, do you anticipate some market share movement within the brand?

Mithun Chittilappilly — Managing Director,

No, I think, the trade will be up-stocking in the current quarter, not only for us, but across brands, because they are — brands will have to stop selling them before 31st December. So I think there is definitely going to be up-stocking by the trade in this quarter. Going forward, I think the market will normalize. I think every company has brought out products that are when confirming with the BEE norms. This is not a new thing, it’s been in the world for at least 3 years. So we have all had adequate time to prepare to changeover. So I don’t — but of course companies who are better prepared with the BLDC products will have more hedge because the BLDC segment is fast growing and it’s growing fairly fast as a sub-segment of the overall fan business.

Aditya Bhartia — Investec — Analyst

Okay, understood, sir. Thanks a lot.

Operator

Thank you. We have our next question from the line of Rahul Agarwal from InCred Capital. Please go ahead.

Rahul Agarwal — InCred Capital — Analyst

Yeah, hi, good evening and seasons greetings to everybody at V-Guard. First question essentially was on industry rather than the company, the demand has been pretty much all over the place and below expectations in first half, rural being more slower than urban market because of inflation. So I had one question on after this festive season, let’s say, November, December and beyond, do you think things look okay or would you think jury [Phonetic] is still out there, the demand actually sustains a decent level, especially when customer pricing is still at the same level, then hardly any price cuts being done by brands and input costs are actually lower, so any thoughts?

Mithun Chittilappilly — Managing Director,

Yeah. Rama, you want to take this?

V Ramachandran — Chief Operating Officer

Yeah, so I think input costs have come down, but also the inputs have not been fully — input correction has not been fully reflected in the market. So what we are witnessing today is — the stress that you’re witnessing is consequence of that. So I think this stress is going to remain on one side. When it comes to demand, I — there are — okay. I think that in the immediate runup to the festive period, there are some stress in demand is observed particularly 30-45 days and we found that we do feel short of a plan. Having said that, if we take a 3-year view of how we have performed for the last quarter, then we find that actually we have still grown at about 15 year — 15% or something like that, even on a half-year level, or maybe around 17% if you just look at for the quarter.

So I think one of the issues when we are comparing with the previous period, COVID impact for the first quarter of last year is also affecting how the numbers look, when you make comparisons. So I think at this point in time, it’s difficult to say how the demand will pan out next half, but I think it’s fair to say that there is stress on demand in rural markets, smaller town or entry-level products, right? So that definitely is there. That has been there for some time now. That’s been there actually from the early stage of the commodity runup and it was initially reflecting in stress for passing input cost increases. So even the companies was stressed in terms of margins on entry-level products because of the inability of the market to absorb. So this challenge is there. This challenge will continue for some time. I think business has been living with the challenge for the last 12 to 18 months. So in that respect, that’s a continuing challenge, but I think there are some other factors also.

Like the transition to new energy standard. It’s causing some destocking in trend, the price reductions in wire is causing some reduction in wire inventory and so on and so forth. So these kind of factors are also paying off as the trade down stocking. So I think some of the slowness that we’re seeing is the combination of these 2 factors also where there is some short-term destocking happening in the channels, so that they are able to adjust for any potential risks that are arising out of this energy change or any downward — further downward impact in copper, so — which is fundamentally reflective in the wire business.

So — but, yes, there is some stress because we found in consumer durable and all, we did, but — the planned selling that we wanted to do has not happened. So there is some stress in terms of sellout. But I think we will know better in the upcoming two months when — once post-Diwali uptakes are replenished by trade.

Rahul Agarwal — InCred Capital — Analyst

Got it Rama. And secondly on gross margin, now South and non-South is almost now becoming equal. So there is — rather actually we should not even discuss regional sales henceforth. But the gross margin difference is still there, the pricing is still lower in northern market compared to South for V-Guard and how is that moving?

Mithun Chittilappilly — Managing Director,

Yes, Sudarshan.

Sudarshan Kasturi — Chief Financial Officer

There’s no difference between gross margin in South and non-South. Pricing is also uniform. So there is nothing really to call out with…

Mithun Chittilappilly — Managing Director,

Yeah. This was — last maybe 3 years or something like that, this has been the case. So it’s almost been, I mean 3-4 years, we have had a uniform pricing.

Rahul Agarwal — InCred Capital — Analyst

Got it. That helps. Thank you so much and Happy Diwali to everybody. Thank you.

Operator

Thank you. [Operator Instructions] We have our next question from the line of Sonali Salgaonkar from Jefferies India. Please go ahead.

Sonali Salgaonkar — Jefferies India — Analyst

Sir, thank you for the opportunity. Sir, my first question is regarding the demand in the industry right now. You did mention that the latter half of Q2 saw slower demand. So what are the initial demand trends that you have witnessed in the festive season and what is the level of channel inventory right now across most of your product categories?

Mithun Chittilappilly — Managing Director,

So Rama, you want to take this?

V Ramachandran — Chief Operating Officer

Yeah. So I think wire sales have been slower because of down-stocking by trade. As you know, wires — copper prices have been coming down. There have been adjusting in that inventory. So adjust risk. We’ve also seen a bit of pressure on fan because the fans also — the trade is preparing for the post BEE scenario. So they are slower to up-stock. And they are slow to up-stock even on growing categories like the BLDC because they want to correct their overall portfolio and they’re focusing more on liquidity. Fans, which will fall in line with the old energy standards. So I think these are 2 areas. I think water heater sales also, our plan has been more bullish, but what we are seeing, although it’s good growth, but it is less than what we would have wanted to. So I think these are some areas where we have seen, I would say like, some stress points. But having said that, I think there is also an issue of appreciation of the subject because when you are making in — for example, we have grown at close to about 8.5-odd percent and there is like 8.7% to 8.8% and if the wire prices were constant, this would be more like 11% to 11.5% kind of growth, which may not be bad because the base period was a higher base as there was shift of sales from Q1 to Q2. Yeah. So I think there is a bit of maybe — I mean we also anticipated much higher sales, but definitely some slowness was observed in some of these categories. It may also be because the short period and all that was coming just before month end, right.

So as far as channel inventory is concerned, yes, I think there is — that is also reflecting some increase in terms of number of days and that’s also one of the factors, why we still said that there maybe a slowdown in the last 40-45 days. So there is some increase of channel inventory. So I mean it’s not alarming or anything, but we are seeing that there is some increase in channel inventory.

Sonali Salgaonkar — Jefferies India — Analyst

Understand. What about real estate demand? I mean you have 2 categories…

Mithun Chittilappilly — Managing Director,

Real estate demand is also bit slower. Yeah. But that is a bit difficult to be right because there may be some amount of — because in our portfolio, we primarily need to look at wire, switches, and switchgears. Yeah. We are not a very big player from an industry standpoint on switches and switchgears and most of our switches and switchgears sale is primarily retail, but yes wire is also retail, but we have a reasonably large wire business and yes, there is a bit of what I will say slowness — finding collections are getting a bit slow, rotation of money is getting a bit slow. So some of — these are some of the indicators, which are contributing to making a feel, right that there may be some slowness in the last 30-45 days of last quarter.

Sonali Salgaonkar — Jefferies India — Analyst

Got it, sir. Sir, my second question is on price hikes last quarter or this quarter that we’re in. Have you taken any notable price hikes also in the fans with respect to the new BEE norms? How much price hikes do you expect?

Mithun Chittilappilly — Managing Director,

Rama?

V Ramachandran — Chief Operating Officer

Okay. During — if you are asking about price movements during the current quarter, prices have largely been flat compared to channel inventory.

Mithun Chittilappilly — Managing Director,

Yeah. There has been no price increase…

V Ramachandran — Chief Operating Officer

Except for wire.

Mithun Chittilappilly — Managing Director,

Yeah. There has been no price increase per se between Q1 and Q2. I think in wire, there will be a drop off prices. Other than that, there is no change. BEE, I think they’re primarily going to be new models. So I think in the entry segment, the price increases are about 5% if I’m not mistaken. Rama, you want to clarify?

V Ramachandran — Chief Operating Officer

Yeah, it’s in that way. So I think fundamentally what will happen is that the newer models will get launched. So it will not represent an increase in price per se, but the newer models will probably be positioned at higher prices anywhere between 5% to 8% depending on the segment that we are talking about, right?

Sonali Salgaonkar — Jefferies India — Analyst

Then how much percentage or rather how much portfolio of our fans into premium fans right now?

Mithun Chittilappilly — Managing Director,

I think mid and premium would be about 40%, I think. Rama?

V Ramachandran — Chief Operating Officer

Yeah. A bit more than that, Mithun. I think last year, year and half, I think the sales in entry-level has been also stressed relatively. So I think it probably would be over 50% now — 40% to 50%.

Mithun Chittilappilly — Managing Director,

40% to 50% you can take, right.

Sonali Salgaonkar — Jefferies India — Analyst

And last question from my side. Could you give us the broader idea of volume versus value mix in cables and wires this quarter?

Mithun Chittilappilly — Managing Director,

Okay. This quarter– okay, can we share that offline. We will share that offline, Sonali.

Sonali Salgaonkar — Jefferies India — Analyst

Sure. Thank you, sir.

Operator

Thank you. We have our next question from the line of Nirav Vasa from Anand Rathi. Please go ahead.

Nirav Vasa — Anand Rathi — Analyst

Hello, sir, and thank you very much for the opportunity. Sir, just wanted to check what is the kind of growth prospects that you seeing in our core product category of stabilizers and how do you see that for the second half of the year? And the second question would be pertaining to the range in reach expansion. So we are already — South and non-South, we are favorably placed. But what would be our next steps with regards to expansion of our channel reach [Phonetic]? Thank you.

Mithun Chittilappilly — Managing Director,

Okay. Rama, you want to take this?

V Ramachandran — Chief Operating Officer

Sure. I think I’ll address the second question first. I think I am basically looking at what our plans for channel expansion, right? So I think, yes, I think the mix of South and non-South is favorably progressing. But I think we probably are — what I would say we have probably covered 60% to 65% of the journey. I think we still have significant scope in non-South to increase reach also and improve extraction also. I think that is the throughput per counter and the reach, right. I think the reach, we will continue to expand the rate of 5,000 to 6,000 outlets every year. We will continue to add as far as non-South is concerned and as far as the distribution reach is concerned. Additionally, we are increasing focus on organized retail. I think we have been weaker in organized retail and this is an area that we will be focusing on in the next 2 to 3 years and that will also represent what I would say beaver [Phonetic] an opportunity for us to expand our business. So I think these are 2 broad levers that we’ll be focusing on 5,000 to 6,000 new counters annually as we have been doing over the last 5 to 6 years and improving our width and depth in organized retail. That’s a lot more easier relatively in terms of access compared to retail expansion.

With your first question, forgetting…

Nirav Vasa — Anand Rathi — Analyst

Pertaining to growth in stabilizers.

V Ramachandran — Chief Operating Officer

Yeah. See the stabilizer growth has been in the region of around — if you look at our electronics growth for example, right, it’s in the region of around 7-odd percent, right if you look at 4-year CAGR for electronics as a segment, right. It’s of course lagging the growth in the electrical and consumer durables. That being said, I think that’s part of our growth trajectory and if we look at our 3-year half-yearly growth of about — 3-year CAGAR of 15% that we have achieved. The electrical and consumer durable segments are segments that we are focusing to drive for faster growth.

Just one more point. I think one of the key challenges with the electronics segment and the stabilizer in particular, I think COVID stresses impacted at least, I would say two of the three or four quarters over the last 2 years’ time because COVID typically has come in and impacted in summer months. So I think couple of years of free and open summer should give us a better sense of how electronics growth CAGR will move. Yeah.

Nirav Vasa — Anand Rathi — Analyst

Great. And sir, because we are a very strong player in the stabilizer market, can we target export markets using this product?

V Ramachandran — Chief Operating Officer

There is an export market and exports are certainly possible. The only thing is each market is having a different requirement and that requires a lot of focus and there is a lot of competition and particularly in Africa and those kinds of markets. Where this kind of product has some opportunity, there is a lot of what I would say, competition from China also. So we’ve chosen to focus our energy on Indian market and the Indian business fundamentally when it comes to stabilizer, right and build V-Guard as a consumer brand in the electrical and consumer durable space, right. So I think that’s more value creating and that’s why we have not chosen that kind of a path.

Nirav Vasa — Anand Rathi — Analyst

Thank you, sir.

Operator

Thank you. [Operator Instructions] We have our next question from the line of Dipak Saha from Savart. Please go ahead.

Dipak Saha — Savart — Analyst

Thank you for the opportunity and [Indecipherable] at V-Guard. My first question, sir is regarding in terms of high cost inventory that you are in a setting there. So the amount of high cost inventory in the setting is compared to the current level of copper prices, is it still significant or it’s almost gone, if you can share some color on that part?

Mithun Chittilappilly — Managing Director,

So on copper, the issue has gone. It was during July and first half of August, we were having higher cost inventory. Once that has gone out, whilst margins are back to normal in September. So it is not an issue with us anymore.

Dipak Saha — Savart — Analyst

Okay. And on the aluminum front?

Mithun Chittilappilly — Managing Director,

Aluminum. So I think it’s primarily in the case of fans, where we are holding some high cost inventory. But I think by end of Q3, even that will get exhausted. So we are not too concerned about it, but yes, that would mean that the margin improvement in fan will take some more time to pick.

Dipak Saha — Savart — Analyst

Okay. And if the commodity prices kind of stabilized at this level, so do you think by the end of this year, we’ll be able to kind meet the similar EBITDA margin level near to 9 to 9.5 of what we ended last year given the operational efficiencies that we have or it will again some — it will again take some time for the operational efficiency to reflect in terms of margin — EBITDA margin that we got?

Mithun Chittilappilly — Managing Director,

I think given the current cost environment, these prices do remain where they are. I think by end of Q4, we should get the kind of gross margin that we had before all this inflation started. So that’s our expectation as such.

Dipak Saha — Savart — Analyst

Okay. And my last question sir is on the electrical point. If you can share some idea that the demand — is there any softness in terms of demand on the electrical part, given the growth that we recorded on YoY basis or it’s a high base impact that we’re having on the electrical?

Mithun Chittilappilly — Managing Director,

No, electrical is primarily for us. If you look at electrical, it’s — the largest component is wires. So whenever there is a copper price decrease, the trade destocks. So when the trade destocks, obviously, the sales will slow down and that’s — that the trade will wait to see a bottoming out of copper before they restart stocking. So that’s the kind of thing we have seen. So it may not be fully explaining — it is probably more with the pricing environment rather than the demand environment.

Dipak Saha — Savart — Analyst

Okay. And last one, sir. As you said, by the end of Q4, we will be able to get back to those high level of margins. Does it mean that we’ll get back to this level of margins, but we will not end at the close, I mean close to somewhere where we ended last year and in terms of full-year basis?

Mithun Chittilappilly — Managing Director,

I don’t want to give out any specific numbers, but what we believe and hope is that when the inventory we are holding given the current price environment and given the pricing in the market and the overall, so our expectation is that by somewhere in Q4, we should start to be in the gross margin levels, which we were before the — before COVID. I think in COVID, what happened is there was an expansion of gross margin also because initially the copper prices, I mean, the commodity prices came down, then it shot up. So I think the good way to what we will look at it is probably pre-COVIID margin numbers.

Dipak Saha — Savart — Analyst

Okay. Thank you sir. That is helpful and all the best for the second half of the year.

Operator

Thank you. We have our next question from the line of Pranjal Garg from ICICI Securities. Please go ahead.

Pranjal Garg — ICICI Securities — Analyst

Thank you for the opportunity, sir. Sir, my first question is regarding our inventory days. You highlighted that inventory days will get normalized. Sir, what will be the target range when we should expect inventory days going forward?

V Ramachandran — Chief Operating Officer

Yeah. We normally operate at about 70 to 75 days of inventory. Currently, we are holding more than that and we would want to come back to those levels.

Mithun Chittilappilly — Managing Director,

We are probably having maybe 20 days more inventory than what we used to hold before COVID, during which time we decided to increase safety stuffs and stuff like that. So, we wanted to reduce it significantly by the end of this quarter, but like Rama mentioned, the sales have been less than what we anticipated. So we’re still carrying some inventory and we hope by end of Q3, we can reduce inventory by 15-20 days.

Pranjal Garg — ICICI Securities — Analyst

Okay. Sir, next is regarding the Asian [Phonetic] eligible participant has also asked about the distribution strength in non-South and south states. Can you quantify your South versus non-South distribution strength as of now?

Mithun Chittilappilly — Managing Director,

You are talking about the number. Rama. I don’t know whether we have the exact numbers with us today.

V Ramachandran — Chief Operating Officer

I don’t have ready numbers.

Mithun Chittilappilly — Managing Director,

We will share it offline. The retailer numbers, we can share it offline. I think one important point to understand also is it’s simply not number, it’s also extraction. So we can try and sell it to 100 dealers in a town or we can try and sell to 20 dealers in a town with 30% share of their counter, which will be more meaningful. So both these are important.

Pranjal Garg — ICICI Securities — Analyst

Okay. Sir, apart from that, the company has started to score key effect duty. Does it need meaningful capex to fill its growth in near-term and what other capex plans for FY ’23 and ’24?

V Ramachandran — Chief Operating Officer

So that means capex projections.

Mithun Chittilappilly — Managing Director,

Sorry. Your first part of the question you had, what — did you talk about manufacturing activity?

V Ramachandran — Chief Operating Officer

You’re talking about rule key plan, right? What is…

Pranjal Garg — ICICI Securities — Analyst

Yeah.

V Ramachandran — Chief Operating Officer

Can you repeat the question, the first part?

Pranjal Garg — ICICI Securities — Analyst

Sir, the company has started its good key facility and which was a greenfield capex. So I wanted to ask, does it need any new greenfield capex in the near term to meet its growth capex?

Mithun Chittilappilly — Managing Director,

We are having 3 more plants under construction and it will take another 18 months to complete them. And the — and I think another 70 — this year and next year, I think INR70 crore of capex has been earmarked for that. Some part of the capex of this year has already been spent out of that INR70 crore.

Pranjal Garg — ICICI Securities — Analyst

Okay. And sir, my last question is regarding the new categories in which V-Guard is entering like water purifiers. Sir, what is the strategy for this new category? In what geography, it has been lost and how has been the correction?

Mithun Chittilappilly — Managing Director,

Down the road, exit.

V Ramachandran — Chief Operating Officer

Yeah. So I think we are still in early stages of the introduction and rollout of the water purifier business. Yeah, we are still expanding our product portfolio in lineup to improve the addressability. Our current focus is to work through e-commerce, right and what I would say, build decent business through e-commerce focus and that should give us comfort on, what I would say the competitiveness of our mix, right, based on the depth of extraction that we are able to make in the category. After that we would open out into our main retail and then only we will get into the GP. So that’s how we are going to travel with water purifier.

Pranjal Garg — ICICI Securities — Analyst

That was really very helpful sir. Thank you.

Operator

Thank you. We have our next question from the line of Rushab Choksi from AC Choksi Share Brokers Private Limited. Please go ahead.

Rushab Choksi — AC Choksi Share Brokers Private Limited — Analyst

Hello, thank you for the opportunity.

Operator

We are not able to hear you. There is a lot of background noise.

Rushab Choksi — AC Choksi Share Brokers Private Limited — Analyst

Are you able to hear now?

Operator

Yes, please go ahead.

Rushab Choksi — AC Choksi Share Brokers Private Limited — Analyst

I just wanted to know the volume growth and headwind sir.

Operator

Sir, are you able to hear in?

Mithun Chittilappilly — Managing Director,

Sorry, no. We are not able to hear. There are a lot of disturbance.

Operator

There is a lot of background noise. Can you move to a quieter place please? [Operator Instructions] We have a question from Mr Aniruddha Joshi from ICICI Securities. Please go ahead.

Aniruddha Joshi — ICICI Securities — Analyst

Yes, sir. Two questions. One, how do you see the kitchen appliances growth panning out and how is the penetration of kitchen appliances in South India as well as non-South India. And do you see any competitive intensity with the acquisition of Butterfly? Also second question is on the effective tax rate as the production at the [Technical Issues] unit ramps up. So how do you see the effective tax rates planning for FY ’24 and FY ’25? Yeah, that’s it from my side.

Mithun Chittilappilly — Managing Director,

Okay. So I think the kitchen appliances part, Rama, you want to take it?

V Ramachandran — Chief Operating Officer

Yeah. The kitchen appliances business is currently mostly focused in South for us. It’s growing much faster than the overall company growth. But still, we are in very early stages. I think we have that — we have established the product breadth, the supply chain and the competitiveness of our categories, yeah. We are currently working on putting in place the manufacturing facility, which should come up in the next 12 to 18 months, so that s our competitiveness in this category can be enhanced. So that’s our near-term focus and we believe doing so will help us to improve our ability to grow this category and business aggressively, So that’s on kitchen. I think, Mithun, you want to take the second part?

Mithun Chittilappilly — Managing Director,

Yeah. Regarding Butterfly, I think we don’t want to make any comments on competitors. So I’ll skip that. Regarding DTR, Sudarshan?

Sudarshan Kasturi — Chief Financial Officer

Yeah. The new manufacturing entity will have a tax rate of about 17%. So there is some amount of tax benefit that will come from there. FY ’24 is going to be a ramp up period. So we may not see a significant — some reduction, but in FY ’25, we can expect a 2% DTR benefit coming from there.

Rushab Choksi — AC Choksi Share Brokers Private Limited — Analyst

Okay. Sure sir. Understood. And last question, any change in market share that you would have noticed in our categories in last 6 months or so?

Mithun Chittilappilly — Managing Director,

I think our market share is not that we have seen on a quarterly basis. When we complete year, then we shall talk about it. Maybe it’s too premature to talk about market share.

Rushab Choksi — AC Choksi Share Brokers Private Limited — Analyst

Okay. Sure sir.

Operator

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

Aniket Mittal — SBI Mutual Fund — Analyst

Yes, thank you for the opportunity. Just a few questions. Firstly, wanted to understand the margin trajectory a bit better. So guiding for the margins to recover by 4Q to the pre-COVID levels, just wanted to understand what would this be dependent on? It is largely a function of the higher cost inventory being sold or are there certain amount of volume pickup or price hikes that you’re basically building this in?

Mithun Chittilappilly — Managing Director,

So I think our gross margins are off by between 2.5% to 3% from where it should be from normative level and we believe that the current level of commodity price offers that reduction provided the current high value — high cost inventory sales out and we are purchasing materials at today’s prices. So I think this entire process will take 4-odd months when the supply chain will keep liquidating the current inventory and buying raw material and manufacturing goods at the current prices going forward. So that’s the — that’s going to be the main reason for the margins to come back to normal.

Aniruddha Joshi — ICICI Securities — Analyst

This would — assuming would largely be on the wires business and the fans versus what you are…

Mithun Chittilappilly — Managing Director,

Wire is more faster. This will be primarily on the consumer durable business where we are having more stress. Mostly consumer durable and maybe even inverter battery — little bit of inverter battery. But I think it’s mostly consumer durable business. The wire business, this impact, we don’t carry much inventory. So you would have already be the reduction of prices also immediate and the consumption of new materials will also be immediate. So, that happens more faster in categories like wires.

V Ramachandran — Chief Operating Officer

Yeah. So main recovery has to happen in Electronics and Consumer durable segment. So Electrical segment will come back faster.

Aniruddha Joshi — ICICI Securities — Analyst

Okay, that’s helpful. The second question was in one of your remarks, you mentioned that the growth in water heaters has been less than what you would have anticipated in the quarter. So, just wanted to get more light on how that marketing is sort of panning out and why has that growth not come in this quarter for you?

Mithun Chittilappilly — Managing Director,

See, water heater business, we had lost some market share couple of years back. So last year and this year, we plan to grow more aggressively than we have been growing too. I mean of course we have regained all these market share that they’ve lost, but we have to — we still have a year of lost year that we need to catch upon. In that sense, yes, our growth has been less than what we anticipated, but we probably have grown still faster than the market. Mr Mithun, does that answer your question?

Aniruddha Joshi — ICICI Securities — Analyst

Yeah. I just have one more question actually and this is to understand a bit better on the growth in certain individual categories. So if I look at, let’s say the ECD segment of fans, water heaters and the Electrical segment of pumps and wires, could you give me a broad understanding of what’s been the YoY growth for this quarter and in the first half?

Mithun Chittilappilly — Managing Director,

No, we don’t give out product wise numbers.

Aniruddha Joshi — ICICI Securities — Analyst

Okay. And just one last question. So we had acquired the Simon brand on the switches front, I think it is fairly positive for switches and switchgears in segment. Just wanted to understand what is the traction that we’re seeing within this segment? And how are we planning to merge the Simon brand in our portfolio?

Mithun Chittilappilly — Managing Director,

Okay. Rama, do you want to take this?

V Ramachandran — Chief Operating Officer

Yeah, I think so we are still in the acquisition process and this is not completed. Since it’s going to be on budget, this will give us the incentive driven process. Okay. And it will take another couple of months, maybe for the process to be complete and for the entity to join hands. So I think this is not yet materialized on the ground in terms of initiatives, right. So the merger is work in progress and we should come back on this sometime in the next quarter.

Aniruddha Joshi — ICICI Securities — Analyst

Fair. So by next quarter is when we would expect it to be completed.

V Ramachandran — Chief Operating Officer

Yeah.

Aniruddha Joshi — ICICI Securities — Analyst

Okay. Thank you. Those were my questions.

Operator

Thank you. We have our next question from the line of Keyur from ICICI Prudential Life Insurance. Please go ahead.

Keyur Rachchh — ICICI Prudential Life Insurance — Analyst

Thank you. The question is on the overall profitability or operating profitability. As you mentioned that as high cost inventories consumed at current prices, they will go back to pre-COVID level gross margin. Now, if I look at pre-COVID gross margins, which we had in those years, but from that level, our sales levels have gone up. So in that backdrop, how should we think about our operating margins? And just to add another layer, this as you hinted that there is some slowdown in the demand and you are seeing competitiveness in pricing as well, so do you see any risk to increase in gross margin as people go for volumes over profitability to push the demand? So how do you see these two equations playing out and the net impact on the operating margins of the company? Thank you.

Mithun Chittilappilly — Managing Director,

I think today — we have no portfolio of products. And when you see it as a portfolio, yes, this particular issue is there in maybe some of the categories, but not in all. But as a company, we don’t foresee that much of an issue. So like I said, we are off by between 2% to 3% in gross margin at a company level and the price reduction since May has been almost in that same range. So that is what gives us the belief that it is possible to go back to the margin. We will have this off hyper-competitiveness happening either in Category A or Category B, but it doesn’t happen across.. So I think this may not be an entire portfolio of problem, but individual category business issue may be there, but we also found that these are transient issues and I think after sometime, people do understand that cutting prices is zero-sum game because everyone else will also do the same and then finally, there is very little evidence that someone will likely gain market share by cutting prices. So I think once our realization happens, we have seen that these things are transient and they will move on. For example, about four years back or five years back, kitchen appliances was the very hypercompetitive activity category. Then after after 5 years, we found it to have mellowed down. Then in a few years back, water heater was in the same position. Today, we are seeing it mellowing growth. So I think this will keep happening, but I think as a company, or as a portfolio, we don’t see it as a huge risk.

Aniruddha Joshi — ICICI Securities — Analyst

Okay, just to elaborate this question. So when we talk about pre-COVID gross margin, but from those levels our sales is at much higher level. So should it boils down to much higher EBITDA margins also as we improve gross margin?

Mithun Chittilappilly — Managing Director,

I think it’s not that high. If you look at the 3-year CAGR, we are talking about 15%, it’s not.– so because 3 years have also passed after COVID has started. So I think we should also look at it from that. Time has also passed. Yes, there has been some increase in prices, but it has been only maybe for one year, there has been an increase in prices and if you look at the previous years, the price increases were very minimal because commodity prices have remained flat since maybe 2016 or 2017,

V Ramachandran — Chief Operating Officer

Just to add to what Mithun said, right, we continue to grow at 15% per annum, but we are also a company which is continuously making investments. We brought into manufacturing and by maybe another 12 months to 18 months, we will complete the manufacturing footprint expansion. We are investing in talent, we’re investing in technology, we are investing in the future. So I think the other part is that these investments will also complement the cost till not. So I think that also, you need to keep in mind that it’s not just a matter of, let’s say, this kind of growth should automatically translate into bottom line. There will be investments for the future and those needs become more strong — had become more stronger because of the changes in the environment that has happened in the last 3, 4 years. So that also need to factor. So that’s why, to be be fair to say that the margins should be similar to what we were enjoying pre-COVID.

Aniruddha Joshi — ICICI Securities — Analyst

Understood sir. Thanks a lot and all the very best.

Operator

Thank you. I would now like to hand the conference over to the management for closing comments. Over to you, sir.

Mithun Chittilappilly — Managing Director,

I would like to thank ICICI Securities and Aniruddha Joshi to — for hosting this call and thank you all for participating in the call.

Operator

[Operator Closing Remarks]