V-Guard Industries Limited (VGUARD) Q3 FY23 Earnings Concall Transcript

V-Guard Industries Limited (NSE:VGUARD) Q3 FY23 Earnings Concall dated Feb. 03, 2023.

Corporate Participants:

Prasheel Gandhi — Equity Research Associate

Mithun Chittilappilly — Managing Director

Sudarshan Kasturi — Chief Financial Officer

V Ramachandran — Director and Chief Operating Officer

Analysts:

Rahul Agarwal — InCred Capital — Analyst

Bhavin Vithlani — SBI Mutual Fund — Analyst

Renu Baid — IIFL Securities — Analyst

Aniruddha Joshi — ICICI Securities — Analyst

Rahul Gajare — Haitong Securities — Analyst

Nirav Vasa — Anand Rathi — Analyst

Harshit Kapadia — Elara Capital — Analyst

Achal Lohade — JM Financial — Analyst

Keyur Pandya — ICICI Prudential — Analyst

Khadija Mantri — Sharekhan — Analyst

Aksh Vora — Praj Financial — Analyst

Presentation:

Operator

Ladies and gentlemen. Good day, and welcome to the V-Guard Industries Limited Q3 FY23 Earnings Conference Call, hosted by Nirmal Bang Institutional Equities Private Limited.

As a reminder, all participant lines will be in the listen-only mode. And there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Prasheel Gandhi from Nirmal Bang Institutional Equities. Thank you and over to you sir.

Prasheel Gandhi — Equity Research Associate

Thanks, Amal, and good afternoon, everyone, Nirmal Bang Institutional Equities welcomes you all to 3Q FY23 Earnings Conference Call of V-Guard Industries Limited.On the onset of call, I would like to thank the management team for giving us the opportunity to host the call. From the management team, we have Mr. Mithun Chittilappilly, Managing Director; Mr. Ramachandran V, Director and Chief Operating Officer; and Mr. Sudarshan Kasturi, Senior VP and Chief Financial Officer.

I now hand over the call to management for opening remarks, post which we can take questions from the participants. Thank you and over to you sir.

Mithun Chittilappilly — Managing Director

Thank you. A very warm welcome to everyone present on today’s call. Thank you for joining us today to discuss the operating and financial performance of our compelling for the third quarter of FY23. I trust all of you have had a chance to refer to our investor presentation, which was shared yesterday.

We reported revenues of INR981 crore in Q3 FY23, higher by 1.4% on a Y-o-Y basis. Revenue growth has been impacted by the high base in the corresponding quarter of last year. Over the last three years, the CAGR for revenues is 15.8%. During the quarter, the South markets de-grew by 5.2% Y-o-Y while the non-South markets grew 10.5% Y-o-Y. With continued strong growth from non-South markets, they contributed 45.6% of the total revenue in Q3 FY23, higher than 41.8% in Q3 FY22. We are making sustained progress in growing our business in the non-South markets and they are now making a sizable contribution to our overall business within all our segments.

Within our segment, the Consumer Durable segment led the growth trajectory for the quarter. In this segment, the market fan, water heaters, kitchen appliances, and air cooler. And Q3 revenues registered a Y-o-Y growth of 4.5% and 17.8% for consumer durables. This segment has now gained reasonable scale in top-line and will begin to conduct more profitability going forward.

In our Electronics segment, comprising of stabilizes, inverters, and UPS systems, we reported revenue de-growth of 4.3% Y-o-Y and a CAGR growth of 5.8% for three years. In the Electrical segment, comprising wires, pumps, switch gears, modular switches, we registered a growth of 1.5% Y-o-Y and 13.2% CAGR for three years. Input prices have stabilized but still remain higher than their long-term averages. We are also carrying higher levels of inventory in both RM and finished goods at higher costs.

We had an impact on gross margin for the quarter — sorry, which had an impact on the gross margins for the quarter. The gross margin at 29.6% in Q3 is an improvement over the immediately preceding quarter, but lower than gross margin of 31.2% in the corresponding quarter of last year. The EBITDA margin was at 7.3% during the quarter and has improved slightly on a Q-on-Q basis, but remained lower than pre-COVID levels, especially in durables. There is some impact of advertisement and promotion spends which have returned to normal levels after two years of lower spending during COVID.

With inventory levels having come down, we should see margins reverting to pre-COVID levels in the next one or two quarters. We have made substantial progress in reducing inventory back to normal levels. Inventory days for the quarter were at 92 days, compared to 105 days in Q2 FY23, and compared to 134 days in Q2 FY22. We expect some more reduction to happen in the coming months.

We have concluded the acquisition of Sunflame in January. We have placed the initial set of team to run the operation. In the next couple of months, we will have the full management team in place and start the integration process.

With that, I conclude my opening comments, and I would like to thank the team at Nirmal Bang for hosting this call. And I would like to request the moderator to open the floor for Q&A. Thank you.

Questions and Answers:

Operator

Thank you very much. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] First question is from the line of Rahul Agarwal from InCred Capital. Please go ahead.

Rahul Agarwal — InCred Capital — Analyst

Yeah. Hi. Thank you for the opportunity and good evening, everybody. Sir, three questions. Firstly, the South de-growth is more of a base issue or you are seeing more competition there? That’s the first question.

Mithun Chittilappilly — Managing Director

The South de-growth is mainly a base issue. Last year, Q3, the South market had grown substantially faster. I think the recovery was faster post-COVID for us in South and non-South.

Sudarshan Kasturi — Chief Financial Officer

YTD is about 15%.

Mithun Chittilappilly — Managing Director

If you look at YTD South, growth is about 15%. So we think it’s a base issue, it’s not a competition issue.

Rahul Agarwal — InCred Capital — Analyst

Right. Secondly on gross margins. I think, quarter-on-quarter, we’ve largely stayed flat. Do we — so recovery of margin obviously is right on the corner, but my sense is, do we go back to 30%, 31% of pre-COVID level or should it be higher because you will have more in-house manufacturing going forward?

Mithun Chittilappilly — Managing Director

No, I think immediately, we will look at going to the pre-COVID levels. The manufacturing facilities, for example, the fan is already online. For inverter and stabilizer, we are commissioning the plant as we speak. And there are two more facilities that are coming online in the next financial year. So, I think it will be in a phase way when we’ll get improvement in margins. So immediately, for us, we should look at going to pre-COVID levels. And then after that, you know, in the longer-term, we should look at more improvement due to own manufacturing.

Rahul Agarwal — InCred Capital — Analyst

So, own manufacturing takes the gross margin up, is that understanding correct, directionally?

Mithun Chittilappilly — Managing Director

Yes, directionally, it will take it up. Yes.

Rahul Agarwal — InCred Capital — Analyst

Okay. And lastly on the segment margins, both for electronics and ECD, again that’s a inventory problem and hence the margins are low. Or is there any other reason?

Mithun Chittilappilly — Managing Director

We have — we had planned for a much higher growth. Let’s say, for example, in a category like water heaters, we had planned for a very high growth this year, because in the two years we had lost market share. Although we have regained a lot of the market share we’ve lost, we have not still hit the numbers we wanted to get. So in water heaters, this is the scale. So there is high-cost inventory sitting in water heaters and stabilizers, which is almost like maybe 25% of the overall sales. The other products, not so much. Most of the high-cost inventory is absorbed and I think this quarter onwards, we are seeing some improvements.

Rahul Agarwal — InCred Capital — Analyst

Okay. Thanks. And maybe I’ll squeeze in one short thing. So, demand obviously has been weaker. I mean that’s the commentary across. Any thoughts on how do you expect demand to basically pan out? What could be like a few reasons here? Like, why are you seeing demand going weak?

Mithun Chittilappilly — Managing Director

So I think the general consensus is that there has been sustained price increases, not only for our products but also for fuel, also for food items, and for everything, and there has been sustained increases across — so basically expenditures of every household has increased substantially. So this is a kind of a shock for a consumer and they maybe not experienced this kind of an inflation in a long-time. Although, in India, we have a lot of inflation. This level of inflation, we have not experienced in some time. So I think, it will take one or two quarters for people to get adjusted and then consume again.

And I think we are seeing slowly the food price inflation is coming down, so that’s a good means.

Rahul Agarwal — InCred Capital — Analyst

Perfect. Thank you so much, Mithun. All the best. I’ll come back in the queue.

Operator

Thank you. The next question is from the line of Bhavin Vithlani from SBI Mutual Fund. Please go ahead.

Bhavin Vithlani — SBI Mutual Fund — Analyst

Yes, thank you. So the question is on the margins, again, especially on the electronics segment, where from a pre-COVID levels of 16.5%, 17%, we’ve seen 10.8%. What do you attribute to such sharp fall in the margins? And what in your view are the sustainable levels?

Mithun Chittilappilly — Managing Director

Well, I think there are two particular issues in the electronics. One is, even in stabilizer, which is the largest segment, we have had a small hit in margins. That I think is mostly due to the high-cost inventory issue that I talked about, because you have understand that in stabilizers, we have to use a lot of electronic components and we are having inventory of almost one year or nine months of electronic components in some cases. So, in the case of stabilizers, because of the supply chain issues in electronics, we are holding — not only in stabilizer, inverter also we are holding, but stabilizer is the larger segment, we are seeing this issue.

We have also seen some margin pressures in the battery segment. That is — primarily, what we could understand is that battery — core battery companies because of the higher demand in automotive batteries are basically enjoying better margins than the core automotive business and cross-subsidizing their industrial battery business, which is the inverter battery business. So, the two large core automotive battery brands in India, they are aggressively discounting batteries in the segment. And we think this is maybe a transient issue and that probably should get resolved soon.

Bhavin Vithlani — SBI Mutual Fund — Analyst

So, just a follow-up on this. So — and correct me if I’m wrong. Two-thirds is the stabilizers and one-third is the inventory in — one-third is the inverters in this segment. Have we kind of — within the segmental, is it like a loss at the EBIT level in the inverters? Because your commentary is more negative on the inverters and you are saying stabilizer is marginally lower.

Mithun Chittilappilly — Managing Director

We don’t give out the product-wise numbers, but no. But the decline is almost similar. So, I think there is a 4% to 5% decline in inverter business. It won’t be negative. But there is a decline in the battery side, as well as the stabilizer business. And both of them have declined by 4% to 5%. But we are less worried about stabilizer business, because it is a — like I said, the high cost inventory issue, and that’s a transient issue. The other one is an external issue. So, we are hoping that once — of course, we have also had increases in less. So, basically, in the battery business, the lead price have gone up and price increases have not happened in the market by the leading battery brands. That seems — that’s the more worrying issue, and we hope that as the summer approaches and season begins, we should — the price increases will be taken and we’ll move forward.

Bhavin Vithlani — SBI Mutual Fund — Analyst

So, in your view, is there a change in the margins that we have been seeing, 16.5%, 17% pre the COVID levels, to your view on the new sustainable levels?

Mithun Chittilappilly — Managing Director

No, I don’t think so. I think at least in electronics, we should come back. I think we have more — I think our work more we are doing is on the — margin improvement is on the consumer durable side, where I think we need to do a lot of work on pricing transmission; in some cases, value engineering and all the other activities we have undertaken. So, the results we should starting in the next one or two quarters. So, I’m not that worried about the electronics segment as of now.

Bhavin Vithlani — SBI Mutual Fund — Analyst

Understand. Appreciate it. The second question is, you — there is a lot of expansion underway. If you could give us the category-wise expansion that you have been undertaking, what’s the kind of investments that you are — you have penciled towards these, and the kind of incremental revenue potential out of those investments?

The second is, a couple of quarters ago, you had highlighted one of the reasons for the lower margins in the durables segment is the TPW fans, where you were importing and now, you are setting up local manufacturing or local sourcing. When do we see that getting corrected and what, in your view, are the sustainable-level margins in the durables segment?

Mithun Chittilappilly — Managing Director

Yeah. Ram, you want to take this?

V Ramachandran — Director and Chief Operating Officer

Yeah. So, I’m not sure what you are referring to by way of the investment. But I suppose you are talking about the investments that we are making at the back end in the manufacturing capability.

Bhavin Vithlani — SBI Mutual Fund — Analyst

Yes. Yes, absolutely.

V Ramachandran — Director and Chief Operating Officer

Yeah, the investments in manufacturing are fundamentally driven towards improving our competitiveness, right? So, some part of it will translate into margin improvement; some part of it will translate into competitiveness improvement, which basically means that we can price our products more competitively and participate better in the opportunity in the market, which we are challenged today.

Now, this nature of investment is fundamentally happening in core verticals. Inverter and battery is one vertical — sorry — yeah, stabilizer is one vertical, inverter and battery is one vertical. Then we are making investments for TPW fan, and we are also making investments for kitchen, mainly in the manufacturing of mixer grinder and gas stove, those areas. So, these are the projects, which are underway, and these should benefit us. We should start to see the benefits flowing through — in the case of, for example, stabilizer and inverter, it should start to flow through from — more seriously from next quarter. I think there is some flow-through, which has just started. But I think more of it will start to happen over the next year.

I think in the case of the other — in the other three cases, right, I think the plants are going to be up and running to reasonable throughput somewhere in second half of next year, yeah? So, that’s in terms of the time frame. And I think we will benefit both ways. Margin improvement will be there. But most importantly, in some of these categories, we will be able to seriously participate, which will then mean that we should be able to grow those categories better. So, because our hands have been tied, particularly kitchen, particularly fan, yeah — battery, our hands have been tied. And we should be able to overcome some of these structural challenges to participate as far as this is concerned.

Now, coming — sorry, I forgot your second question.

Bhavin Vithlani — SBI Mutual Fund — Analyst

Yeah. The second question was — I mean, you partly answered it. Like, the durable margins, when do you see it back to the pre-COVID levels of…?

V Ramachandran — Director and Chief Operating Officer

Yeah. The durable margins have multiple issues. I think in the case of TPW — in the case of ceiling fan, we are hopeful to get back to our historical margins maybe in the upcoming quarters. Once, we see how the energy-efficiency fans pricing is transmitting into market, yeah, I think we should be able to see that. And hopefully, I think maybe quarter one of next year — partly quarter four of this year and then probably quarter one of next year, I think, we should be able to see the picture back there.

On TPW fan, so while our own internal manufacturing capability will take some time, I think what has also simultaneously happened is the freight rates have got normalized. And so, some improvements, to the extent that we are importing, we’ll be able to see. So, I think TPW margins have got a bit better from where they were. But I think normalization is maybe another six months away there, yeah?. Also what happens, most of the consumer durable businesses are seasonal, and the timing of the improvement should coincide with the season if we have to see the impact and benefit of that.

In the case of water heater, right — in the case of water — I think in the case of air cooler, I think the margins are coming back, and I think we should see the — coming quarter, I think we should see the margins normalize. In the case of water heater, I think water heater, what has happened is, it’s a seasonal business. The season has not gone well, yeah? And therefore, what has happened is that we are running behind plan, although we have regained our lost market share. Now, on a higher plan, the inventory that we had procured, right, has — will be extending into Q2 of — early Q2 of next year also.

So, I think — so, that is where we are. We will be taking some pricing corrections there on top of the commodity easing out, and we have some value engineering and other efforts, which are underway so that we are able to restore margins. I think on a replacement basis, we should be able to restore margins by the time we get into the season. Consumption basis, I think we — which is actually what — when — from a timing point of view, when it will reflect in our P&L, I think that’s something is looking now like Q2 of next year.

Bhavin Vithlani — SBI Mutual Fund — Analyst

Sure. Thank you so much for taking my question.

V Ramachandran — Director and Chief Operating Officer

Water heater will be the slowest, right? See, the one big challenge that happens, right, any pricing transmission in seasonal category typically coinciding with the commencement of the season, which is one of the reason why in battery, the margins — earlier Mithun was talking about, the lead prices started to increase towards the end of the season last year, right? And therefore, as we exited the season, the margins started to drop and I think the markets have not passed on, because it’s not conducive to correct prices off-season. So, we are hopeful that some correction in some of these categories will happen as we enter the season also.

Bhavin Vithlani — SBI Mutual Fund — Analyst

Great. Yeah. Thank you so much for the elaborate answer.

Operator

Thank you. [Operator Instructions] Next question is from the line of Renu Baid from IIFL Securities. Please go ahead.

Renu Baid — IIFL Securities — Analyst

Yeah. Hi. Good evening, team. My first question is given that now broadly the festive period, everything is over, we have winters also approaching towards the end, how are you looking at demand outlook for summers on the backdrop that sufficient inventory of the non-BEE fans are already built-up in the system. Sir, if you can give some inputs in terms of the likely demand outlook? And especially, in the fan segment, I heard of the season where sufficient inventory of the old [Indecipherable] fans have been down. And also your preparedness on BEE range which is there.

Mithun Chittilappilly — Managing Director

Yeah. So, I think V-Guard has been more proactive in preparing the transition to BEE range. To put it in context, we had very little inventory of non-BEE-rated fans by the mid of November. I think by November 15, we had almost sold out whatever non-BEE fans we had. Because we had planned the transition and we had stopped production of these fans much earlier. But of course, that is only our story. But the other companies in this category has continued to produce these products and they’ve continued to heavily discount and sell them in the market. So that overall will be there, but the overall invent — our own distributors are very, very lean with inventory and we are — and we have already started to supply. We are one of the first to start supplying the new fans, be it five-star or one-star or whatever in the market with the new price list and all that.

So we are — but definitely, we will have an issue in the month of — we had an issue in the month of January, because like you said, most companies have heavily discounted and dumped these products and retailers will be selling them before they start picking up. So I think we will see maybe demand picking up, maybe end of February for fans.

And our numbers have not been bad, but they are less than planned. But I think if you ask me, we are in a better position because we had little less of the low star-rated models. But wherever we have common distributors or wholesalers, we have a problem because they’re all stuck with inventory of other brands. So they will be trying to liquidate that first. So I see this sale happening maybe by end of Feb or beginning of March, we should start to see. Because that will almost given them 60 days to sell out these old non-rated fans.

Renu Baid — IIFL Securities — Analyst

Right. And sir, what is the kind of price hikes that we have taken for this new range? Has the entire cost of the transition been passed on or it would be done over phases in the coming season?

Mithun Chittilappilly — Managing Director

Yeah. Ram, you want to answer this?

V Ramachandran — Director and Chief Operating Officer

I think we have communicated the price corrections in line with the industry. I think it should overall average somewhere between 6% to 8%. Higher in the premium segment and lower the popular, the entry-level segment, right? Maybe at the premium level, it is also growing in some cases to double-digit. So this is, more or less we have taken price increase in line with other players in the market. I think the pricing transmission, I think we will have to wait and see at what pace this is going to happen. But I think almost all players in the industry have communicated the price revisions. And we are hopeful to realize fully what we have initiated. And this will cover basically the increase in material cost consequent to the shift to energy efficiency.

Renu Baid — IIFL Securities — Analyst

Got it. The second question is on the large kitchen appliances, especially post-acquisition of Sunflame, could be a bit of repetition from the previous call, which was post-acquisition. So if you can just help summarize now that you are in the initial phase of completing the acquisition. But what are the key strategies and the key integration targets that you like to put on place for the initial two to three years in terms of integration and ramp up.

Mithun Chittilappilly — Managing Director

Yeah. Ram, you want to take this?

V Ramachandran — Director and Chief Operating Officer

Yeah. So I think we just closed the Sunflame transaction around — on 12th of Jan and we just had 20 days — just 20 days after that. So I can give you some sense of, at a high level, what we see as the key levers that you can continue to — we can leverage. But I think a detailed plan and outlook and view, I think we will prepare once the new management team of Sunflame will come into place, right? And which is still work in progress. Because right now, the integration, we have a correct [Phonetic] integration team, which we have put in place till the, what I would say, the operating — long-term operating teams will move in.

So now, as far as the growth levers are concerned, I think there are multiple growth levers for Sunflame. I think South is a huge opportunity for Sunflame and Sunflame is under-represented in South. E-commerce and organized retail, where we have the organization and the business system, that’s something that Sunflame can leverage. I think Sunflame brand shops, also for what I would say, supporting the sale of built-in goods and hobs 10, these kind of — is also an very interesting opportunity in space. They have 8 to 10 outlets and that can be scaled up. So these are some levers.

I think Sunflame has been doing most of its general trade business on cash, and I think there is a lot of opportunity to expand the network, you know, since I think they have been risk covers when it comes to going to market. So these are levers — significant levers that are available. And I think there is also opportunity to transport the knowledge across both the organizations at the backend and to leverage the sourcing capabilities and make capabilities on both sides, which would benefit both the portfolios. So, I think these are the broad levers, but I think we will probably — let us say, somewhere in the June quarter, I think we will have a better view, having done some more serious work to assess the opportunities and priorities, and put the resources on the ground to drive the [Indecipherable].

Renu Baid — IIFL Securities — Analyst

Got it. And lastly, just a bookkeeping question for Sudarshan, sir. If we look at the Electrical segment, there the margin were much better than the rest of the other segments with a slight improvement there. So on — did that also include inventory gains in the cables and wires business with the commodity price engine upwards towards the end of the quarter. And if yes, approximately what proportion of the segment margins will be led by inventory gains?

Sudarshan Kasturi — Chief Financial Officer

Does it include staff [Phonetic] gains, no. That’s not the point. But it’s — the margins in wires have pretty stable, except when there was a significant drop-in copper, that impacted [Indecipherable] in the last year — last quarter. It’s just that the margin compression or the margin gap is higher in durables than in electronics.

Renu Baid — IIFL Securities — Analyst

That’s right. So the margin — the 8.5% kind of margins in this category is also driven by better performance — probably better performance of the switchgears and switches and pumps portfolio, or it would be equally led by all three and — or cables and wires driving this improvement.

Sudarshan Kasturi — Chief Financial Officer

Yeah, wires is making steady margins and it’s a fairly steady business. Switchgears, switches, pumps, less impacted by the margin [Speech Overlap]

Mithun Chittilappilly — Managing Director

Some margins are impacted, but it is lesser than what durables [Indecipherable]. The impact on electricals is less, yes. Just one more point I want to make, right? The electrical business is a business which is stable, steady, round the year. So I think margin recovery is quicker and faster because it’s a 12-month product price, right? The material is also getting consumed faster. And because it’s a 12-month product. It’s the Consumer Durable segment and that to some degree in the electronics segment, where the sales are seasonal. So depending on the timing of your inventory purchase and the quantum of inventory, right, it takes longer to consume. And, for example, like last three, four months, right? From September onwards, the sales have been lower than planned, right?

So our expected, what I will say, consumption of high-cost inventory has not happened, right, and it has carried forward longer. So I think in some parts, it is like that and where in the last three, four months slower sales have happened compared to plan. Although if you look at last year YTD, it’s still 22%, 23% growth. But I think internally, we expected to do better, and that has not translated because of this change in sentiment. So that’s the extend in some of the inventory and that is amplifying the issues in seasonal categories. Because the consumption of the material is happening more in the season and that’s when it is going to go out, right?

And also know, any pricing action also can happen closer to the future [Phonetic] price. So these are the challenges. Whereas in the case of wire, switches and switchgears transmissions are fast, because it’s a round-the-year business, right, so the input cost increase also with the lack of [Indecipherable] inventory we’ll see hitting the business in. So, broadly, I think you should see it like that.

Renu Baid — IIFL Securities — Analyst

Sir, most of this high-cost inventory, which we have, which has been built up, will that be fully absorbed by the end of March quarter or that may continue for April and May as well?

Mithun Chittilappilly — Managing Director

I think, the water heater will take longer. I think some part of electronics can go into June quarter also. In the electronics, we have six months to one year in some cases, right.

Renu Baid — IIFL Securities — Analyst

Right.

V Ramachandran — Director and Chief Operating Officer

Yeah, yeah. But again, what we will see — what we will start to see is that, the blended margins every quarter will start looking up slowly, right. So for example, November or October, I think November was our bottom. December was better. January will be better than December, like that it will slowly keep inching up, right? And as more and more categories participate, this will keep moving up rolling margins will keep moving [Speech Overlap] I think — Ram, yeah, I’ll just say. So I think what we are saying is that we believe the margins have bottomed out and we will see sustained improvement. Now, like — otherwise, to the question of high-cost inventory, it’s more or less what Ram mentioned. I think most of it is over, some will linger on like water heaters and electronics, but others have been more or less over.

Renu Baid — IIFL Securities — Analyst

Got it, got it. I’m not sure if I can ask one more. Any indication on the volume growth in cables and wires, and in the fans portfolio for us?

Mithun Chittilappilly — Managing Director

We don’t give product-wise numbers, but we can say that the performance in wires has been good like Ram earlier mentioned. It is also due to the fact that copper prices have gone up. So in the expectation of price increases, dealers are upset [Phonetic] also. So, some of the volume growth has come from that as well.

Renu Baid — IIFL Securities — Analyst

Got it.

Mithun Chittilappilly — Managing Director

Fan’s volume growth was slower because there was this churn on, what you call, moving from the old regime to the new regime. And we, unfortunately, did not have much inventory of the old items, so our numbers look little less than what others would have done, because we had less — dealers were buying only the old items because they were available for a good discount. And the difference between the old price to the new prices also like what Ram mentioned, 6%, 8%, plus it is considered a huge gap, so which the dealers have taken advantage of.

Renu Baid — IIFL Securities — Analyst

Sure. Thanks so much for your inputs. All the best.

Operator

Thank you. The next question is from the line of Aniruddha Joshi from ICICI Securities. Please go ahead.

Aniruddha Joshi — ICICI Securities — Analyst

Yeah. Sir…

Operator

Aniruddha, you are not audible. Request you to use the handset. There’s a lot of disturbance from your line.

Aniruddha Joshi — ICICI Securities — Analyst

Is it okay now?

Operator

This is also not clear. Please use the handset.

Aniruddha Joshi — ICICI Securities — Analyst

I am from handset. [Technical Issues] Sir, what is the Sunflame nine months FY23 versus nine-Month FY22 performance? And — because we have seen many kitchen appliances companies also getting impacted which had no relation with fan issue also. So how is the performance of Sunflame per se? And secondly, how has the — in this quarter on a Y-o-Y basis.

Mithun Chittilappilly — Managing Director

Yeah. Thanks, okay. We will not give any specific numbers, but we can give some color. Ram?

V Ramachandran — Director and Chief Operating Officer

I think from what I understand, I think it’s broadly flat. There is some decline of 3% to 4% which is driven by the institutional business. Institutional business, I think, there have been some changes in the income tax which has affected the gifting business. So there is a significant drop in the gifting business. So, I think that’s where there is a hit.

But minus of that, I think, it’s almost flat. Sunflame is almost flat, maybe towards 3% [Phonetic] down. The big chunk is the Institutional business where the institutional customers stopped buying, because I think they are required to — there were changes in the income tax act that require GST and to be charged. Some trial is getting created on the gifting. So companies who are typically buying for gifting, they have stopped buying. So that’s got a drag of 2%, 3% on the on the overall Sunflame businesses. But I think the core Sunflame business was almost flat, maybe plus or minus 1% [Indecipherable], top of mind, that’s what I remember. Is that clear?

Aniruddha Joshi — ICICI Securities — Analyst

Yes, yes. That’s clear. Sir, last question is on the [Technical Issues]

Operator

May I request you to please reconnect from a different device. Thank you. In the meanwhile, we’ll take — move onto the next question that is from the line of Rahul Gajare from Haitong Securities. Please go ahead.

Rahul Gajare — Haitong Securities — Analyst

Yeah. Good evening, gentlemen. Thanks for the opportunity. I’ve got a couple of questions. First, congratulations on the Sunflame acquisition closure that you finished in Jan. Now you invested almost INR680 crore in this acquisition. You are looking at adding more manufacturing. Could you indicate to us the kind of capex that you are doing in the manufacturing, so we know how to shape up the balance sheet from here.

Mithun Chittilappilly — Managing Director

So Sunflame has one large manufacturing facility which I think only some 50% is utilized there — where there’s a 150,000 square feet of large plant in Faridabad, where only half of it is utilized. So — and they have one more factory in Baddi which is [Indecipherable] but it is also about 30,000 square feet and also not utilized. So we have almost 100,000 square feet of manufacturing space ready with licenses, everything. So I don’t see capex investment for factories happening in Sunflame for at least two years — two to three years. I think any capex will be mainly for molds and dyes for any new SKUs we launch, and that may not be that large.

Rahul Gajare — Haitong Securities — Analyst

Alright. You also mentioned about adding more capacities in V-Guard. So, that is what I was referring to.

Mithun Chittilappilly — Managing Director

V-Guard kitchen [Phonetic] so yeah. So, I think our capex like what we have mentioned is, we will spend between INR50 crores to INR70 crores annually, every year, and that will continue to happen. And we have done that for the last — last year, this year, and even next year, I think some part of the capex will happen. So that’s how you can look at the balance sheet there for V-Guard.

Rahul Gajare — Haitong Securities — Analyst

Okay.

Mithun Chittilappilly — Managing Director

Manufacturing, what we talked about will fall under this guide.

Rahul Gajare — Haitong Securities — Analyst

And after this, how much of your sales will come from own manufacturing and how much will be…

Operator

There is a slight airy disturbance on the line. I request you to keep the mic closer.

Rahul Gajare — Haitong Securities — Analyst

Yeah, is this better now?

Operator

Yes.

Rahul Gajare — Haitong Securities — Analyst

Yeah. So, I want to know, with this entire Sunflame manufacture and adding capacity in V-Guard, how much of your total revenue will come from your own manufacturing?

Mithun Chittilappilly — Managing Director

So I think for us, I think close to 65% to 70% will come from own manufacturing and that’s what we see. And Sunflame I think already has I think…

V Ramachandran — Director and Chief Operating Officer

Sunflame, that’s about 2/3.

Mithun Chittilappilly — Managing Director

Sunflame is also about 2/3, so roughly 65% is own manufactured. So it is going to remain between 65% to 70% of the combined entity. And probably — in the next five years, probably, [Indecipherable]. And we will still continue to work with some vendors in some cases where we are buying certain products where we find it better to trade than to manufacture.

Rahul Gajare — Haitong Securities — Analyst

And one of the reasons you indicated about having low-margin on the consumer division is import. But from what I recollect, I don’t think that imports are very high. Maybe 2%, 3% is what you import. Correct me if I’m wrong on that import numbers.

Mithun Chittilappilly — Managing Director

So the margins in consumer durable is low because what Ram had mentioned is in kitchen, we are working with Indian outsourcing vendors. So when you work with Indian vendors or even import vendors, they also have their own market. So it’s not because of imports, the important issue is mainly for fans, which was the table, pedestal and wall fan which is now largely resolved.

For the other segments, the issue on margins is also because our competition is there. That is what I think Ram was talking about in terms of putting up manufacturing. So for example, we are selling induction cooktop cast stoves, mixer grinders. We are roughly doing about INR130 crores and INR140 crores of revenue, where we believe we are not competitively pricing the product in the market. That’s what he was talking about.

Rahul Gajare — Haitong Securities — Analyst

My last question is on — certain bookkeeping questions. I see cash of almost INR140 odd crore in December. Could you tell us what is the cash right now — cash level right now?

Mithun Chittilappilly — Managing Director

Sorry. Cash of — Cash flow has been close to INR400 crores.

Rahul Gajare — Haitong Securities — Analyst

Well, that is as 30, December, is it?

Mithun Chittilappilly — Managing Director

Yes.

Rahul Gajare — Haitong Securities — Analyst

Current investment and cash put together will be closer to INR400 crores INR450 odd crores, but what would be this number now with this [Indecipherable] closed?

Mithun Chittilappilly — Managing Director

We will use the cash for the acquisition.

Rahul Gajare — Haitong Securities — Analyst

So what is the cash balance now?

Mithun Chittilappilly — Managing Director

INR40 crores, INR50 crores. INR50 crores or something like that.

Rahul Gajare — Haitong Securities — Analyst

Okay, sir. Thank you. Thank you very much. And all the very best, sir.

Operator

Thank you. [Operator Instructions] The next question is 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. Let me congratulate the entire team for successfully executing this Sunflame acquisition. My queries are pertaining to that. So sir, would it be possible for you to share how the funding has been done and what is the amount of debt which has been raised and at what cost?

V Ramachandran — Director and Chief Operating Officer

Yeah. Mithun.

Mithun Chittilappilly — Managing Director

Yeah. We have taken debt of INR275 crores. The balance INR400 crores was through internal accruals. And if that comes to us at slightly less than 9%, 8.9% — 8.98%.

Nirav Vasa — Anand Rathi — Analyst

My second question. So sir, maybe because this transaction was executed in January. So the February and March revenue would be booked in — would be consolidated, is that right assessment?

Mithun Chittilappilly — Managing Director

Yes, we will consolidate and claim from January onwards.

Nirav Vasa — Anand Rathi — Analyst

From January onwards. Thank you, sir.

Operator

Thank you. The next question is from the line of Harshit Kapadia from Elara. Please go ahead.

Harshit Kapadia — Elara Capital — Analyst

Thanks for the opportunity, sir. Just wanted to check with you in terms of volume growth, if you can highlight for all the three-year CAGR?

Mithun Chittilappilly — Managing Director

Sorry. Volume growth for?

Harshit Kapadia — Elara Capital — Analyst

All the three segments.

Mithun Chittilappilly — Managing Director

Okay. Can we —

V Ramachandran — Director and Chief Operating Officer

I’ll calculate and tell you.

Mithun Chittilappilly — Managing Director

What’s your name, please?

Harshit Kapadia — Elara Capital — Analyst

Harshit Kapadia from Elara Capital.

Mithun Chittilappilly — Managing Director

Elara, okay, so we’ll get in touch with offline on this, you need to come back on, okay.

Harshit Kapadia — Elara Capital — Analyst

Okay, sir. Thank you, sir, that was my question.

Operator

Thank you. The next question is from the line of Achal Lohade from JM Financial. Please go ahead.

Achal Lohade — JM Financial — Analyst

Yeah, good afternoon. Thank you for the opportunity. Just wanted to check in terms of the outlook. On one hand, we are seeing an element of slowdown or slack in-demand. So how do we see next couple of years in terms of what is the growth outlook one could have? I’m not asking for specific guidance, but can we go back to that high-teens kind of growth or you think that is still sometime away for us? This is ex of Sunflame. Obviously, Sunflame will have the delta, but ex Sunflame I would like to check.

Mithun Chittilappilly — Managing Director

So I think, see, what we’ve been saying is right from June onwards, we are witnessing slowness in the market and that is coinciding with the increase in rate hikes. So whenever there is a high inflationary environment, it does two things, one is, it increases the fear in the minds of consumers to spend because their monthly household expenditure has gone up significantly. Be it petrol, food, whatever it is, it has gone up significantly.

And the second thing that happens is the increase in interest rates, sucks the liquidity out-of-the market, be it retailers, wholesalers, distributors. Banks are not lending like — last year people — they were in a bandwidth flushing the trade with money today may not be very we do get financing. So I think we are entering a high-interest rate cycle and last time what we’ve seen it this is going to play out for some time until we start to see a reduction in the interest rates. So that’s my answer to you. So we — that’s not as we see a reduction in oil prices and we see indexing inflation and reduction in interest rates. I will — the demand will come back strongly,

So I think it’s a cyclical thing, nothing much we can do about it.

Achal Lohade — JM Financial — Analyst

And with respect to counter that, obviously, the distribution side, if you could elaborate where are we in terms of the target? And how do you see that over next two-three years in terms of non South?

Mithun Chittilappilly — Managing Director

So we are going as planned, even you would have seen in this tough quarter in markets have done well and that shows that our expansion work is going on. We will continue to grow, expand and all that. But we have to understand that we also have a South where we have very-high market-share and that’s where we’ve published some headwinds, because we probably can’t grow there without the market itself growing, because additional opportunity to grow distribution in South is limited for us.

Of course, Sunflame can grow. But for V-Guard brand, maybe slightly challenging, because most of our products we have in a very high market shares.

Achal Lohade — JM Financial — Analyst

Understood. The second question I had with respect to pumps business. Can you help us understand how the pumps in terms of the momentum has been? Have you seen any improvement there or it’s just languishing as it was earlier?

Mithun Chittilappilly — Managing Director

No, pump business continues to be under pressure. We are not as badly impacted, like the agricultural pumps. We are more in the residential pumps, but even the residential pumps demand has been impacted. I also think it’s to do with the fact that we have had very good rains, very good monsoon. I mean, actually excess rains in most places.

So I think till we hit — pump replacement usually happens when there is a reduction in water table. So what happens is, pump are largely a replacement market new demand is also there but slightly it’s a replacement demand. So is there significantly high water table levels, the requirement for pumps is low. So we are hoping that this summer is going to be strong and long one. And that should kick-start the demand for pumps. As of now, it is continuing as a business, it’s not — it’s nothing — not doing too well. Margins are also slightly impacted as far as the pump is concerned.

So it’s not — there is not much of different from what we have stated in the last call.

Achal Lohade — JM Financial — Analyst

Right. Just a clarification there that we were told by another competitor is that there is an element of aggressive pricing for the pumps. So can you give some more sense on that? Are you seeing aggressive pricing by the peers or not yet?

Mithun Chittilappilly — Managing Director

Yeah, I think, so this is because of the other thing, right. So when there is lack of demand, we were going to have accurate pricing, right. So it’s a demand and supply thing. When there is more suppliers than there is demand. There is going to be competitors who are going to cut prices. And because some of them have to, you know, liquidate their inventory and so on and so forth.

So I think this is something that we’ve seen before also when the demand. This happened. One more thing I’ll tell you during COVID, what happened is one year of COVID — first year of COVID, the pump demand was very strong, because always smaller pump companies in Coimbatore and Gujarat. They do not supply. Now, all of them have come back in full force as well. So there is obviously that also playing out. But I think we’ll wait and see what happens.

So obviously with the lack of demand, pricing is also under pressure. Or other people are not taking up pricing. The increases have not been passed on.

Achal Lohade — JM Financial — Analyst

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

Operator

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

Keyur Pandya — ICICI Prudential — Analyst

Sir, just want to understand the backdrop of the macro-environment you mentioned. The inflation and demand slowdown. So now, when we see our RM cost coming down, does cutting the price help remove — improve the demand or it is better to get the margins and that demand? Basically your thought in this context, between say, maintaining the margin on improving the margin versus giving away margin to improve the demand.

Mithun Chittilappilly — Managing Director

So I’m a firm believer in not cutting price to improve things. Because that’s a very short-term thing and that can be done by anyone. But however, all of my peer companies don’t believe in the same way that I do. So, some of them will refer to this type of tactic.

Ram, anything you want to supplement?

V Ramachandran — Director and Chief Operating Officer

Yeah, Mithun. I think the margins are stressed for all companies, okay? And I do believe that there is limited room for companies to cut prices from here. In fact, I think you will see price tweaking happening right here and there. 1% or 2% tweaking will certainly happen is what I believe, as we enter the season, because most people have not been able to do much than — much of the — particularly, after February or March of last year, no price increase has happened. Then the commodity continued to increase in mid-May/June and then it’s now slowly easing, right?

Also, I think even if the commodity price easing is fully flowing into P&L, I think it will only help companies to get back to that long-term rate. I think — so, business has normalized, right, business spending has normalized, travel is normal now, ATM spendings are slowly getting back to normal. So, I think it’s not going to be practical to expect that companies will respond cutting prices.

And also, I think 1% or 2% or 3% price cut is not going to trigger consumer demand, right, since there is not appetite to choose that path in our kind of product portfolio. And I’m saying this even for peers, right? So, I would be very surprised if they would resort to that. And I also think that it will have less scope to increase demand. I think demand increase will happen based on macros. I think, as the economy comes back and as the inflation is — across the consumption basket, right, is flattening. So I think we will have wait for that.

Keyur Pandya — ICICI Prudential — Analyst

Okay. And just last question. So, any divergence in demand as far as rural versus urban or, say, regions, North, South, East, West, any divergence are we seeing?

V Ramachandran — Director and Chief Operating Officer

There is a bit of pressure on small towns, rural and entry-level segments, right? So, that is pretty much there and that’s been visible from somewhere around, I would say, August of last year, right? So, that is pretty much there and it continues.

Geographically, I think, it’s by and large — to my mind, it’s by and large fine geographically.

Keyur Pandya — ICICI Prudential — Analyst

Basically — okay. So, now are — you are saying rural…

Mithun Chittilappilly — Managing Director

Yeah, yeah. Small town, rural, entry-level customers, I think that segment, still there is pressure.

Keyur Pandya — ICICI Prudential — Analyst

Okay. Understood. Understood. Sir, thanks a lot, and all the very best.

Mithun Chittilappilly — Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Bhavin Vithlani from SBI Mutual Fund. Please go ahead.

Bhavin Vithlani — SBI Mutual Fund — Analyst

Sir, thank you for the opportunity again. So, this is a follow-up to the earlier comment you mentioned about unorganized. If could you also highlight about, besides the pumps, which are the other segments where you have seen unorganized come back with engines and that’s kind of taking back some market share preventing its slow-down?

Mithun Chittilappilly — Managing Director

No, pump is the only category in our industry, where we still have a large presence of unorganized. We were very strong. If you look at other product segment, it’s largely consolidated into branded products, feed wires, water heaters. Of course, there is unorganized in it, but it’s not like — people who are buying the — a branded wire or cable, very unlikely to buy unbranded products, because he is getting it cheaper. But pump is not like that. Pump is more like a cottage industry. There are very strong local brands in each district and so on and so forth.

So — and maybe the awareness of people is less. People relying more on the retailer or the plumber and so on and so forth. So, only in the pump, I think this issue is more present. I’m sure unorganized is there in all the other categories. But I think over the years, they’ve all reduced their activity levels.

Bhavin Vithlani — SBI Mutual Fund — Analyst

Second is, on the raw material, we have seen some amount of catch-up that has happened, whereas aluminum, copper prices have gone up. So, for the bill of material index that you track internally, how — what [Technical Issues] seen over the last quarter wins? Like, if you take Jan as an end and versus what we saw in September, and what’s the kind of increase that we have seen?

Mithun Chittilappilly — Managing Director

So, it’s difficult to say on a blended basis. But I think copper and — copper has gone up significantly high, and aluminum has also gone up. But there are certain other things that have not gone up, like steel and all that. So, I think still, if we start to look at replacements, we should start to see some improvement and that’s what is making us confident about talking about improving margins going forward. But we’ll wait and see. Things are not fully settled. So, we’ll have to wait and see what happens. But yes, there is also some price increases that has not happened, and we are going to — as we are approaching summer, we are going to push through some pricing on.

Bhavin Vithlani — SBI Mutual Fund — Analyst

Sir, make this last question. While I understand you are not giving category-wise revenue numbers, but just to understand more directionally some of the categories which were fast-growing last year, if you could give us the Y-o-Y growth number for the quarter for fans and water heater, please?

Mithun Chittilappilly — Managing Director

We’ll probably share that offline. This is Bhavin, right, from SBI Mutual Fund?

Bhavin Vithlani — SBI Mutual Fund — Analyst

Yes. Yes.

Mithun Chittilappilly — Managing Director

We will share it off.

Bhavin Vithlani — SBI Mutual Fund — Analyst

Thank you so much. These are my questions.

Operator

Thank you. The next question is from the line of Khadija Mantri from Sharekhan. Please go ahead.

Khadija Mantri — Sharekhan — Analyst

Hello?

Operator

Yes. Please go ahead.

Khadija Mantri — Sharekhan — Analyst

Good evening, sir. Sir, my question is regarding Sunflame Enterprises, who — in the budget, the basic custom duty on electric kitchen chimney has been increased from 7.5% to 15% and the duty on heat coils also has been reduced. So, will it have any impact on Sunflame?

Mithun Chittilappilly — Managing Director

Yeah. Ram, you want to take this?

V Ramachandran — Director and Chief Operating Officer

Yeah. So, yes, I think Sunflame has a large chimney business. But having said that, Sunflame has started to manufacture chimneys and over the last four, five months, they are slowly stabilizing output. It’s quite possible that there maybe some near-term impact on the chimney business, because it’s presently dependent on imports to some degree. But I think it’s going to shift to — fully to own manufacturing pretty soon or significantly to own manufacturing pretty soon, yeah, because they are just month-on-month ramping up the production output.

Khadija Mantri — Sharekhan — Analyst

Okay, sir. So, currently, how much of it is imported? I mean, the mix. Would you be able to give…

V Ramachandran — Director and Chief Operating Officer

It’s too early. I wouldn’t have that kind of sense. But I think that there is some — maybe there is a smaller portion, which is domestically sourced and there is a larger portion, which is imported. And — but I think this is just a matter of three, four months, because the plant is already up, running, and they took a pilot output about four to five months back. And they are scaling the throughput month on month.

So, I think even if there is any impact on Sunflame, it’s going to be transitionary, maybe whatever inventory, which is sitting in the system and whatever POs that are in pipeline, yeah, I think, probably, they will switch over to domestic manufacturing or domestic sourcing pretty soon, except for maybe some premium models, which might mean that some — I would say that six months down the line, maybe not more than 15%-odd of the revenue may come from imported chimneys, and the rest will all be manufactured in the factory.

Khadija Mantri — Sharekhan — Analyst

Okay, sir. Thanks for the explanation. And my next question is regarding the capital employed number. So, if I see, the unallocated capital has gone up on Q-o-Q basis from INR400 crores to about INR700 crores.

Mithun Chittilappilly — Managing Director

Sudarshan, you want to — unallocated capital, you’ll come back?

Sudarshan Kasturi — Chief Financial Officer

I’ll come back.

Mithun Chittilappilly — Managing Director

Okay. We’ll answer that later. We don’t have the number with us right now.

Khadija Mantri — Sharekhan — Analyst

Okay, sir. No issues. Thank you so much.

Operator

Thank you. The next question is from the line of Aksh Vora from Praj Financial. Please go ahead.

Aksh Vora — Praj Financial — Analyst

Hi, sir. Earlier, you mentioned that our manufacturing base contribution would go to around 65%, 70% or 75%. So, just from a longer-term picture, what could be our blended EBITDA margins be in, say, three to four years, say?

Mithun Chittilappilly — Managing Director

So, we obviously don’t give out guidance on EBITDA margins. But our hope is that the manufacturing bush will help us to improve gross margin and consequently EBITA margin. But first, we have to get back to pre-COVID EBITDA margins before we talk about moving even higher than that. So that’s our immediate focus to restore margins to about 10%, which is that Tricoat market.

Aksh Vora — Praj Financial — Analyst

I understand. I’m not asking for any numbers, actually. But then, just wanted an assessment in past you have been saying that, we would move to South and non-South mix to 50-50. And you executed that well enough. From a longer-term picture, I was assessing that if the manufacturing base growth is higher and [Indecipherable] margin level of the pre-COVID. Say from four to five years picture, would it be around mid-teen level or we can achieve that number, or something like that you have?

V Ramachandran — Director and Chief Operating Officer

I think we prefer not to make any comments on that. But I’ve always said that we would like to improve 1% every two years. But for that to happen for to get back to my three pre-COVID margins and then work on that. Of course, when Sunflame comes on-board, Sunflame margins are higher than V-Guard, so some impact of Sunflame will also flow in the blended market.

Mithun Chittilappilly — Managing Director

Just one point I also make right. Say on behalf of — this business environment is pretty volatile, right? I think, it’s even, for example, for short-term we are projecting — sometimes there is revenue slippage and inventory expense. So it’s a bit — pricing calculation within the struggle with some raising it on near-term demand, So I think it would be sensible to say that we would like to see the business normalize. I think, once the business normalizes, we should be able to continue on-track of being able to do that. But I think, the foundational normalization of business actually happens. So business margin.

Aksh Vora — Praj Financial — Analyst

I absolutely agree with you. And all the best for the future, sir. Thank you.

Operator

Thank you. Ladies and gentlemen, that would be our last question for today. I now hand the conference back to the management for their closing comments. Thank you, and over to you.

Mithun Chittilappilly — Managing Director

I would like to thank the entire team of Nirmal Bang for helping us to host the call, and thank you.

Operator

[Operator Closing Remarks]