Orient Electric Limited — Q2 FY25 earnings call

Call held 25 Oct 2024

Management summary

Orient Electric delivered encouraging Q2 FY25 results, with strong top-line growth driven by the ECD segment and strategic premiumization efforts. Gross margins improved significantly, reaching pre-COVID levels, supported by cost optimization initiatives. While the first half of the quarter was subdued, the latter half showed recovery, and the company remains optimistic about its strategic initiatives and future growth, aiming for higher operating margins in the coming year.

Highlights

  • Revenue for Q2 FY25 stood at ₹660 crores, marking a 16.5% YoY growth.

  • EBITDA margin was ₹36 crores, or 5.3% of revenue, expanding by 180 bps YoY.

  • PBT for the quarter was ₹14 crores, achieving over 200% YoY growth (adjusted for land sales).

  • Gross margin expanded by 240 bps YoY to 32.4% of revenue, returning to pre-COVID levels.

  • The ECD segment (Fans, Appliances) registered robust growth of 21% with revenue of ₹440 crores.

  • The Lighting and Switchgear segment grew by approximately 8% to ₹221 crores.

  • The 'Spark Sanchay Program' delivered ₹36 crores in cost savings for H1 FY25, aiming to surpass last year's ₹75 crores.

  • Premium portfolio in fans currently stands at 30% of revenue, with a target to increase to 40-45%.

Key financials

  1. Revenue ₹660 Cr +16.5%YoY
  2. EBITDA ₹36 Cr
  3. EBITDA Margin 5.3%
  4. PBT ₹14 Cr +200%YoY
  5. Gross Margin 32.4%

What they filed

Q1 FY27: revenue up 23.5%, net profit up 72.2% against the same quarter last year.

₹ Cr · quarterly
Line itemQ2 FY25Q3 FY25Q4 FY25Q1 FY26Q2 FY26Q3 FY26Q4 FY26Q1 FY27
Revenue660 817 862 769 703 +7%906 +11%948 +10%950 +24%
EBITDA36 61 67 46 38 +6%68 +11%77 +15%67 +46%
Net profit10 27 31 18 12 +20%26 −4%40 +29%31 +72%
How to read this

₹ crore, as filed. The percentage beside a figure is the change against the same quarter a year earlier — never the quarter before, which would make every seasonal business look like it collapses and booms each year.

Segment breakdown

Share of Revenue
₹661 Cr Total
  • ECD ₹440 Cr 66.6%
  • Lighting and Switchgear ₹221 Cr 33.4%

Guidance & targets

Profitability

  • Gross Margin Profitability · ongoing · High confidence 32.4%
    We are now back to our pre-COVID levels of gross margin delivery. With a strong focus on premiumization and mix improvements, we expect to stabilize this and be in the same range.

    — Ravindra Singh Negi, Managing Director & CEO

  • EBITDA Margin Profitability · next year onwards · Medium confidence towards 9%
    Now going forward, we expect all our operating leverage to start taking in and you will see exit this year, better margins, will it go back to the earlier 9% level in the next 2 quarters? May be not, but definitely next year onwards, we should start seeing us inching towards that.

    — Ravindra Singh Negi, Managing Director & CEO

Cost Savings

  • Spark Sanchay Program Savings Cost Savings · full year FY25 · High confidence surpass Rs. 75 crores

    From Rs. 75 crores today

    Our 'Spark Sanchay Program', aiming for cost leadership, has delivered Rs. 36 crores for the first half of the financial year, and we are committed to surpassing our standards by the end of the year. This initiative is supporting gross margin delivery by both expanding and protecting it from commodity changes.

    — Ravindra Singh Negi, Managing Director & CEO

Product Mix

  • Premium Portfolio in Fans (as % of revenue) Product Mix · future · Medium confidence 40% to 45%

    From 30% today

    Our premium portfolio in fans today stands at about 30% of the revenue, and we aim to increase it to about 40% to 45%.

    — Ravindra Singh Negi, Managing Director & CEO

Market Share

  • B2B Share of Business in Lighting Market Share · future · Medium confidence rise further

    From approximately 20% today

    Our B2B share of business in Lighting, which is approximately around 20%, is set to rise further.

    — Ravindra Singh Negi, Managing Director & CEO

Regulatory Cost

  • EPR Cost Regulatory Cost · FY25 · High confidence Rs. 20 to Rs. 21 crores
    Nirransh, we are still in line with what we had projected for the year on the EPR and that's a calculated EPR cost.

    — Ravindra Singh Negi, Managing Director & CEO

Capex

  • Normative CAPEX Capex · current year · High confidence Rs. 50 to Rs. 60 crores
    As we always maintained at Rs. 50 to Rs. 60 crores is our normal, normative CAPEX for the year. So, we hope to be being range bound around that.

    — Saibal Sengupta, Chief Financial Officer

Working Capital

  • Working Capital Days Working Capital · medium term · Medium confidence lower levels

    From 19 days today

    So, that same trend will continue, but yes, our aim is to maintain the working capital at these lower levels.

    — Saibal Sengupta, Chief Financial Officer

Risks & concerns

  • Commodity price fluctuations and pricing pressures in Switchgears and House Wires.

    medium

    Switchgears and House wires experienced muted growth in the quarter due to commodity fluctuations and pricing pressures.

    Management acknowledged

  • Pricing erosion in the Lighting segment due to intense competition from regional players.

    medium

    Pricing erosion is still prevalent in the market, largely due to regional players and smaller brands compromising on quality.

    Management acknowledged

  • Potential impact of new government gazette on environmental compensation rate (EPR).

    medium

    A new government gazette on environmental compensation rate may have an impact, with associations making representations.

    Management acknowledged

Areas of evasion (2)

  • Specific breakdown of cost savings beyond general categories
  • Exact margin split between Lighting and Switchgear

Q&A highlights

1 direct
Export potential for Switchgears and TPW fans, and associated margins. Partial
So, for TPW, I can definitely say that it's a very competitive market. China pricing are very, very competitive. So, exports on TPW is not a higher margin business. While our efforts in Hyderabad would be to control the cost, but you are kind of capped on the pricing ability in the market when you go on TPW. Switchgear, vis-a-vis domestic, it's not that high a business, but still a reasonably okay margin that you make on exports.

Reveals the competitive landscape for exports and clarifies margin expectations for new export ventures, indicating that TPW exports are not a high-margin business.

Asked by Natasha Jain

Outlook on overall market, especially rural offtake and regional performance, and the sustainability of current EBITDA margins. Partial
Now going forward, we expect all our operating leverage to start taking in and you will see exit this year, better margins, will it go back to the earlier 9% level in the next 2 quarters? May be not, but definitely next year onwards, we should start seeing us inching towards that.

Provides a nuanced view of market recovery and sets a realistic, longer-term expectation for margin recovery, indicating no quick return to historical highs.

Asked by Aniruddha Joshi

Impact of EPR costs on FY25 and the company's strategy to recover these costs through price hikes. Direct
Nirransh, we are still in line with what we had projected for the year on the EPR and that's a calculated EPR cost. We have taken one price hike in quarter one, and if we were to look at it in by and large, we have put in about 1% in the price hike for catering to the EPR impact.

Quantifies a new regulatory cost and demonstrates management's proactive approach to mitigate its financial impact, providing clarity on future pricing strategy.

Asked by Nirransh Jain

3 min read 7 chapters

Detailed narrative

Q2 FY25 Performance Overview

Orient Electric reported a strong Q2 FY25, with topline revenue reaching ₹660 crores, marking a 16.5% year-on-year growth. The quarter was characterized by a 'tale of two halves,' with initial subdued momentum followed by promising recovery in the latter half, driven by festive build-up. EBITDA margin stood at 5.3% of revenue, or ₹36 crores, demonstrating a significant expansion of 180 basis points year-on-year. Profit Before Tax (PBT) showed over 200% year-on-year growth, reaching ₹14 crores, after adjusting for the base effect of land sales.

Gross Margin Improvement and Cost Optimization

The company successfully expanded its gross margin by a healthy 240 basis points year-on-year, reaching 32.4% of revenue, returning to pre-COVID levels. This improvement was attributed to a better product mix and continuous cost optimization through the 'Spark Sanchay Program.' This program delivered ₹36 crores in savings for the first half of FY25, with management committed to surpassing last year's total savings of ₹75 crores for the full year. The company expects gross margins to stabilize in this range.

Segmental Performance Highlights

The Electrical Consumer Durables (ECD) segment, encompassing Fans and Appliances, was a key growth driver, registering a robust 21% growth with revenue of ₹440 crores. Within ECD, Appliances saw high double-digit growth, particularly in water heaters and coolers, which grew 5x and 6x respectively. The Lighting and Switchgear segment grew by approximately 8% to ₹221 crores, with Lighting itself achieving double-digit growth. Switchgears and House Wires experienced muted growth due to commodity fluctuations but grew sequentially.

Premiumization and Product Mix Strategy

Orient Electric is actively pursuing a premiumization strategy across all categories. In Fans, the BLDC segment is a focus, now contributing 25% to total ceiling fan revenue, with a target to increase the premium portfolio to 40-45% of revenue. The Lighting segment's value-added portfolio now accounts for 60% of its overall ceiling business. The company is also expanding its B2B presence in Lighting, which currently represents about 20% of the segment's business and is 'set to rise further,' with new sub-categories like Tunnel and Stadium Lighting.

Distribution Expansion and Emerging Channels

The transition of 10 MD (Master Distributor) states to DTM (Direct to Market) model for fans has been completed and is stable, with DTM states outperforming, growing by 35% for the quarter and contributing about 30% to Fans GT share. The company is also leveraging emerging channels, with digital and retail channels delivering high double-digit growth, backed by water heaters and small appliances. Orient Electric has started listing products on quick commerce platforms like Blinkit and Zepto.

Manufacturing Excellence and Capex Outlook

The industry 4.0 greenfield plant in Hyderabad has been fully commissioned and is geared for stability, efficiency, and scale-up for the upcoming season in H2 FY25. The Faridabad plant has also undergone upgrades. For capital expenditure, the company has capitalized the Hyderabad project and anticipates a normal, normative CAPEX of ₹50-60 crores for the year, expecting to remain within this range.

Market Outlook and EPR Impact

Management noted a mixed market, with 'green shoots' observed in both urban and rural areas during the latter half of Q2, particularly for new products like BLDC fans and premium offerings. The company acknowledged ongoing pricing erosion in the Lighting segment, primarily from regional players, but is countering this with value-added products. Regarding the Extended Producer Responsibility (EPR) cost, the company projects it to be around ₹20-21 crores for FY25 and has implemented a 1% price hike in Q1 to largely cover this impact, with another price increase in Q3 for BIS implementation and commodity costs.

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