Key takeaways of the call

On account of weak summer in the northern parts of the country the room air-conditioner sales volume of current summer season will be lower compared to corresponding previous season.

The room air-conditioner inventory at distribution/retail channel was about 2 months currently. Lastly the company has revised its price in January 2018 giving effect to inflation in material/component prices it bought out in Q2&Q3FY18 and used in the manufacture. Since the older inventory to the tune of 2 months in channels the earlier planned price hike effective from June 2018 end or July 2018 start may be pushed back to August 2018. Sales to distributor will be slow till the older stocks get exhausted as the newer stocks are with higher price factoring in the recent material cost.

Company's Water purifier business is on asset light model. The company has 3 contract manufacturers one in northern part of the country and two in western part of the country. The company gives managerial resources as well as components for manufacturing and the contract manufacturers gets conversion charges for their production. So the biggest expenses is advertisement and sales promotion, the company plans to spend about Rs 35 crore towards Advertisement and sales promotion for water purifiers.

Since the water purifier business is yet to achieve critical size in-terms of size, the EBITDA margin of Unitary cooling products under which this business is clubbed will be hit by 150 bps.

For Water purifier business to turn profitable it has to achieve a sales turnover of Rs 200 crore or 1.5 lakh units of volume sales. The company expects to close FY2019 with a sale of Rs 100 crore from water purifier business alone and touch Rs 200 crore by FY2020. The company targets 3% market share in FY19 and 10% in next 2 years.

The residential water purifier market size in the country is pegged at about Rs 4200 crore and is growing at a CAGR of 15-20%. In terms of value due to their higher price points, electric purifiers contribute to about 85% of the market whilst balance comprises gravity based purifiers. About 2.6 million units sold every year are electric i.e. RO, UV, RO+UV and its variants.

The company has presence only in electric water purifiers.

The company will not foray into unrelated business segments for next 2 years.

Given increased quality certification across various countries as non tariff barriers are not under the purview of WTO guidelines, the country is increasingly focused on backward integration of certain components for some products such as air-conditioners and water purifiers. The company looks at backward integration for components such as inverter drives, PCB, remote control, cartridge (for immune boost water purifiers) etc. Rolling of RO membranes by importing raw materials can also be done as part of backward integration. Backward integration to this components is expected to be economically beneficial to the company.

About 20% of the cost of water purifier is accounted by RO membranes. Globally three players dominates the RO membranes including DOW Chemicals, GE and Japanese players. The company uses membranes of DOW Chemical's which is almost 2-4 times costlier than the cheapest available one in the market.

Water purifiers with immune boost technology will be costing Rs 2000 higher than the other variants of the same product.

The company is also test marketing a range of commercial water purifiers to cater to the growing demand of purified water in offices, restaurants, clinics and other commercial establishments. Commercial water purifiers will in the capacity range of 25 litre per hour (lph) to 50 lph.

Commercial water purifier is a low hanging fruit as the company has strong connection with this segment with its water cooler products. Once it establishes its credentials in residential water purifier it will cross leverage to tap this segment.

As far as EMP business is concerned the execution in FY19 will be better than FY18 that saw the GST related disturbances.

The construction work on Sri City plant will begin by Nov-Dec 2018. Similarly the shifting of manufacturing capacity of water cooler from HP to Wada is as per schedule and will complete by Dec 2018.