From the beginning of the year, the Bajaj Electricals stock saw a one-way rally till May, post which the company posted weak numbers for two consecutive quarters, which resulted in putting pressure on the stock. This at a time when its peers Havells , Crompton Greaves and TTK Prestige posted good second quarter numbers.
The company is seeing rising weakness in its lighting business. EBIT margin of the segment remained weak at 2.8 percent due to a decline in CFL sales and flat luminaries sales growth. The management expects weakness in the CFL business to continue, given increasing competition from LEDs. Prices of LEDs are falling sharply, which makes the outlook for CFLs look bleak.
Bajaj Electricals CMD Shekhar Bajaj says with winter not setting in yet, sales of winter-dependent products are yet to pick up. Also, with online retailers offering such steep discounts, there is confusion in the minds of consumers. They expect discount on every product and hence wait to make a purchase. Consumers fail to see that these e-tailers offer discount on just 10 percent of their products.
He feels once this confusion clears, consumers will make the come back to the brick and mortar stores. He adds that Diwali sales too were slow, but saw a pick-up post Diwali.
Bajaj Electricals has targeted an ad spend of Rs 60-65 crore in FY15 and has spent Rs 24 cr in the first half of FY15.
Shekhar Bajaj believes that the next four months will be critical to get growth back in place.
Another consumer durable company, Blue Star reported a decline in order inflow in the second quarter by 37 percent year-on-year (YoY) to Rs 558 crore. Its order book declined by 14 percent to Rs 1,490 crore. However, the company management appears optimistic on order recoveries in the second half of FY14, highlighting a strong enquiry pipeline.
As far as the AC business goes, Blue Star's market share in the air conditioner market (both retail and commercial) currently stands at 8.5 percent, with it being slightly lower in the retail air conditioner market.
Blue Star executive director B Thiagarajan is a happy man. He says Blue Star has seen an increase in sales. In volume terms, while the industry grew 10 percent, the company witnessed 19-20 percent growth between April and November in room air-conditioners. The company also saw 30 percent growth in value terms. In deep freezers and water coolers too the demand healthy, he adds. He expects this demand to continue. However, in large commercial spaces, demand is slow.
Thiagarajan is also comfortable with inventory scene and build up for the summer season.
Below is the verbatim transcript of B Thiagarajan and Shekhar Bajaj's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.
Latha: I have already identified the argument which emanated from what Havells India and TTK Prestige told us. How was the second half shaping up in terms of demand?
Bajaj: As far as we are concerned, November and early December we find that the winter has just not come. Major products like water heaters and room heaters, etc are basically depending on the weather. Therefore we are hoping that the winter is going to set-in in the next few days.
We are still saying that the last quarter, we are looking at double digit growth, whether it will be 12 percent or 14 percent I am not sure but definitely there is a slight slowdown. However, more so because there is a little confusion which is taking place in the market because of the online Flipkart's and Snapdeal's, when they start offering such heavy discounts a person says let me wait and watch is it real or not.
My personal experience has been that Filpkart's and all are giving maybe special pricing for maybe 10 percent of their products but it gives a feeling as if they are always going to be cheaper across the board which is not the case. The brick and mortar stores in most of the products are competitive; it is not that they are going to be not competitive. So, once the consumer knows that this is more of a gimmick and not a reality they will come back to the market.
That is what happened in Diwali, sales were quite slow but immediately after Diwali it picked up. Therefore a double digit growth and especially now with the oil prices coming down, commodity prices coming down and therefore we can expect a clear cut double digit growth taking place in the next four months. December also has started picking up already and we are expecting a good Q4.
Sonia: Were your sales impacted as well because of the heavy discounting that was offered by e-commerce sites?
Thiagarajan: On the contrary, sale has been going up. The industry is growing, up to November for example in volume terms the industry has grown by around 10 percent and value terms around 19 percent. We have grown in volume terms by around 20 percent and in value terms around 30 percent.
The demand continues to be strong and perhaps due to the lower penetration level in the room air conditioners, this must be the reason. Again in deep freezers and water coolers the demand has been very healthy. They are all around 15 percent growth or so. We expect this demand to continue for quite sometime. However, in the large commercial spaces, the slowdown continues.
So, I am a happy person that the room air conditioners continue to hold up, the deep freezers, water coolers continue to hold up. We are preparing for the summer in a big way, at least 25 percent growth we anticipate.
Latha: When you said that you have grown 20 percent in volume and 30 percent in value at Blue Star itself are you referring only to room air conditioners and not to commercial air conditioning? Is it your overall sales volume or the specific product that you were talking about and what period?
Thiagarajan: It is between April and November and even in October, November the growth has been healthy. I am referring to room air conditioners.
The light commercial segments – shop, showroom, boutiques where there is no land clearance is required that is doing well. It is the large commercial spaces – big office complexes, hospitals, etc which is led down very clearly.
In December, there is an announcement which is supposed to happen with regard to the extension of the Central Value Added Tax (CENVAT) rebate that was given. As you recall prior to the Budget last year it was extended up to December. Whether the finance minister will go ahead and extend it till February and take a holistic call or straight away this will continue is one of the anxieties we have. However, irrespective of that demand seems to be healthy.
Sonia: One consumer durable company yesterday was telling us that the ad spends for them have gone up quite a bit because of lower demand and increasing competition as well. As a percentage of sales do you expect that in the next year, your ad spends will go up significantly?
Bajaj: Yes, current year we were still looking at a growth of 15 percent plus which has not taken place and therefore the ad spend percentage has gone up because we had planned for a certain percentage but if your sales doesn't take place... Also, we get impacted because the inventory is planned on the basis of achieving a certain sales target, you don't achieve your sales target your inventory goes up. So, therefore there is interest cost which comes in, there is a fixed cost which is on lower volume and that is why the bottomline gets impacted.
Next four months are very critical for us that we are able to again get our growth back in to place and therefore fixed cost and our publicity which we are spending gets covered. Compared to last year we are looking at similar type of advertising amounts though last year we spent about Rs 13 crore for our 75 years campaign; that won't be there this year. Despite that we are looking at similar ad spend as last year.
Latha: In your second quarter you had said that or it was said by company people that you'll had a huge build up in inventory and that led to a higher jump in other expenses. The growth that you have seen since that is the months of October-November and half of December have you cleared out inventory, is it definitely lower?
Thiagarajan: In our case the inventory was not a major concern except that in some stock keeping unit (SKUs) we did have inventory but we have exhausted those inventories. The new product launches are planned in the month of January and February so we are very comfortable with regards to the inventory as well as inventory build up for the summer season. As you know in the summer season around 40 percent of the annual sales takes place. So, that build up is also going to commence now from this month onwards.
Stay tuned for more…
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