Voltas Ltd Q1 FY2023 Concall Summary

Key Takeaways

• UCP volumes surge on heatwave, but margins squeezed: Unitary cooling product volume jumped 111% YoY, recapturing overall AC market share to 24.1%, yet EBIT margin dipped ~330 bps QoQ as the seasonal ad budget hit and no competitor raised prices despite input cost pressure.
• Inverter leadership reclaimed: Voltas overtook LG to lead the inverter AC segment with a 21.8% share, a 300 bps gap, driven by competitive pricing and a wider SKU range.
• Project business drags with a loss: The EMPS segment posted a ₹12 crore loss on revenue that fell to ₹455 crores, hit by cost overruns, conservative provisions, and a low carry-forward order book.
• A price-hike stalemate freezes margin recovery: No player passed on higher input costs in Q1, and management sees no price increase in the lean Q2; any move to raise prices, and any margin relief from falling commodities, is pushed to Q3 at the earliest.
• What to watch next quarter: Whether the festival season spurs demand despite inflation, the pace of new EMPS order bookings, and any signal on Q3 pricing as dealers begin building inventory.

Unitary Cooling Products: Volume Boom, Margin Squeeze

• Heatwave-driven volume: A full season of hot weather and extended dealer relationships drove stellar 111% YoY volume growth, helping Voltas recoup market share lost from a prior supply chain disruption.
• Market share recaptured: Overall AC market share recovered to 24.1% by June exit, a 950 bps lead, after correcting supply chain issues and regaining lost ground in the south by mid-March.
• Inverter mix accelerates: Inverter contribution in split ACs rose from 70% to 82% YoY, and Voltas took the lead in the inverter category with a 21.8% share, 300 bps ahead of the nearest competitor.
• Demand dampened late: Unprecedented rains and an early monsoon from the south muted secondary market demand in the latter part of the quarter, while inflation fears cut discretionary spending.
• Margin hit is seasonal, not structural: EBIT margin dipped ~330 bps QoQ because ~75% of the annual advertisement budget is spent in Q1, reaching 3–3.5% of revenue; gross margin remained almost intact.
• No price hikes taken: Competitive dynamics and regional distribution considerations led all players to withhold price increases, so nobody passed on increased input costs to consumers.

Management: "The good aspect is we were trailing to LG in the inverter category being they had started their portfolio early to the market expectations. At the end of the June, we have gained our leadership there as well with the gap of 300 basis points."

EMPS & Projects: A Loss-Making Quarter, Cautious Rebuilding

• Revenue collapse: EMPS revenue fell to ₹455 crores from ₹688 crores YoY, owing to a low carry-forward order book and most projects reaching completion.
• Segment loss: The segment reported a loss of ₹12 crores, driven by cost overruns, contingency build-up on projects facing time extensions, and conservative provisions on a few delinquent projects.
• Domestic order inflow improves: Orders booked were higher than ₹225 crores vs ₹58 crores YoY, as a judicious approach retained a few but healthy orders.
• Middle East drags: Big-ticket running projects are closer to completion, while new projects are in early stages where margin recognition will accrue later; delayed work certification and client payment deferrals forced conservative provisions.
• Annual view matters: Management cautions that the project business should not be viewed quarterly and expects the segment to be positive on an annualized basis, targeting a 4.5–5% margin percentage.

Pricing, Margins & the Commodity Waiting Game

• Stalemate on price hikes: No competitor raised prices in Q1, and with Q2 being a lean period carrying retailer and manufacturer inventory, no further price hike is expected in the near future.
• Q3 is the inflection window: Management may initiate a price increase process beginning Q3 when dealers start building inventory for primary sales, acting as the category leader.
• Commodity tailwind delayed: Based on contracts and inventories in hand, the positive impact of falling commodity prices on procurement costs would start to materialize more likely from Q3 onwards.
• Structural margin recovery conditional: If commodity prices continue southwards and cost advantages materialize from Q3, margin recovery is possible for the entire industry and Voltas, provided competition does not pass the input cost benefit to end consumers.
• BEE-related cost: The new energy-rating table became effective 1st July 2022, resulting in incremental cost; the effective price rollout to the market is expected probably mid-Q2 or later.

Management: "Given this current stalemate ... we won't see any further price hike by any of the competitor in the near future. However, beginning quarter three when the dealers start moving into some of the primary, building up the inventory, we may look into passing off some of the increase input cost and we may initiate the process being leader in this category."

Voltbek, Commercial Refrigeration & Other Businesses

• Voltbek contained losses: Brand and trade acceptance enhanced overall performance; in-house manufacturing, value engineering, and a healthy product mix improved gross margin and contained losses despite higher input costs and increased Q1 advertisement spend.
• Voltbek market share static: Market share remained almost the same as March levels; management notes three months is not significant for a young brand to show share gains.
• Commercial refrigeration growth: Consistent growth backed by market expansion into tier-3 and tier-4 cities for ice cream and chocolates; volume grew 138% over FY21 and 20% over FY20.
• Commercial AC: Turnover grew almost 50% over last year, driven by light commercial air conditioning, packaged air conditioners, and ducted split units.
• Textile machinery demand strong: High demand for capital machinery in the spinning and post-spinning textile industry and a focus on after-sales business achieved significant growth, though price increases by principals and supply chain disruptions pose challenges.
• EPS steady: Both Mozambique and Indian operations performed satisfactorily; an increase in export duty fines on iron ore marginally impacted demand for mining equipment.

Restructuring, Capacity & Strategic Moves

• Business transfer consummated: All conditions precedent were fulfilled, and 1 August 2022 was finalized as the effective date for transferring the MEP, mining, construction equipment, and textile machinery businesses to wholly owned subsidiary UMPESL.
• Standalone to focus on products: From Q2 onwards, standalone accounts will show only the UPVG (product business) and international project business, aiming for equal management focus on both product and projects businesses.
• Chennai plant on track: Land has been acquired in an industrial zone; production is expected towards the end of CY23 or Q3 FY24, with efforts to accelerate.
• Highly JV slow: The joint venture is awaiting government approvals from multiple departments and, given the current political dispensation, appears to be on a slow track; Voltas is proceeding with its own Chennai operations.
• PLI sanction partial: Sanction has been received except for the compressor, which is still under consideration.
• CAPEX outlook: FY23 and FY24 capex is pegged at close to ₹400–450 crores for manufacturing expansion in ACs and commercial refrigerators, plus PLI-related work, excluding Beko.

Management: "Given the current political, dispensation it is like looking like it's on a slow track. Keeping that in mind, we are going ahead with our Chennai operations."

Guidance & Commitments

Key Metrics