Voltas Ltd Q2 FY2023 Concall Summary

Key Takeaways

• Soft quarter, margin pressure persists: Consolidated revenue grew just 6% YoY as unseasonal rains and inflation hit consumer discretionary demand, while an overseas project provision dragged PBT.
• UCP margins stuck in single digits: High-cost inventory and competitive intensity kept H1 margins at 7%–7.5%; management sees double-digit margins as difficult for the current year and one or two quarters beyond.
• Market leadership intact but share slipped: Voltas held 22.8% YTD room AC share with a 750 bps lead, though exit share dipped from 24% to 23% sequentially in the lean months.
• Domestic Projects order book turning: Order bookings surged to ₹950 crores from ₹99 crores YoY, with BTA consummation expected to improve the bid-to-win ratio going forward.
• What to watch next quarter: Whether high-cost inventory clears enough by mid-Q4 to lift UCP margins toward higher single digits, the pace of backward integration execution, and any resolution on the Highly JV approval.

Unitary Cooling Products: Demand & Market Position

• Revenue held up in a weak quarter: Segment revenue grew 4% YoY despite incessant rains, lower consumer sentiment, and high inflation, though secondary sales were lower on a high base, impacting primary billing to channel partners.
• Premiumization trend intact: Consumers shifted toward higher star-rated products; split inverter AC share rose to 77% from 66% YoY, driven by replacement demand in saturated markets where five-star products make economic sense over the full lifecycle.
• Market share leadership sustained: YTD August 2022 room AC share at 22.8%, with a lead of close to 750 bps over the second player; leadership held in the inverter category as well.
• Exit share dipped sequentially: Exit market share moved from 24% in June to 24.5% in July, then down to 23% in August; management noted that in lean months, even 10,000-unit swings can move the share reading materially.
• Competitive dynamics: A key competitor dipped on margin in August; management observed that if the competitor’s strategy were consistent, they would have done well month-on-month, implying price cards alone do not sustain share.
• Air coolers bucked the trend: Higher double-digit growth on lower channel inventory, targeted dealer schemes, and expanded footprint; phased primary billing resulted in higher order booking for coming quarters.
• Commercial refrigeration softer in Q2: Softer OEM and channel demand on a high base and Q1 pent-up demand, though strong OEM tie-ups delivered higher double-digit growth on an H1 basis.

Manish Desai: "It doesn't mean that Voltas has been leading this category, blindly follow the strategy of the other players."

UCP Margins: The Central Concern

• High-cost inventory is the anchor: Lower-than-expected volumes in Q1 and Q2 left high-cost inventory on the books, which will continue to weigh on margins through Q3; improvement may become visible only from mid-Q4.
• Commodity tailwind neutralized by rupee: Softening commodity prices and easing logistics costs were largely offset by rupee depreciation, since several components remain import-sourced; management called the net benefit difficult to quantify.
• Near-term margin guidance cut: H1 margins at 7%–7.5%; double-digit margin looks difficult for the current year and one or two quarters beyond; efforts are to move closer to higher single digit.
• Medium-term range: For the next 12–15 months, margins expected in the higher single-digit range; long-term projections depend on how backward integration and localization initiatives evolve.
• Commodity pass-through posture: Management intends to be first to pass on price benefits when commodities soften to the right stage, but noted that cost increases previously absorbed by brands must be recouped first.
• Stabilization thesis: Once commodity prices stabilize, real price discovery should happen a quarter after stabilization, at which point margins would settle in the mid- to high single-digit range.

Jitender Verma: "When the prices increase, we, as brands, did not pass on all the price increases to the consumer. A lot was absorbed by, I would say, almost all the brands and which is reflected in the lower margins and in certain cases of other suppliers that increased losses also."

Projects Business: Domestic Recovery, Overseas Setback

• Domestic Projects order inflow surged: Order bookings including potential orders in pipeline aggregated to ₹950 crores, versus ₹99 crores in the same period last year; consummation of BTA has largely addressed challenges of securing fresh orders.
• Execution and collection focus: Project monitoring, execution, and intense focus on collection supported results; a larger order book helps strategize sourcing, standardize vendor base, and secure long-term continuity contracts.
• International Projects revenue muted: Low carry-forward order book and most running projects nearing completion kept revenue subdued; headwinds included delay in certification and collection, lower-than-expected productivity, and low availability of skilled manpower.
• Overseas project provision: The main contractor unilaterally terminated the contract in October and encashed the underlying bank guarantee; Voltas took a prudent approach and provided for outstanding dues and the encashed performance guarantee, disclosed as an exceptional item.
• Risk mitigation question left open: When asked what went wrong despite risk measures put in place after a prior overseas project issue, management stated the two events were quite different and that open risk definitely remains, but declined to elaborate further.

Jitender Verma: "So as long as everybody plays fair, we are very, very, I would say, in a position where business like conditions, we are fully taking care of mitigating that risk, but the open risk definitely remains."

Voltas Beko & Other Segments

• Voltas Beko revenue declined: Revenue fell 15%–20% YoY as muted industry demand and limited festive-season uptake affected trade participation and primary sales; being a nascent brand, it was not immune to industry-wide disruption.
• Bottom line partially protected: Despite the revenue decline, the bottom line was protected to a certain extent through rollbacks; localization of some products and value engineering supported margin improvement.
• Engineering Products improved: Both Mozambique and Indian operations delivered satisfactory performance; improved delivery of textile capital machinery from principals and tactical after-sales service revenue helped, though export duty on iron ore impacted demand for capital equipment.
• Commercial air conditioning grew: Growth came from opening of commercial spaces, expansion of middle-to-small outlets, and increased focus on aftersales conversion rates; orders in hand provide good visibility for forthcoming quarters.

Strategic Initiatives: Backward Integration & Localization

• Backward integration starting small: PLI application scope is restricted to heat exchangers and some plastic components; in-house heat exchanger capacity is beginning with 0.05 crore units, with the remainder still sourced from OEMs.
• Localization roadmap: Motor, heat exchangers, and to a certain extent compressors, together ~40% of the bill of material, will be localized over the next two to three years; sourcing will shift progressively from outside India to within India.
• PLI broadening the supplier base: PLI-led investments by other players are widening component supplier choices, which should result in more benefits flowing to manufacturers; management clarified PLI is not a reason for margin imbalance among manufacturers.
• Manufacturing learning curve acknowledged: Initial years of manufacturing within India will have a bearing on margins; benefits will accrue as the learning curve progresses.
• ROCE impact unquantified: When asked whether more in-house manufacturing versus outsourcing would impact ROCEs, management acknowledged capital employed would be higher but noted the benefit of not holding imported finished goods inventory; no quantified impact was provided.
• A&P spend normalizing: Lower A&P spend in the last two years was not structural but because there was no merit in spending during COVID when retail outlets were closed; management expects to return to pre-COVID A&P levels, with a shift toward digital and technical marketing.

Industry Structure & Competitive Dynamics

• Consolidation toward top players: Tail-end players are losing importance because the price gap between leading brands and tail brands has narrowed; this is expected to drive consolidation toward the top five or six players.
• High-star rated AC mix rising: Contribution of high-star rated products is increasing in the product basket, driven by replacement demand in saturated markets where consumers find five-star products make economic sense after full usage of the earlier product.
• Inventory buildup is strategic: Manufacturer inventory at 90–110 days is largely attributed to taking care of potential supply chain disruptions given global uncertainty and preparing for the upcoming season starting from Q4.
• Highly JV still in waiting mode: Discussions with the ministry have been ongoing; recent news reports about stipulations on board control with the local JV partner may or may not apply; management is waiting for clarity.

Jitender Verma: "We would wait for a few more weeks before the real action starts at the ministry level. However, in the interim, we still remain in a waiting mode."

Guidance & Commitments

Key Metrics