VOLTASNSENovember 02, 2022

Voltas Limited

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Management on call

Jitender P. Verma

CHIEF FINANCIAL

Manish Desai

HEAD - CORPORATE FINANCE – VOLTAS LIMITED

Vaibhav Vora

MANAGER - CORPORATE

Aniruddha Joshi

ICICI SECURITIES

Key numbers — 40 extracted

rs,

in. On one hand, we had an open window to a complete season after a gap of close to two COVID years, which supported sales. On the other hand, the global economy continued to face challenges of high

nning of the financial year. Amid the above challenges, the company reported a marginal growth of 6% for the quarter in consolidated total income at INR 1,833 crores, as compared to INR 1,737 crores

INR 1,833 crore

ges, the company reported a marginal growth of 6% for the quarter in consolidated total income at INR 1,833 crores, as compared to INR 1,737 crores in the corresponding quarter last year. Profit before share of

INR 1,737 crore

nal growth of 6% for the quarter in consolidated total income at INR 1,833 crores, as compared to INR 1,737 crores in the corresponding quarter last year. Profit before share of profit, loss of joint ventures as

INR 149 crore

arter last year. Profit before share of profit, loss of joint ventures associated and tax, was at INR 149 crores as compared to INR 162 crores in the corresponding quarter of last year. Profit before and after

INR 162 crore

share of profit, loss of joint ventures associated and tax, was at INR 149 crores as compared to INR 162 crores in the corresponding quarter of last year. Profit before and after tax was further impacted duri

INR 1,

ceptional provision made on an overseas project. Earnings per share for a face value per share of INR 1, not annualized for the quarter ended 30th September 2022, was at negative at INR 0.22 compared to

INR 0.22

per share of INR 1, not annualized for the quarter ended 30th September 2022, was at negative at INR 0.22 compared to INR 3.13 last year. The consolidated total income for the six months period ended 30th

INR 3.13

not annualized for the quarter ended 30th September 2022, was at negative at INR 0.22 compared to INR 3.13 last year. The consolidated total income for the six months period ended 30th September 2022 was h

29%

The consolidated total income for the six months period ended 30th September 2022 was higher by 29% at INR 4,627 crores as compared to INR 3,598 crores in the corresponding period last

INR 4,627 crore

onsolidated total income for the six months period ended 30th September 2022 was higher by 29% at INR 4,627 crores as compared to INR 3,598 crores in the corresponding period last year. Profit befo

INR 3,598 crore

six months period ended 30th September 2022 was higher by 29% at INR 4,627 crores as compared to INR 3,598 crores in the corresponding period last year. Profit before share of profit loss of joint

Guidance — 20 items

Jitender Verma

opening

“Profit before and after tax was further impacted during the current quarter due to an exceptional provision made on an overseas project.”

Jitender Verma

opening

“Collective efforts towards project monitoring, execution of the projects and intense focus on the collection has supported the results for the Domestic Projects group.”

Jitender Verma

opening

“With the consummation of the BTA, the challenges of securing fresh orders has largely been addressed, which should result in improving bid-to-win ratio for the new orders across project verticals and will help improve the order book.”

Jitender Verma

opening

“Amidst about various challenges in one of the overseas project, the main contractor has unilaterally terminated the contract in October with Voltas, and also encashed the underlying bank guarantee pursuant to the termination of the main contractor's contract by their customers.”

Jitender Verma

opening

“The company has considered a provision towards outstanding dues and encash performance guarantee on this said project following a prudent approach and disclosed the same as an exceptional item during the quarter and six months period ended 30th September 2022.”

Jitender Verma

“So therefore, it will be a judicious approach where we would see whenever the softening of prices reaches the level, which is before the increase, then obviously, we would not shy away from passing on those benefits to the consumer, but it would not happen immediately because immediately, it will be just to recoup the earlier price increases, which were not taken.”

Jitender Verma

“So if I look from the value chain perspective, it will be in the range of around 35 to 40 days for the channel partners of September, if I look from the manufacturing perspective, it will be in the range of 90 to 110 days.”

Jitender Verma

“So we'll have to wait and watch whether is that going to be the new directive or is that just a guidance or what exactly would happen.”

Jitender Verma

“And that's why we have said in our obligation that we will be going legal against this person at this particular main contractor and take all the legal remedies to recover this amount.”

Manish Desai

“Renjith, the fact is that when you are carrying out risk mitigation approach while selecting the project, the project execution generally in such kind of large size take a good amount of duration, in terms into two to three years' time frame.”

Risks & concerns — 15 flagged

Lower inventory at channel partner end coupled with incentive schemes directed towards primary sales and expansion of channel footprint resulted in higher double-digit growth for air cooler in a generally weak quarter.

— Jitender Verma

The concern on the supply chain, especially logistics costs has relatively eased out and commodity prices are also softening.

— Jitender Verma

However, the rupee depreciation has neutralized the impact of the same to some extent.

— Jitender Verma

The company is also evaluating legal remedies to challenge the termination of the contract by the main contractor and recover the proceeds.

— Jitender Verma

But the intention is all there if the prices do fall, as a company, I would say, a very good social player in the scene, we would be the first ones to pass on whenever the prices soften to the right stage.

— Jitender Verma

And sir, this INR 106 crores of provision because I think post Sidra, we have taken so many measures from our side in terms of risk mitigation and putting up much more good processes in which to avoid such kind of thing.

— Renjith Sivaram

So what had gone wrong because despite all these risk mitigation measures, still we are coming back to the drawing board on the same, so...

— Renjith Sivaram

But let me tell you on the risk mitigation efforts which we have been taking and I'd like to reiterate and agree with your thought process that, yes, the company is very selective in who we partner with, how do we do our business, what kind of contracts we entered into, who are our counterparties.

— Jitender Verma

However, in spite of all these risk protection, there is a continuous risk, which is, I would say, is in the -- inherent in the nature of the business is that if somebody wants to play unfair and want to encash the bank guarantee, that risk is something which remains with us because in this contract business, you have to offer advanced bank guarantees or performance bank guarantees.

— 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.

— Jitender Verma

Renjith, the fact is that when you are carrying out risk mitigation approach while selecting the project, the project execution generally in such kind of large size take a good amount of duration, in terms into two to three years' time frame.

— Manish Desai

You must have seen that enough incidences or the care has been taken for by the management to look after or to consider or to have a cautious approach.

— Manish Desai

Given the situation of inventory and the competition which we, the market is setting in currently, to go to a trajectory of in excess of double-digit looks difficult.

— Manish Desai

And I am seeing that it is difficult for this current year as well as for the one or two quarters later on as well.

— Manish Desai

We guided in the earlier quarter as well that achieving double-digit looks difficult, however our efforts are there to go closer to a higher single digit.

— Manish Desai

Q&A — 11 exchanges

I wanted to ask you, with more in-house manufacturing versus outsourcing as it was earlier, would ROCEs be impacted going ahead?

Jitender Verma

Mr. Bagrodia, I think that's a very good question. However, because whenever you start manufacturing, you have to carry sufficient inventory for the purposes of manufacturing, carry sufficient finished goods also for the purposes of managing the seasonality of the product. So therefore, definitely, capital employed would be a bit higher. However, at the same time, you do get the benefit of not having to hold the inventory, which was the case when you were importing a lot of finished goods in the past. So there is a kind of a nullifying effect. But however, with the current scenario where we ar

So the last quarter, our exit market share was at 24%. Did you lost market share in this quarter?

Jitender Verma

See, like, we have advised you that 24% was last quarter's exit and 23%. Of the current quarter So you can say there is a 1% drop. However, with that drop, we still continue to maintain a big difference from our second player, close to almost 750 basis points as we have indicated in my presentation. Yes, to that an extent, we are definitely the front runners in our market share. So this loss... And furthermore, Gopal, just to give you overall flavor, in the month of August, if I look to overall secondary sales because we always report on a secondary basis, the numbers are very small compared t

Just wanted to understand like what is the status of that Highly joint venture? Because today, there is some news that government has eased out their norms for high-end electronic JVs from China. So is there a probability that this Highly JV also can come under this easing of norms and work can restart on that? Just wanted your thoughts on that.

Jitender Verma

Renjith, we have also seen that news and since our people are already in touch with the ministry. So discussions have been going on. 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. At the same time, if you're talking of the report, which came out today, it also talked about certain stipulations which have to be met by these joint ventures and all, wherein the control of the Board has to be with the local JV partner and things like that which actually is not the case in all the applications. So w

My first question is with respect to the UCP segment margin. This first half, we would have done 7%, 7.5% kind of margins. How confident are we to get back to last year's levels of 10%, 10.5%. Is there a possibility like that? Or the margins are likely to be more in the range of 8% to 9% for the year?

Manish Desai

Ravi, we have been telling this from the start of the year and more particularly after the Q1. Given the situation of inventory and the competition which we, the market is setting in currently, to go to a trajectory of in excess of double-digit looks difficult. And I am seeing that it is difficult for this current year as well as for the one or two quarters later on as well. We have to carefully watch the situation in the market dynamics in the same sense. We guided in the earlier quarter as well that achieving double-digit looks difficult, however our efforts are there to go closer to a highe

Sir, first on the margins, will it be possible to indicate the broad range of benefits factoring in the commodity as well as rupee depreciation. Can we look at net level about 100, 200 bps benefit? Or will it be higher or lower than that?

Manish Desai

Siddhartha, to give this answer, I hope that I should have been astrologer knowing how the future is going to work, which is not the true case we all know today. Like when we were happy that the commodity prices are coming down, rupee has taken a different knock altogether. And probably whatever benefit what we anticipated as an industry player in the commodity price is generally getting squared off against the rupee depreciation because still, in our case, and in the industry as such, few components are still import sourced and will the foreign currency or the rupee level will still make a lo

Sir, first question is regarding the market share shuffle that kind of happening. I just want to get your perspective on this. Earlier, we saw this low-value brands like in-house brands of Flipkart, Amazon, some low market share companies like Godrej, Whirlpool, et cetera. There's a preference towards no value ACs. There was a downgrade, which is happening within customers. But now in your commentary it says that higher star rated ACs are growing faster. So where do you see a post PLI? How should this tail end players lose market share to larger players, which will become larger? Or do you thi

Manish Desai

If I give you a further elaborate to more to your question, the tail end players are actually losing the importance because of the huge price difference between them and the leaders in this category. They also make or manufacture five star or high star rated products because they cannot be different from the consumer preference. The question then arises, being a consumer, what you would like to prefer with the price gap between the leading brand and the tail brand is, to a certain extent, which they can easily absorb with the -- in support of the consumer scheme also being available to them to

A bit longer-term question. So sir, two years from now, how do you see your sourcing settling between in-house, outsource within India and import. If you can just break it up in terms of, say, from INR 100 of bill of materials, what will the breakup or say in terms of key components or total assembly? So how it will be divided, say, in next two years?

Manish Desai

See, in the next two years, I would say that, see, many -- when I say indigenized, which means that we may not do our own production, but we start looking into sourcing from within India rather than going for outside India. I'm answering from that perspective, because we are not going to manufacture as a brand many of the components, which anyway will continue to source from the outside. Even our PLI applications, we have restricted our scope of backward integration to our heat exchanges and some kind of plastic components. To give you an answer on the overall indigenization versus what we are

So sir, again, going back to the question of market share versus margin. One of the three your key competitors is prepared to operate at deeply negative margins, and they have clearly communicated that they are going for the market share. So to what extent will you be ready to compromise on margins to hold on to your 23% market share? I mean will you be happy with even 20% margin -- 20% market share to hold onto your margins? Or for you, say, a band of 23% to 25% market share is?

Manish Desai

See as I said, we look -- we do look into the market dynamics and the competitive move. It doesn't mean that Voltas has been leading this category, blindly follow the strategy of the other players. I know about the brand which you're talking about, but you have seen that in the exit month, the August, they dipped down on the margin. If they have to work consistently on the strategy, they should have exceedingly doing well on a quarter or on a month-on-month basis, which means that beyond that point, the price card doesn't play in the minds of channels, in the minds of the consumer as well. And

Most of my questions have been answered. I just had one data point to seek if possible. Just within UCP, if you could share the proportion of the commercial segment and also the air cooler segment if possible?

Manish Desai

So Commercial segment, if I look into it, CSC to be in the range of 16% to 18% of the overall turnover. And I'm taking YTD, chief, because the reason being is because quarter one will always be air condition driven, residential air conditions. So the comparison won't go well or won't be giving a meaningful, I would say, benefit to it. And if I look from the air cooler, air cooler is still a nascent category for us. We are looking into it. And if you look for the price point, it is like one fourth of the air conditioner price. So in terms of its overall contribution to the sales turnover, it is

Sir, my first question is, again, harping on margins. I mean we've had competition in this business for a long time. Yes, commodity prices are hurting us, but the fact that you are still hesitant giving a higher margin guidance, is it to do with just the amount of capacity that is coming in India and with everybody wanting to produce as much as they can, structurally have the margins come down to the high single-digit number? Or is it just maybe a two to three quarter phenomena when commodities normalize, we could go back? So I mean, is there a change in thought process versus what it was ther

Jitender Verma

Pulkit, actually, we have been saying that during this phase of volatile prices where depending upon different constituents and depending upon their policies and their purchase point exists, this low guidance would definitely prevail. However, the period after that, let's say, once the prices stabilize and maybe a quarter after that, now whether these prices stabilize right away or they take two to three quarters, but at least a quarter after the prices stabilize, then the real price discovery should happen and where the margins would kind of stabilize. But the guidance would be definitely in

Well, I'd like to thank all the participants for asking, I would say, very relevant questions. And as a closing guidance, we still maintain that we will have a judicious balance in our market share as well as margins. And wherever it is required, we would definitely continue to maintain our leadership position, which we are very careful about and we maintain that. In these inflationary trends -- current inflationary trends, we would like to continue with the same philosophy. But given our strength and our other supporting factors, we are very optimistic on maintaining the margins and the incre

Management

Speaking time

Manish Desai

Jitender Verma

Moderator

Dhananjai Bagrodia

Gopal Nawandhar

Renjith Sivaram

Siddhartha Bera

Sandeep Tulsiyan

Keyur

Abhijit Akella

Opening remarks

Aniruddha Joshi

Yes. Thanks, Yashashri. On behalf of ICICI Securities, we welcome you all to Q2 FY '23 results conference call of Voltas. We have with us senior management represented by; Mr. Jitender P. Verma, Chief Financial Officer; Mr. Manish Desai, Head of Corporate Finance and Mr. Vaibhav Vora, Manager, Corporate Finance. Now I hand over the call to the management for the initial comments on the quarterly and half yearly performance, and then we will open the floor for question-and-answer session. Thanks, and over to you, sir.

Jitender Verma

Thanks Aniruddha for the introduction. And welcome to everyone to this call. As you are all aware, the current fiscal year started with mixed indicators for the economy and especially the industry we are operating in. On one hand, we had an open window to a complete season after a gap of close to two COVID years, which supported sales. On the other hand, the global economy continued to face challenges of high inflation, owing to global supply chain imbalance, depreciation in currency across the world amid surging Dollar Index and increase in interest benchmark rate by respective central bank impacting revival of the economy. In India, consumable durable industry witnessed weakness due to incessant rains and consequent dipping consumer sentiment towards discretionary spend given the high inflation rate. The CPI continues to be on the higher side and WPI Index is coming down gradually, indicating the absorption of the inflation impact by the manufacturers due to slowness in overall deman

Outlook

The current economic situation is surrounded with uncertainty and volatility. The inflation continues to remain a focus point on all the future monetary and non-monetary actions were impacting the overall economic growth and consumer demand in the coming quarters. We remain very optimistic given the various sporting factors for the businesses we are operating with. With this, I close my presentation, and I can request the organizer to open for question and answer. Thank you.

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