Voltas Ltd. (NS:VOLT) recently corrected almost 15% from around the recent high of 1125 (June’21) to a low 955 (26th Aug’21); the lifetime high was 1132 made in Feb’21 after making the COVID lockdown 1.0 low 427.45 in May’20. Thus there was a phenomenal gain of almost +165% in 13-months for patient investors, who can take risks with a contrarian view and invest in a good business model/company in temporary disruption.
Voltas is Indian MNC home appliances and engineering company specializing in room air conditioning and cooling technology on a global scale. Voltas is a Tata Group company, originally incorporated in late 1954 as a JV between Tata Sons and Swiss-based Volkart Brothers. Apart from room air conditioners, Voltas deals with contract revenue, commercial refrigeration products, and the sale of services. Voltas’ segments include Electro-mechanical Projects and Services (EMPS); Engineering Products and Services (EPS); Unitary Cooling Products (UCP) for Comfort and Commercial uses.
Voltas is engaged in the field of air conditioning, refrigeration, as well as in the business of electro-mechanical projects as an engineering, procurement, and construction (EPC) contractor. The Company is also engaged in the business of engineering product services for mining, water management and treatment, construction equipment, and the textile industry. Voltas offers products, including textile machinery; mining and construction equipment; heating, ventilation, air conditioning and refrigeration (HVAC&R), and water coolers and dispensers. Almost 75-80% of revenue comes from domestic operations (India) and the Middle East contributes around 15-20%.
Voltas is broadly structured into projects and goods & service business. The projects business is divided into Domestic Projects Group (DPG) and International Operations Business Group (IOBG). The products business is classified into Unitary Products Business Group (UPBG), Mining & Construction Equipment Division (MCED), and Textile Machinery Division (TMD).
The Unitary Products business group manufactures products in categories including air conditioners, air coolers, commercial refrigerators, water coolers, and water dispensers. Voltas is the largest air-conditioning brand in India, having almost 27% of the market share. It started manufacturing air conditioners in the 1960s under license from Carrier Corporation. Voltas produced India's first window air conditioner with DC-inverter-based variable-speed motors. DC Inverter is an innovative technology that provides superior cooling while reducing the frequency of turning the compressor on and off. This helps in reducing power consumption to a greater extent. Voltas also has a large network of repair centres. The firm is also a major producer of evaporative coolers, which are widely used for comfort cooling in arid and semi-arid climates.
Voltas has also entered into a joint venture with Turkey-based Ardutch, which is a subsidiary of Arçelik, part of the KOC Group making the Beko brand of home appliances, producing refrigerators, air conditioners, washing machines and kitchen appliances under the brand name of Voltas Beko.
Voltas has executed many prestigious international projects in the Middle East including air conditioning in the world's tallest building, the Burj Khalifa, in the once largest ocean liner, RMS Queen Mary, Palace of Sultanate of Oman, Bahrain City Centre Mall, Ferrari (NYSE:RACE) World Theme Park in Abu Dhabi, Sidra Medical and Research Centre in Qatar, Villaggio Mall in Qatar and Dubai’s Mall of Emirates.
Highlights of Q1FY22 report card:
- Core operating revenue was around Rs.1.79B vs 2.65B sequentially (-32.68%) and 1.30B yearly (+37.65%)
- Core operating expense was around Rs.1.65B vs 2.32B sequentially (-28.93%) and 1.23B yearly (+34.08%)
- EBITDA was around Rs.0.14B vs 0.34B sequentially (-58.95%) and 0.07B (+103.42%)
- Interest paid Rs.0.0035B vs 0.01B sequentially (-66.41%) and 0.0067B yearly (-47.925)
- EBTDA (EBITDA-INTT); i.e. core operating profit was around Rs.0.13B vs 0.32B sequentially (-58.70%) and 0.06B yearly (+120.36%)
- Core operating EPS (EBTDA per share) Rs.4.00 vs 9.68 sequentially (-58.70%) and 1.81 yearly (+120.36%)
- FY21 core operating EPS Rs.18.60 vs 20.12 in FY20 (-7.57%) and 18.48 for last 4-years’ average (+0.61%)
- EBITDA margin 7.61 vs 12.47% sequentially and 5.15% yearly
- Q1FY22 as-well-as FY21 was impacted by lingering COVID lockdowns and various restrictions both locally and globally (where it operates); Volta's management said:
The Group's operations and financial results for the quarter ended 30th June 2021 have been impacted due to the outbreak of the second wave of COVID-19 pandemic during the peak season because of lockdowns and restricted operational hours even after easing of state-wide lockdowns. Nevertheless, the business activities were resumed gradually following the relaxations and directives issued by various State Governments as well as Local Authorities in India and other countries where the Group has business operations, albeit with constraints of the workforce and free accessibility to the project sites.
The Group has considered the possible impact of the COVID-19 pandemic on its operations, liquidity position and recoverability of its asset balances as of 30th June 2021 based on the internal and external information up to the date of approval of these financial results. The impact of COVID-19 may be different from that estimated as at the date of approval of these financial results and management will continue to monitor any material changes arising due to the impact of this pandemic on the financial and operational performance of the Group and take necessary measures to address the situation.
Unitary Cooling Products for Comfort and Commercial use: Given the smaller window available during the quarter, upon easing of the lockdowns, the Unitary Cooling Products business made a good recovery and achieved overall volume growth of 10%. Voltas continues to be the market leader and is at the No.1 position in ACs with an exit market share of 26.7% as of June 2021.
On the back of the volume growth, Gross Segment Revenue increased by 19% and was at Rs. 963 crores as compared to Rs. 811 crores in the corresponding quarter last year. Segment Result was at Rs. 118 crores as compared to Rs. 114 crores in the corresponding quarter last year, given the customer-centric sales promotional expenses incurred during the current quarter.
Electro-Mechanical Projects and Services: The Segment has reported higher revenue of Rs. 688 crores as compared to Rs. 412 crores in the corresponding quarter last year, an increase of 67%. Segment profit was Rs. 31 crores as compared to a loss of Rs. 44 crores last year, a positive swing of Rs 75 crores. Improvement in Revenue and Result was due to good progress made on the execution of certain ongoing projects.
Engineering Products and Services: Segment Revenue and Result for the quarter almost doubled and was higher at Rs. 115 crores and Rs. 38 crores as compared to Rs. 48 crores and Rs. 20 crores, respectively in the corresponding quarter last year.
- Q1FY22 was impacted by the COVID tsunami in India (regional lockdowns/restrictions) and lingering COVID restrictions in other countries, where it operates
- The management is not very confident about ‘V’-shaped economic recovery despite the progress of COVID vaccinations
- Surging global commodity prices, rising inflation, supply chain disruptions, and higher logistic costs affecting both head and bottom line
- Growth in UCP (home AC segment) despite challenging conditions to operate smoothly (lockdown 2.0) and unfavourable weather in South and East India (patchy summers); but robust sales in North and Central India helped
- Continued leverage with trade & distribution, the contribution from exports, healthier model mix from B2B accounts helped a stellar growth in the Commercial Refrigeration vertical. Launch of new SKUs, increased number of touchpoints and acceptance of products resulted in higher growth in the current quarter despite the availability of a limited time window of sales for the Air Cooler category
- Better product mix, coupled with planned procurement of inventories helped to partially mitigate the increased cost of commodity prices and higher logistics costs. We have continued with various cost austerity measures, however, certain customer-centric sales promotional expenses were incurred during the quarter, leading to higher selling & distribution expenses. As a result, Turnover grew by about 19% in the current quarter and the Segment EBIT was Rs. 118 crores as compared to Rs. 114 crores in the previous year
- Electro-Mechanical Projects and Services:
Construction activities were allowed in the current quarter, unlike the national lockdown in the previous year. This provided relatively easier access to the project sites resulting in higher progress in the execution of projects in both domestic and international markets, leading to a 67% growth in Segment Revenue for the quarter to Rs. 688 crores as compared to the previous corresponding quarter of Rs. 412 crores. Progress of the projects and a centrally driven focus on the collection helped to restrict ECL provisions; resulting in improvement in Segment profit of Rs 31 CRS as compared to a loss of Rs 44 CRS in the previous year.
That said, weakened sentiments of delay in announcement of Capex plans by potential clients across the operational geographies coupled with a diligent choice of orders has translated into subdued but high-quality order booking during the quarter. Nevertheless, the total carries forward order book at Rs. 6149 crores as of 30 June 2021provides an adequate level of forwarding revenue visibility. The carry-forward order book for Domestic projects at Rs. 3702 crores contained a mix of orders across Water, HVAC, Rural Electrification (NS:RECM), Solar and Urban infra-activities. The International order book of Rs. 2447 crores represented MEP work, mainly in UAE and Qatar.
- Engineering Products and Services:
Segment Revenue and Results for the quarter were at Rs. 115 crores and Rs. 38 crores, depicting the growth of 142% and 93% respectively. Both Mozambique and India operations have contributed to this performance backed by the renewal of the contracts as well as a strong order book of Crushing & screening equipment.
After Sales support and renewed demand for Capital machinery both in spinning and post-spinning has contributed significantly to the bottom line for this vertical. The announcement of the much-awaited PLI scheme will boost the sentiments for the capital machinery industry; however supply-chain disruption may pose some interim challenges.
- Voltas Beko:
Production at Sanand factory surpassed the milestone of 5 lac units since its opening and cumulative sales since inception crossed 1 million units. Voltbek products continue to be accepted well in the market, and we are happy to witness significant demand pull from the Trade. We are also happy to inform you that Voltbek’s market share in the highly competitive segment of Refrigerators and Washing Machines have improved to 3.1%and 2.7% YTD respectively.
In terms of distribution, billing points have been scaled up to exceed 1200 numbers. Accelerated opening of exclusive brand shops & Experience zones along with cost-effective digital marketing should help in increasing reach and augmenting brand visibility. Distribution and other synergies with Voltas continue to be aggressively leveraged to achieve the overall objective of break-even and targeted market share.
- Outlook:
Although Q2 is a lean period for Cooling products, the start of the festival period may witness a spurt in demand. It will be interesting to see the impact of a myriad of factors such as the anticipated third COVID wave, pace of vaccination and opening up of the economy at large. We continue our sharper focus on working capital management and conservation of cash while remaining cautiously optimistic.
Voltas is a victim of ‘K’-Shaped (uneven) economic recovery as it’s a part of the contact-sensitive service industry. Apr-Jun QTR is usually the ‘season time’ for AC companies, but sales were adversely affected both in Q1FY21 and Q1FY22 due to an all-out national lockdown 1.0 and partial regional lockdown 2.0. AC is not under any essential item category and thus sales/shipping was restricted. Nevertheless, sales recovered in subsequent quarters, once restrictions were lifted.
Voltas tumbled more as the management virtually issued subdued guidance (as a part of conservative Tata group) for Q2 (July-Sep) as traditionally the demand for cooling products (AC) is subdued (monsoon period), but the start of Festival and end of monsoon season should support AC sales going forward. Now AC is an essential product in hot and humid places and with rising income, people’s aspirations, WFH trend (even after COVID), pent-up demand and availability of easy EMI (loans) for consumer durable goods, sales of energy-efficient ACs are on the rise. Many households/families are now going for 2nd AC in a separate room for not only WFH but also for family purposes.
Although the pace of full vaccinations in India is quite muted due to huge population and supply constraints, India may be now going towards the stage of endemic from pandemic as 70% of the population may have COVID antibodies due to either natural infections or artificial vaccinations. India is now running almost 90% normal compared to pre-COVID levels, almost all shopping centres/malls are now open with basic COVID mitigation protocols (mask-wearing). Indian room AC market size is now around $200B and is projected to grow by almost +20%CAGR in the next few years (after ~10% CAGR in the last few years).
Voltas is the brand leader followed by LG, Daikin, Hitachi, Lloyd, and Blue Star (NS:BLUS). Further, the Indian government is under huge pressure from industry leaders for 28% GST (‘sin tax’) on ‘luxury’ products like cars, ACs, refrigerators etc. So, the government may also come forward to rationalize GST on such consumer durable goods to spur demand from the middle class in the coming days.
With the onslaught of scorching summer and the extension of working from home amid lingering COVID restrictions, fear of another wave, most people still prefer to stay indoors unless it’s essential to venture out. This is positive for the AC industry. Voltas, on its part, has already planned and executed a comprehensive marketing plan to grab the market share.
In line with the campaign slogan of ‘Keeping India Cool since 1954’ and being the ‘cooling experts of India,’ Voltas recently launched its Air Cooler campaign ‘Ab Garmi Ke Mazey Lo, Bina Garmi Key, targeting less affluent consumers. Voltas is also giving a thrust of digital media campaign and sales. Voltas has also opened new exclusive shops in Tier II and III cities for higher distribution reach and market share and strengthen its leadership position in urban and semi-urban areas.
The Voltas CEO Bakshi said recently:
We, at Voltas, believe in having a holistic 360° strategy, where we focus on being accessible to our customers in multiple formats. As part of this, we have adopted an Omni-channel strategy with an emphasis on offline as well as online channels. This largely helps us customize our approach to suit the different markets in the rural, as well as urban areas, across the country. With consumers at the centre of our universe, our marketing initiatives have always included campaigns that can easily identify with consumers. We have a record of demystifying technologies and creating meaningful campaigns, which stay relevant for the consumers for years. We will continue to have the highest Share of Voice in the Cooling products category, with a heavy presence across electronic media. Further, keeping in mind the trend of consumer media habit consumption, over 25% of our Advertising spends will be on Digital.
We are delighted to report that despite the pandemic situation, we maintained our market leadership with a 26% market share in the room air conditioners category. The Cooling Products business made a good recovery, post easing of the lockdown situation. As of last quarter, we achieved a YoY growth of 46% over the same quarter (non-COVID period) of the previous year.
The performance of the Air cooler vertical too has been satisfactory with a growth of 11% over the previous year. Based on the latest market share figures, we are now at the number two position overall. We expect this momentum to continue in the next few quarters. Overall, I am optimistic about double-digit industry growth this summer.
This summer, we are already witnessing robust demand for Room Air Conditioners and our range of Cooling products like Air Coolers and Commercial Refrigeration products. This is due to the India Meteorological Department’s (IMD) forecast of a strong summer this year, across most regions of India. The work-from-home hybrid routine is expected to continue for some more time, thus leading consumers to continue looking for home appliances and cooling products that help with the burden of household chores and make their work-from-home scenario more comfortable.
Voltas has strengthened its market leadership with close to 26% market share in the Room Air conditioners. And we are not just ramping up production in our existing factories in Pantnagar, Waghodia, and Sanand but also working towards enhancing the production capacity of Air Conditioners through another plant in the Southern (NYSE:SO) region of the country. So, for the upcoming summer season, we expect more traction in urban and mini-metros, due to the high level of penetration of branded cooling products in these markets.
To address this growing demand, we have taken some key steps like shifting stocking focus to high-demand goods, penetration in more rural, less affected zones and increasing the manufacturing capacities. As the pace of electrification increases and the expected trickle-down effect on consumer durables is likely to be witnessed, given the increasing disposable incomes, demand from rural as well as Tier 2 and 3 cities will also increase.
Bottom line/Fair Valuation:
Voltas is a good business model under temporary disruptions. Voltas is a household trusted name/brand in India. Voltas also enjoys a scarcity premium in listing space and thus have relatively higher PE historically, around 30. Voltas reported a core operating EPS of 18.60 in FY21 and considering all the factors, pros & cons as discussed above, Voltas may report a 25% CAGR in the next few years and in that scenario, FY: 24-25 core EPS maybe around 36.33-45.41. Applying a median PE of 30 with +/-5 SD, the average fair value should be around 1211 by FY25. As the market is now discounting FY:24-25 forward EPS, Voltas may reach 1090-1211 by Mar: 22-23.
Technically, whatever may be the narrative, Voltas now has to sustain above 955-940 zones for a bounce back to 998 and then 1022-1050-1080 levels and further to 1130-1140 areas. And only sustaining above 1140, Voltas will target 1310-1355 zones. On the flip side, sustaining below 940, Voltas will target 918-890 and 816-747-716-705-690-675 areas.
Voltas
Financial analysis: Voltas (Consolidated)