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Ready for intense summer; maximising volume is top priority

We attended an analyst call organised by the Voltas management to address concerns about compressor shortage. The company said that it had secured adequate compressors for the expected harsh summer. The management is confident of meeting the high demand for ACs and said the company has endeavoured to grow above the industry growth rate. However, it reiterated that if demand rises abnormally, like it did last year, then the company may be unable to meet the excess demand; in fact, it said such a situation will affect all industry players equally. Though rising raw material prices and rupee depreciation are expected to have an impact on Voltas, margins in the UCP segment are expected to be in high single digits aided by value engineering efforts undertaken to reduce cost. The management emphasised that Voltas will continue to be a mass brand, focusing on increasing sales volumes and absolute EBITDA rather than margins

* Attention remains on maximising sale volumes: The management was clear that Voltas’ aim is to maximise sales volumes this summer. It undertook price hikes in May-Jun’24 and has not planned any price hikes currently as it believes price hikes at the beginning of the summer will not be a good sign to customers and will interfere with the company’s aim of remaining a mass brand. Margins are not a concern as the management will focus on absolute revenue and EBITDA while increasing market share through greater volume sales.

* Ample space in the industry for growth: The air-conditioner industry is expected to grow at a healthy rate this summer, giving all players adequate opportunities to grow. Early signs of summer are already being seen in the West and the South with channel partners already picking up inventory. In order to steadily improve market share, Voltas will concentrate on superior servicing and advertising at the right time, which is expected to lead to growth above the industry growth rate

* Margins to be affected by multiple factors but cost-cutting efforts underway: Increase in prices of raw materials such as aluminium and copper combined with depreciation of the rupee are expected to impact margins. In addition, Voltas’ in-shop demonstrators (ISDs) have increased by 70-80% YoY, which will further strain margins. However, Voltas is undertaking value engineering efforts that are expected to drive down costs, thereby improving margins to high single digits within the UCP segment

* Government support essential to maintain long-term sustainable industry growth: The government eased BIS certification norms for compressors for ACs >2 tonnes earlier today. While the government is also evaluating easing norms in the <2 tonnes category, it still takes 60-70 days from procurement of components to final sale of ACs to channel partners as a large number of components are dependent on imports. For FY25, it is estimated that ~13mn units of ACs will be sold while the current domestic compressor manufacturing capacity is 6mn-8mn units. Favourable government policies are critical to bridge this gap and bring down the lead time from procurement of material to sale of ACs.

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