AC major Voltas margins need to match growth trajectory for further gains

After a strong show during the September quarter (Q2FY25) and favourable demand conditions, going ahead, the country’s largest player in the room air conditioner segment, Voltas is well placed to improve its market share.

  Expectations of record volumes in FY25 for the sector and the company’s strategy of prioritising market share over margins could help the leader expand share in the room AC segment. 

  The near-term positive for the company is the performance of its unitary cooling products or UCPs in Q2. It expects similar growth in the coming quarters.

  Even as overall revenue growth of the company came in at 14 per cent, the UCP segment posted a 31 per cent uptick in volumes.

  This is the third consecutive quarter of 30 per cent growth after 44-51 per cent rise during the March and June quarters.

  The lower overall revenue growth was on account of the electromechanical projects and services (EMPS) segment, which reported a 5 per cent decline in sales over the year-ago quarter. This was on slower project executions.

  The delays were on account of the monsoon as well as a decline in order inflows over the past four quarters. 

  Despite Q2 being an off-season (monsoon), room AC sales were robust due to excessive heat in North India.

  This helped the company improve its market share to 21 per cent after closing FY24 with a share of 18.7 per cent.

  The company sold 1.3 million room ACs in the first half of FY25, registering a growth of 52 per cent. It is expected to do well in Q3 as well.

  Nirransh Jain of BNP Paribas Securities, said, “The performance was aided by a heatwave in North India in early Q2 and the ongoing second phase of summer in West and South India. This indicates good secondary sales and a potential for channel filling from Q3 onwards.” 

  Within UCP, other products such as air coolers also saw good performance, aided by an aggressive channel expansion and new product launches.

  This resulted in air coolers ending the quarter with a market share of 11.11 per cent.

  Water heaters also saw good growth on the back of strategic partnerships with distributors and sub-dealers. Margin accretive products helped the commercial AC segment post robust sales in Q2.

  The company expects to cross 2.5-3 million unit sales in FY25 if growth momentum continues. While it currently has 1.5 million capacity, a new facility in Chennai will add 1 million units of room AC capacity. The company plans to scale the capacity at Chennai further to 1.5 to 2 million units by FY26.

  Analysts led by Achal Lohade of Nuvama Research believe that strategic manufacturing expansion (Rs 800 crore capex) alongside robust distribution and rising presence in modern trade underpin strong prospects in the UCP segment. 

In addition to strong volume growth, the expansion is also aimed to tap the rising demand projections.

  ICRA estimates that the Indian room air-conditioner industry sales volumes will grow by 20-25 per cent year-on-year (Y-o-Y) and reach record high levels of 12-12.5 million units in FY25. 

  The rating agency believes that factors like rising temperature, increasing need for room ACs, rising urbanisation levels, improved disposable income, and favourable consumer financing options are expected to drive growth in the next few years.

 

Rising usage and higher energy costs is also leading to a preference for energy efficient models during replacement. 

In the EMPS segment, project execution across all verticals in Q2 was impacted by heavy rainfall, leading to marginal growth for the business.

  The company is expecting project margins to improve with a healthy domestic order book and improved execution in H2FY25.

  Nuvama Research has a buy rating on the stock and believes that the room AC market share needs to be balanced with profitability.

  BNP Paribas has an outperform rating. With Q2 results further validating the company’s strategy of driving volumes and retaining focus on market leadership, it expects UCP margins to remain capped but being offset by higher-than-industry sales growth, say analysts at the brokerage.

  While most brokerages are positive about the volume-led growth, going ahead, the same will reflect in the stock price, if it is accompanied by margin gains.

  Even as overall operating profit margins expanded 310 basis points (bps) Y-o-Y to 6.2 per cent led by the EMPS segment, those of UCP were lower by 30 bps to 7.1 per cent.

  Thus, despite a good show in Q2, the stock has shed about 13 per cent from its highs in October. 

  Elara Capital has maintained its sell rating on the company as it continues to focus on retaining market leadership rather than profitability, resulting in margin remaining in mid-to-high single digit.