Voltas AC sales are cool, but other challenges could chill growth momentum

 Voltas' core products business is faring well, with a 26.5% year-on-year increase in net sales to  ₹8,278 crore for 9MFY24. (Photo: HT)
Voltas' core products business is faring well, with a 26.5% year-on-year increase in net sales to 8,278 crore for 9MFY24. (Photo: HT)

Summary

  • While soaring AC sales have warmed market sentiment, challenges loom with its electro-mechanical projects, a squeeze in Ebitda margins, and cash flow concerns

Investors in Voltas Ltd have reasons to cheer, as the company on Sunday announced a remarkable 35% year-on-year increase in air conditioner (AC) sales for FY24, reaching 20 lakh units. This surge was even more pronounced in the March quarter (Q4FY24), with a volume growth of 72%, provisional numbers showed.

Anticipating that the impressive volume growth would translate into increased profits, the market lapped up Voltas shares on Monday, leading to nearly 13% intraday surge, before the stock closed with a 6% gain. The stock also traded higher today, though by a smaller margin.

However, this optimism may not have fully accounted for the broader challenges Voltas faces, particularly in its electro-mechanical projects (EMP) division.

In the nine months through December (9MFY24), the EMP business saw pre-tax loss of 221 crore. This division, responsible for 30% of the company’s topline, undertakes projects, including those in international markets such as the Middle East, where execution and payment challenges abound.

While boasting a robust order book that could cover nearly three years of sales, with a third of these orders originating from overseas, geopolitical tensions in the region cast a shadow of uncertainty over near-term prospects. Voltas has thus opted for a cautious approach, being selective about new projects in these volatile regions.

On a brighter note, Voltas' core products business is faring well, with a 26.5% year-on-year increase in net sales to 8,278 crore for 9MFY24. Nevertheless, the company's profitability is under pressure, with Ebitda (earnings before interest, taxes, depreciation, and amortization) margin dropping to 3.4%, a 200 basis point decline year-on-year, mainly due to rising costs. The competitive nature of the AC market, coupled with high raw material costs, which account for more than 75% of sales, limits the ability to pass on these increases to consumers, exposing the company to commodity price fluctuations. In its Q3 earnings call, the company had noted that several brands were registering losses to gain market share.

Additionally, Voltas faces challenges in cash flow management. An Incred Equities report, dated 1 February, had projected FY24 cash flow from operations at barely 17 crore despite an Ebitda of over 500 crore. Voltas is also undertaking capital expenditure on various projects, including one under the government's production-linked incentive (PLI) scheme. Any delay in project commissioning or payment from the government etc. can affect its cash position. Voltas is facing a similar situation in Volt-bek, a joint venture for manufacture and sale of consumer products such as washing machines, refrigerators.

Against this backdrop, Voltas’ shares have gained 34% so far in 2024. Investors may be ignoring the risks amid impressive sales of ACs.

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