Voltas’s woes have no quick fix as competition is catching up

Voltas’s woes have no quick fix as competition is catching up
Voltas’s woes have no quick fix as competition is catching up

Summary

Voltas sailed through Q1 with better-than-expected consolidated revenue growth of 21% year-on-year to 3,360 crore. Growth can be attributed to the decent performance of its unitary cooling products (UCP) and electro mechanical product and services (EMPS) businesses.

For Voltas Ltd, the June quarter (Q1FY24) is usually a strong one. But unseasonal rainfall in its key markets played party pooper this time. Still, Voltas sailed through Q1 with better-than-expected consolidated revenue growth of 21% year-on-year to 3,360 crore. Growth can be attributed to the decent performance of its unitary cooling products (UCP) and electro mechanical product and services (EMPS) businesses.

The UCP segment—a major revenue generator—comprising room air conditioner (RAC) and other products, clocked 16% revenue growth last quarter. Thanks to the aggressive sales push, Voltas achieved 15% volume growth in the RAC segment, higher than the overall industry growth, the management said in the earnings call.

Graphic: Mint
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Graphic: Mint

However, its market share in RAC continued to drop in Q1 to 20.6% with the competitive intensity heating up. This could act as a headwind. “Although Voltas continues to focus on recovering its lost market share (additional thrust on south and east regions), but we believe overall share recovery will be tough as well as slower," said analysts at HDFC Securities Ltd.

The chase for volumes among consumer durables makers is likely to continue as companies add capacity to benefit from the PLI scheme, thus keeping competitive pressures elevated. What is more, Q2 is a seasonally weak quarter for the consumer durables industry. The management expects dem-and to revive in a run-up to the festival season, but cautioned that RAC industry margin is expected to be in single-digits.

“The top three-four companies in the RAC segment are opting for steep price discounts/schemes to push sales, so Voltas’s ongoing market share loss is a negative. The management is betting on the upcoming festive season, but with competitors’ aggressive pricing strategies the downside risk to market share in RAC remains," says Praveen Sahay, analyst at Prabhudas Lilladher.

Plus, there are other moving parts. For instance, the order book in its EMPS business was decent in Q1, but the increased provisions need to be monitored. “Voltas’s EMPS business is another drag on overall earnings outlook. There is a lack of clarity/guidance on the roadmap for this segment and how long will the pain of one-offs last," Sahay said. Further, while the Voltas Beko joint venture is helping in product diversification, it continues to incur losses and may take more time than estimated to break-even.

In this backdrop, shares of Voltas have risen by merely 3.33% so far in 2023. Given these factors, a turnaround in stock price performance could well take longer.

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