Voltas: Departing market share; bets on Voltbek & Project

Voltas’s FY23 annual report highlights RAC market growth at only 10% Cagr over FY24-28. This does not bode well amid competition chipping away at market share. Despite ad expense at 1% of revenue vs 2- 2.5% earlier, FY23 margins are 8.3%. Focus is on backward integration to maintain parity in cost structure. Voltbek has gained market share and is targeting to double reach from 7k to 15k outlets to drive further gains; which should aid FY25 target of breaking even. Consolidated ROCE will improve from FY23 lows, but not to previous levels. Analysts of IIFL Capital Services cut estimates by ~10% for FY24-25 and downgrade to REDUCE.

Expecting only 10% Cagr for RAC industry: 

Even as AR23 highlights growth drivers like hotter summers, rising incomes & aspirations, and easy financing — it still expects India RAC market to expand at only 10% Cagr to reach US$5bn by FY28. When combined with intense price-led competition, this does not bode very well for Products business growth for Voltas. Incrementally, focus is on backward integration through a new plant in South India (Rs4.5bn capex announced recently) to benefit from PLI, lower logistics costs and shorter supply chain. This should put Voltas largely at par with competition, in terms of cost structure.

Voltbek focusing on rapid reach expansion, indigenized production: 

Voltbek ended FY23 with an overall market share of 5.3% and 17% YoY revenue growth to Rs11bn. This was achieved through a distribution reach of 7,000 touch points. The JV continues to focus on expanding distribution, especially in South and West with a target of 15k touch points. It is also focusing on indigenised manufacturing of products at Sanand, Gujarat and expects to benefit from an improving domestic ecosystem of component manufacturing. This should help meet the stated FY25 breakeven target for the business.

Project business better-placed: 

While FY23 Projects business saw an impact of Rs2.44bn provisioning in intl projects, outlook is stronger backed by 52% jump in order book and higher share of domestic orders at 71% vs 68% in FY22. Revenue growth and margins should trend up gradually amid conservative accounting practices. Risk mitigation and cash flows remain the core, backed by willingness to let go of orders.