Q2FY24 Review: Voltas: Pain in Projects business continues

23 Oct 2023 , 12:05 PM

In Q2, Voltas’ Product business performance was stable with a value and volume growth of 15%. The YTD market share stood at 19.2% vs 20.6% for RAC in Q2. However, continued provisioning (beyond ECL requirements) for international projects drove the 6th consecutive quarter of Ebit loss (Rs419mn in Q2, ~Rs4bn over six quarters) for projects business, with mgmt guiding for two to three more quarters of impact. With flat loss levels, Voltbek’s performance was encouraging (YoY & QoQ). Analysts of IIFL Capital Services cut estimates by 28% for FY24. Retain REDUCE. 

Stable Products business: 

The Q2FY24 Products-business revenue growth of 15% was supported by 15% volume and value growth for the RA`C business. YTD RAC market share (MS) at MBO stood at 19.2% vs 20.6% in Q1, with exit share of 19.5% in Aug’23. The respite on RM costs was visible in Ebit margin of 7.7% (up 40bps YoY, down only 50bps QoQ), despite QoQ revenue being half of Q1 levels. Competition remains intense among the large players, with management targeting leadership in MS and margins. 

Continued provisioning in Projects offsets execution surprise: 

The YoY revenue growth of 67% in the projects business surprised, supported by a ramp-up in execution of the large and growing order book (OB). However, impacted by Rs860mn of incremental provisioning (beyond ECL) for stressed international projects, the company reported Ebit loss of Rs419mn in Q2. Over the last six quarters, total Ebit loss stands at Rs4bn, due to continued provisioning. While the recently won and ongoing projects have healthy margins, mgmt expects segment Ebit to see continued provisioning impact for another two to three quarters. 

Voltbek – healthy growth with flat loss levels: 

In Q2, Voltbek reported 40% volume growth (on a low base) with MS expanding to 3.3% and 5.4% — up 0.9% and 1.4% YoY for refrigerators and washing machines, respectively. Increasing localisation and premiumisation drove the flat net-loss, with higher gross margin (GM) providing buffer for higher A&P expenses. The company reiterated FY25 Ebitda breakeven target. However, the 10% MS target will likely see 2-3yr delay vs the original FY25-target.