Voltas - Not Just a Summer Stock ☀️

Over the last 3 years, India has seen a record number of heatwave days. This year too, the IMD has issued heatwave alerts for several states. This is being fuelled by a weather system known as El Nino, which usually lasts 2-3 years.

And while temperatures soar and result in social perils, there are several economic implications - mainly around destruction of crops, worrying reservoir levels and inflation risks; and some capitalistic opportunities too - higher sales for aerated beverages, ice creams and refrigerators.

One such beneficiary of increasing temperatures is air conditioners. With just 8-10% of India’s 300 million households having an AC, this item is one of the most under penetrated in the consumer electronics space.

This gives the industry a leeway for growth, which is beyond weather cycles. And a stock that can be a large beneficiary of this mega cooling wave is a pioneer in the space - Voltas; which, fun fact, has been in the business since as far as 1954.

Voltas doesn’t only benefit from its leadership in air conditioners, but also has a couple of other drivers, which can result in lower temperatures and stronger reasons for an investment!

1. The (Un)Disputed Leader in ACs

With a 20% share in air conditioners, Voltas is currently a leader in the market. But the leadership hasn’t come easy for Voltas.

For nearly five decades, from its inception in 1954 to 1992, Voltas dominated the Indian AC market with a staggering 40% market share. However, the landscape shifted drastically in 1993, thanks to globalisation, and the entry of giants like Carrier, LG, and Samsung, bringing Voltas’ share to a mere 7%.

Faced with the threat of irrelevance, the Tata leadership issued a decisive ultimatum - Voltas must reclaim its position among the top three players or consider exiting the AC business altogether.

The company adopted a comeback strategy, which consisted of three basic components, but drove market share back to 16%.

2. EPC Woes for Voltas

While we know Voltas for its dominance in room air conditioners, it also has a B2B segment, wherein it provides solutions to large scale projects in the areas of MEP (mechanical, electrical and plumbing), electrification, water management and HVAC (Heating, Ventilation, and Air Conditioning).

It has undertaken some marquee projects Burj Khalifa and Ferrari World, and is also working on Neom in Saudi Arabia. But while the business sounds glamorous, it is one filled with issues marked by intense working capital requirements, project delays, cost overruns, execution challenges and difficulties around recovery.

The very nature of business has resulted in periodic and longstanding challenges for Voltas since decades. These got immense limelight when Voltas had undertaken a massive project for the Sidra Medical and Research Centre in Qatar, which got completed after 7 tough years and even a write-off of nearly 20% of company’s revenue.

However, over the last 10 years, Voltas has actively contained these risks. While the segment used to contribute to around 70% of revenue back in 2012, it makes up for just about 30% of revenue now.

With the business hovering around the Rs. 3,000 crore mark for the last 10 years, and ACs growing at a 15% CAGR, the reducing proportion of the EPC business has resulted in a consistent improvement in overall financial performance and valuations.

3. Venturing Beyond Air Conditioning

While a steadily growing AC business and reducing stress from EPC have been resulting in consistent double digit revenue growth, Voltas is prepping for the next leg of growth, transitioning itself to becoming a home appliances player.

In 2018, it entered into a JV with Europe’s leading consumer durables player, Arcelik, launching the Beko brand to launch refrigerators, dishwashers, and microwaves. It would leverage on Voltas’ market knowhow and distribution, and Arcelik’s manufacturing prowess.

This venture has already taken strides by investing Rs. 1,000 crore in a factory to manufacture 1 million refrigerators, capacity for which will be increased to 2.5 million by FY25. As of now, it already has a 3% market share in refrigerators and 6% share in washing machines.

With a strong product line-up and low-base, Voltas targets to achieve a billion dollars in revenue from Beko by FY28. This would result in its contribution to revenue going from the current 12% to nearly a third of Voltas’ total revenue by FY28.

Putting it Together

The International Energy Association predicts that 50% of Indian households will have ACs by 2037. Increasing global temperatures and increasing affordability are likely to continue driving AC demand for the next 10-15 years, and result in double-digit growth for the industry, which Voltas will of course benefit from.

Other than this, despite a strong order book of Rs. 8,500 crore, the projects business is likely to continue being a reducing function in the larger slate for Voltas. The company has learnt its lessons from repeated incidents and is likely to contain exposure, resulting in a declining impact.

And while these two factors provide for visibility of strong performance and make for a steady cash cow, Voltas is working on driving its next leg of growth through an entry into other home appliances.

Sustained double-digit revenue growth, coupled with an overall improvement in the company’s growth profile can lead to potential re-rating for Voltas, and might just make it a company that El Nino or not, continues to turn the heat on in your portfolio!