Business conditions were strong for Voltas Ltd towards the end of the March quarter (Q4FY22) with soaring temperatures leading to strong demand for ACs. However, the company was unable to benefit from this environment and instead lost market share to the dismay of investors. Market share in the room air conditioner category was 23.4% in March 2022, up from 25.4% in January 2022 (year-to-date), Voltas management said on the conference call. .
The lack of a solid foothold in southern India, where summer starts early, has affected its market share.
However, it hopes to regain lost market share through customer-focused schemes and other initiatives. However, in an industry with limited product differentiation, such efforts would hurt the margin. In the fourth quarter, Voltas’ refrigeration unit product segment, which contributes 69% of consolidated revenue, increased 10% year-on-year (yoy) to $1,818 crores.
However, this growth is much lower than that of its peers. For example, Blue Star’s unitary product segment and Lloyd’s of Havells India consumer segment recorded year-on-year growth of 32% and 62%, respectively. ACs contribute 80-85% of Lloyd’s revenue.
Voltas raised prices, but this was not enough. Overall, the profit margin before interest, taxes, depreciation and amortization (Ebitda) fell to 9.8% from 12.5% in the same period last year.
In FY22, Voltas increased prices in the room air conditioner category by 12% to 15%. If raw material costs continue to rise, I would look for further price increases. However, this would be easier said than done.
“Voltas is already priced on average 2-3% higher than its peers. Competitors are focusing on increasing volumes, leading to price disruption. We believe Voltas would also be forced to price match competitors, putting pressure on margins,” analysts at Kotak Institutional Equities said in a May 9 report.
Thats not all. The outlook looks bleak with the peak primary sales season drawing to a close.
Investors seem to have taken notice. Voltas shares have fallen 14.6% since fourth-quarter results were released Thursday after market hours. The stock is now hovering around 52-week lows seen in May 2021 on NSE.
Voltas’ premium valuations against its peers have shrunk due to market share losses amid heightened competitive intensity and concerns about eroding margins, the analysts noted.
Voltas shares have risen just 2% in the past year, but Blue Star shares have gained 23%. Credit Suisse Securities (India) Pvt. Ltd’s sum-of-the-parts valuation for Voltas shares attributes about 60% of the value to the refrigeration business.
The brokerage has cut the price target on Voltas shares to $975 of $1,225. However, if the company recovers its market share, it would be positive.