2 days ago
Dull summer casts a cloud on Voltas's air conditioner volumes in Q1
This year's summer seems to have ended in a rush thanks to unseasonal rains. But this has left air conditioners in a spot, with their sales suffering during the typically strong June quarter.
In a recent analyst interaction, Voltas Ltd said room air conditioner volumes had dropped 20-25% year-on-year in April and May, for both the company and the industry. Voltas's unitary cooling products segment, largely comprising room air conditioners, contributed 69% of its total revenue in 2024-25.
Some recovery was visible in June, but only in parts of north India. With channel inventory at 6-8 weeks and weak secondary demand, the overall air conditioner industry is tracking well below expectations in the ongoing April-June financial first quarter (Q1FY26).
With inventory piling up at dealers, the industry is offering free installation and bundled deals to move stock, raising the risk of discounting if demand remains sluggish.
Voltas's room air conditioner plant in Chennai is running at suboptimal utilisation. The company's management expects this to improve to 75-80% by the end of FY26, provided volumes recover meaningfully in the second half.
The management, however, said the company gained market share in April. Still, persistent volume pressure could weigh on Voltas's profit margins and FY26 earnings. Voltas believes its unitary cooling products (UCP) segment can achieve a high single-digit Ebit margin in FY26.
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Risk factors
'Rising competition and aggressive pricing/higher discounts to recover market share are likely to lead to margin risks for Voltas despite production-linked incentives. Increased backward integration should keep costs elevated," Nomura said in a recent report.
The investment bank has factored in a 10%/21% UCP volume growth for Voltas in FY26/27, while maintaining Ebit margin at 8.5%/9.0%.
New Bureau of Energy Efficiency (BEE) standards for air conditioners from January will raise unit costs by ₹800-1,000, which Voltas intends to pass on to consumers via price hikes. This could drive purchases in Q3FY26 (October-December).
Another relative bright spot is VoltBek, Voltas's joint venture with Turkey's Arçelik for large household appliances. The JV posted 57% volume growth in FY25, though much of that came from lower-margin stock-keeping units (SKUs), keeping profitability elusive. The management plans to contain VoltBek Ebitda margin at -5% in FY26.
In the electro-mechanical projects and services business, Voltas is cautious on international projects where order inflows have been slow. In contrast, domestic project activity is expected to pick up meaningfully in FY26, making it the segment's key growth driver.
To be sure, at 36x FY27 estimated earnings, as per Bloomberg, Voltas's stock isn't cheap. For the valuation to sustain, both demand for room air conditioners and the company's execution must improve.
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