Voltas Hit a 52-Week High! Here's Why.
Voltas hit a milestone no AC company ever did - it sold 20 lakh ACs in FY 23-24! How?
News Flash:
Voltas becomes the first brand ever to sell 20 lakh AC units in one year (FY 23-24)
Result? Voltas’ stock hit an upper circuit on 8th April 2024, making a new 52 week high.
How did Voltas do it?
Read on.
Reason 1: First Time Buyers
With scorching summers hitting us harder every year, ACs are shifting from luxury to must have.
And it is not just the heatwaves driving this AC party.
Aspiration to own an AC is stronger than ever.
And with the rise of disposable income and easy financing options (especially in India 2.1), buying ACs has never been easier.
As per an article in Business Standard published in March 2024, first time buyers of AC are expected to be the “key growth drivers” for the industry.
About 95% of the AC market is of first-time buyers and 65% is in tier 3, 4 and 5 cities.
Reason 2: The Aatmanirbhar force
Back in 2021, the government rolled out a Production Linked Incentive Scheme for White Goods - meaning ACs and LED Lights. With a budget of Rs. 6,238 crore from FY 2021-22 to FY 2028-29, the scheme aimed to boost local manufacturing and reduce our dependency on imports, especially from China.
But why was this needed?
You see, till 2020, approximately 1/3rd of our demand for fully assembled ACs and critical components was fulfilled via imports.
Our local value addition was only 15-20%.
In October 2020, India took a bold step.
A smart step.
We banned the import of ACs with refrigerants.
But banning imports was not going to be enough.
Something had to be done to boost local manufacturing.
And so, the government announced the “Production Linked Incentive Scheme”.
A scheme that promised to change the Indian manufacturing game.
The objective? Increase the share of locally manufactured components to 75-80%.
And, how!
As per Economic Times, the ratio of gross domestic value addition in the AC industry has gone up from 25% to 45%
That too in just 1.5 years!
But what does an increase in local manufacturing have to do with record breaking sales?
Surely, people are not buying more ACs JUST because more components are being made in India?
The real answer lies in how the manufacturers are being incentivised.
While Production Linked Incentive revolves around boosting production, the real incentive hinges on sales.
The government will reward companies with a 4-6% incentive on any additional sales they make compared to their sales before joining the scheme. And this incentive will be given for 5 years.
Now a company cannot just increase component manufacturing without bothering about the sales of its finished products.
Afterall, the supply chain has to keep moving.
Working capital has to keep rotating.
Now, with government incentives for increased sales, companies are hustling hard.
They're slashing prices and offering sweet stock clearance deals.
Here’s what Voltas’ annual report for FY 2022-23 had to say:
“Due to severe competition and aggressive pricing adopted by competitors, the margins in Room Air Conditioning business remained under pressure”
Blue Star’s MD had flagged this trend last year itself.
He said the industry will grow 25% per year for at least the next 5 years.
In short, PLI is killing 2 birds with one stone - boosting local manufacturing as well as pumping up sales. But it is also putting a pressure on margins.
Does Voltas have a special edge?
While the 20L units is an interesting milestone to hit, the real story is this:
The YTD market share of Voltas as reported in December 2023 was 19% as against 21% a year before.
Demand pull and a strong brand presence is working in its favour and helping it grow, but losing market share indicates that other competitors are also gearing up.
While Voltas has participated in the PLI scheme to manufacture cross flow-fans, heat exchangers and plastic moulding components, it’s not alone. Competitors have followed suit.
64 applicants have been approved under the PLI scheme for White Goods.
So, Voltas still has some demand-side battles to fight, to ensure it keeps growing consistently. It is also nearing the end of its capex cycle (which started in 2021 with the PLI scheme).
So we can see some more sales milestones being hit over the next year.
All in all, we would keep a keen eye on the developments in the AC space.
Lessons from this one?
Simple. Never take a single piece of news at its face value.
News pieces are optimised to create availability bias, and make us look at numbers and stats in a way that confirms our own bias.
The next time you look at a headline, dive deeper.
Ask a lot of “whys.” And if that feels like too much work, subscribe to our newsletter :)
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Until next time, ReadOn.
Disclaimer: We are not SEBI registered Research Analysts or Investment Advisors. The research is purely based on our curiosity about the markets, and should not be construed as investment advise.
Beautifully written especially adding snippets from charlie munger and connecting a news flash with the other related points to show the whole image or truth behind rising sales. (I LOVED IT!!)