Secret Sauce. In search of cool solutions

Voltas, the Tata group company, is synonymous with air conditioners. Not many people know that the company does a bunch of other stuff as well. Voltas’ operations are organised into three independent business units.

These are electro-mechanical projects and services (domestic electrical, mechanical and refrigeration solutions and international electrical and mechanical solutions); engineering products and services (textile machinery, mining and construction equipment); and unitary cooling products (air conditioners, commercial refrigeration, water coolers and dispensers). Until recently, the company also had a material handling division (which manufactured forklifts and other warehousing equipment) that was recently sold to the Kion group, an international leader in the space.

Today, Voltas is not only India's largest air conditioning company, but also one of the world's premier engineering solutions providers and project specialists. Some of the landmark projects that the company has been involved in are Burj Khalifa in Dubai, Ferrari World and F1 circuit in Abu Dhabi.

This article looks at the company’s performance and few of its strengths, weakness, opportunities and threats.

Scaleable Services

Over the years, Voltas has gradually transitioned from products to solutions. Towards this, the company scaled up its projects division, both in India and abroad (especially West Asia) and expanded from merely air-conditioning and refrigeration to the broader MEP (mechanical, electrical and plumbing) space. This included the acquisition of Rohini Industrial Electricals.

The nature of the projects business was that it was easily scalable and enabled the firm to grow its top line at a much faster clip. A decade back, the projects business also brought in much higher operating margins compared to cooling products — so it was only natural that the company decided to increasingly focus on this business segment.

Large projects tilted the revenue profile of the company towards B2B (business-to-business) engagements as against B2C (business-to-consumer), making the company more dependent on institutional spending — be it the government/private sector.

Unfortunately, this was the segment that was worst hit in the economic slump, especially in West Asia. Result: Project suspensions, delays and pricing pressure coupled with cost overruns, all of which impacted the segment’s revenue growth, margins and working-capital requirements.

Obviously, the current state of affairs, with 5 per cent or lesser operating margins for projects, is not sustainable and needs to improve.

The silver lining is that there is possibility of consolidation in the MEP space and green shoots are visible in the West Asia construction market — spearheaded by the planning for 2022 FIFA World Cup in Qatar.

In India too, infrastructure investment is bound to pick up sooner, if not later, which bodes well for the company over the medium term. In the meantime, the company is doing what best it can to stay financially sound, by selling non-core assets, so that it is equipped to bounce back when the tide turns.

The projects business has synergies with other group companies such as Tata Consulting Engineers (TCE) — a leading engineering consulting firm — and the Shapoorji Pallonji group — a leading construction conglomerate. However, Voltas competes with another Shapoorji Pallonji associate — Sterling Wilson — in the MEP space. Now with Cyrus Mistry taking over the reins at the Tata group, it would be interesting to see how the two companies divide the turf between them, given that the shareholding of the promoter group is larger in the latter than in the former.

This is a rather small division but records healthy margins. The business model involves partnership with various leading domestic and international manufacturers of textile machinery, mining and construction equipment, from whom all items are sourced, shipped, installed, tested, commissioned, and supported with full service and parts.

Unitary Cooling Products

With the projects business going through tough times, Voltas has been re-focusing on the air-conditioners business lately. After all, this is a segment with a margin trend that has been the opposite of what the projects business witnessed over the last decade. But here too, not everything is rosy.

The air-conditioners market has witnessed an explosion of new entrants, not to mention the increasing aggression by Korean counterparts — Samsung & LG. The good news is that Voltas has been able to retain its leadership position due to creative R&D and marketing (for example, All weather AC). The bad news is the focus on volumes has already reduced margins from over 10 per cent in FY11 to 8 per cent in FY12.

In addition to ACs and commercial refrigeration, the products business also includes water coolers and dispensers — which may be relatively small today but hold good potential over the long term. I am still optimistic about air-conditioners though, despite the onslaught of MNC competitors, due to a couple of unique attributes that differentiates Voltas.

Affordability and Durability

When I was at the neighbourhood consumer goods retail store recently, I casually asked the salesman: “How does one really pick an AC for the home amidst so many options?” His answer surprised me. He said: “it’s kind of like picking a car, Voltas is the Maruti and Daikin the Mercedes, the rest are somewhere in-between”. I think that says a lot in terms of brand reputation.

Service as a differentiator

Another aspect that provides succour for Voltas is its vast network for distribution and after-sales that penetrates into Tier-2 and Tier-3 towns. This I understood, when my in-laws opted for Voltas to air-condition their home in Tirunelveli. Their logic: Reliable service.

(The author is a business consultant. The views are personal. Feedback can be sent to perspective@thehindu.co.in )

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