Ladies and gentlemen, good day, and welcome to the Voltas Limited Q2 FY 2024 earnings conference call, hosted by PhillipCapital India Private Limited. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Deepak Agarwal from PhillipCapital India Private Limited. Thank you, and over to you, Mr. Deepak.
Thanks. Good afternoon, everyone. On behalf of PhillipCapital (India) Private Limited, I welcome you all to Voltas Limited Q2 FY 2024 earnings call. Today, we have the press management represented by Mr. Jitender Pal Verma, Chief Financial Officer, Mr. Manish Desai, Head of Corporate Finance, and Mr. Vaibhav Vora , Manager, Corporate Finance. I would like to thank management for giving us the opportunity. Now, I would like to hand over the floor to the management for their opening remarks, post which we'll open the floor for Q&A. Thanks, and over to you, sir.
Hi, good afternoon. This is Jitender. Thanks to all the participants who have joined for the call. Before we get to the question and answer session, we just wanted to have a few words and explain our results, and then we can go on to the question and answer session. As we all know, the second quarter of FY 2024 began with slow economic recovery across major economies, but amid a sluggish pace. The action taken by the central banks across the globe on tightening of the monetary policy by increasing benchmark interest rates has helped tame the inflation to some degree. However, inflation still remains at higher levels. The key commodity prices have also shown a downswing, given the overall supply exceeding the demand.
Amid this slow recovery, recent geopolitical events may further cause some disruptions in the new, new future in the near future, and we have to wait to assess its impact on the economy. In these challenging times, the Indian economy has remained resilient. High-frequency indicators of GDP growth, GST collections, and PMI point towards sustained economic recovery, largely led by the urban diaspora. However, the rural economy is still having muted growth owing to high inflation. Given the lower economic growth in developed countries, recent geopolitical events and strengthening of U.S. dollar index may impact the fiscal budget, which will consequently impact the overall economic growth. There are still some positive offshoots in terms of manufacturing focus, fueled by production-linked incentive schemes announced across various sectors and signs of receding inflation month-on-month that should support the growth going forward.
In this traditionally tepid second quarter of the financial year, both for product and project businesses, Voltas clocked a considerable top-line growth in both Unitary Cooling Products and projects business. The financial results for the quarter have, however, been impacted on account of provision of INR 86 crore due to delayed collection in the overseas business. Consolidated total income for Q2 FY 2024 was INR 2,364 crore, as against INR 1,833 crore in quarter 2 FY 2023, growth of 29% year-on-year. Profit before tax and after tax was INR 85 crore and INR 36 crore respectively. Earnings per share or face value per share of INR 1, not annualized, for the quarter ended 30 September 2023, was at INR 1.11 against a negative EPS of INR 0.22 reported last year.
The consolidated total income for the six months period ended thirtieth September 2023, was higher by 25% at INR 5,795 crore as compared to INR 4,627 crore in the corresponding period last year. Profit before share of profits, loss of joint ventures, associates, and tax was at INR 352 crore as compared to INR 340 crore in the corresponding period last year. Profit before tax was at INR 280 crore as compared to INR 174 crore last year. Net profit after tax was at INR 165 crore as against INR 103 crore in the corresponding period last year.
Earnings per share, not annualized, for six months ended 30th September 2023, was at INR 5.02, as compared to INR 3.07 last year. The corporate balance sheet continues to remain healthy, with the cash and cash equivalents and minimal borrowings at INR 2,590 crore as at the year end. With the objective of conserving cash for the potential future growth opportunities, the board in its meeting has approved issuance of listed unsecured non-convertible debentures to the tune of up to INR 500 crore for funding the capital expenditure plans. You have already seen our snapshot of results. I'm not repeating that in more details.
As the segment goes, in Segment A for unitary cooling products, the second quarter of a financial year is usually a lean period for the unitary cooling business through the initial period, but it is also the start of the festive period that continues for a period of 2+ months across various parts of the country. The Onam festival in Kerala has witnessed a strong growth in the appliances business after almost 3 years of muted sales. This has given a hope of higher tertiary sales in the coming festival period across the rest of the country, supporting primary billing to the trade partners. That is reflected in the overall volume growth of the room air conditioners during this quarter. The focus on the inverter category and promotion of higher energy efficiency products has resulted in a healthy product mix, contributing to the overall margins.
Voltas continued its leadership in multi-brand outlets with YTD market share of 19.2%. Exit August market share of 19.5%, and this amidst an intensely competitive and fragmented market. The commercial refrigeration vertical witnessed a muted growth on account of cautious investments by B2B due to lower demand of cold beverages, chocolates, and ice creams. Nevertheless, focus on the retail channel and product mix within the category supported the overall volume during the quarter on a higher base of the previous year. Within the commercial refrigeration category, the demand was buoyant for water coolers. The air cooler vertical witnessed a strong demand in East and South India, whereas demand in northern region was stagnant.
Increased channel participation, network expansion, and product launch at competitive price points resulted in more than 50% volume growth over the previous year, with an exit market share of 7.7% as of July, and achieving the number 2 position in the industry. In commercial air conditioning vertical, the quarter has witnessed a good demand for chillers and packaged air conditioners. The mandatory quality control order, or QCO, compliance in few of the commercial air conditioning product categories and slowdown in projects will have some impact for the coming period. However, the focus on customer retention and retrofit jobs will continue to support the overall growth for the category. The commodity prices have softened during the quarter, however, the volatility still continues.
Various manufacturing initiatives undertaken, expanded sourcing base with expected stabilizing of commodity prices, should help in containing product costs, thereby supporting the overall margin in the future. To summarize, for the quarter ended September 2023, unitary cooling products segment registered revenue of INR 1,209 crores, a 15% growth in turnover from INR 1,048 crores in quarter 2 FY 2023. The segment reported an EBIT of INR 93 crores in quarter 2 FY 2024, as compared to INR 76 crores in quarter 2 FY 2023, a growth of 21%. And for the six months ended September 2023, unitary cooling products segment registered revenue of INR 3,723 crores, a 16% growth in turnover from INR 3,210 crores in first half of financial year 2023.
Segment result was INR 300 crore in first half of FY 2024, as against INR 243 crore in first half of FY 2023, a growth of 24%. In Segment B, which is Electro-Mechanical Projects and Services , the segment revenue for the quarter was INR 924 crore, as compared to the previous corresponding quarter revenue of INR 554 crore, a growth of 67%. The segment results, however, for the quarter, reported a loss of INR 49 crore, due to a provision of INR 86 crore made on account of delayed collection in overseas projects. Healthy order book at the beginning of the quarter and scheduled execution has resulted in this attractive growth for the domestic project business during the quarter. The focus on collections and certification has improved the overall working capital and return on capital.
The domestic projects segment booked orders worth INR 673 crores, largely in the electrical and MEP, as compared to INR 475 crores during the previous quarter. Commencement of new projects and planned progress in the running projects during the quarter resulted in a higher revenue over previous year. While top line has grown as targeted, the overall results in our overseas projects business has been impacted due to slow progress in the certification and collection of the receivables in few sizable and completed projects. The accelerated efforts are underway to expedite certification by engaging with the customers and thereby improving collection of the due amount. The order booking in overseas projects, OBD, for quarter two, financial year 2024, was INR 449 crores, as compared to INR 119 crores in the similar period last year.
The carry forward order book for domestic projects stands at INR 5,309 crores, containing orders across water, HVAC, rural electrification and urban infra activities. The international order book as at 30 September 2023, stood at INR 3,368 crores, largely in the UAE, Qatar and Saudi Arabia regions. Total carry forward order book of the segment stood at INR 8,677 crores, vis-a-vis INR 5,496 crores of outstanding orders as at 30th September 2022. Segment C: Engineering Production Services. The segment revenue for the quarter was INR 134 crores, and EBIT for the quarter was INR 54 crores respectively. Our customer-oriented approach continued to support Mozambique operations, contributing significantly to the results. However, a sluggish iron ore market and slower pace of infrastructure rollout has muted the domestic mining business performance.
In case of textile machinery business, capital machinery rollout from the principals remained positive, although a reduction in yarn price and acceleration in exports, coupled with supply chain disruptions, has lowered the momentum. Focus on sale of accessories contributed positively in the overall performance. Voltas Beko. During the quarter, Voltas Beko crossed a cumulative volume of 4 million units since launch of commercial sales, becoming the fastest brand to achieve this milestone. The overall volume growth was in excess of 40% over previous year, against the muted growth for the industry. In line with the premiumization efforts, the overall revenue share of frost-free refrigerators and automatic washing machines has increased over previous year. The intelligent spend on digital and social media has also helped the brand in connecting with the youth and targeting the consumers in an effective manner.
Leveraging on the distribution reach of Voltas, the touch points have seen accelerated expansion over the last two quarters. The strategic tie-ups with modern trade and e-commerce partners, in addition to the traditional channel, has contributed in achieving much higher volume growth than the industry. Our market share stood at 3.3% for refrigerators and 5.4% for washing machines, representing an increase of 0.9% and 1.4% respectively over the same quarter previous year. The favorable product mix, coupled with localization of the fast moving SKUs, has resulted in the improvement of overall gross margins. The profits have remained at the previous year levels, despite higher advertisement spends and spends on BTL activities.
Various cost reduction efforts, coupled with increased in-house production of SKUs, will improve the overall gross margins, leading to better profitability for rest of the year. Outlook. The early indicators of tertiary sales indicate a strong demand during the upcoming festive months. The downtrend of inflation, stagnant interest rates, and a fulfilling monsoon season may help in reviving rural demand during this auspicious period. The general elections may slow down the capital spending by the central government over the next few months. However, the long-term commitment of government towards improving infrastructure remains intact. Private capital spends are expected to continue on the back of the production-linked incentives announced across sectors. We therefore remain optimistic given the various supporting factors for the business we operate in. Thank you. That is the end of my introductory message, and we may open the floor for this for the question answer session. So I'll request the MC to take it forward. Thank you.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Ladies and gentlemen, in order to ensure that the management is able to address questions from all participants in the conference, please limit your questions to one or two per participant. Should you have a follow-up question, we would request you to rejoin the queue. We will wait for a moment while the question queue assembles. Thank you. Our first question is from the line of Natasha Jain from Nirmal Bang. Please go ahead.
Hi, sir. Good afternoon. My first question is regarding the EMPS segment. Sir, are these delays in collections happening because we were possibly a little negligent in terms of screening these orders, or are these more geopolitical related, specifically in the Middle Eastern belt? And how are the margins in the newer orders that you're taking? Because the order book is quite strong. Does it mean that in order to get surety of payments, we might bid for the newer projects at probably a lower EBIT margin than historically taken?
If you look at the slowed collection, it's basically a trend which we are seeing in our international operations, and because of that, over the last few quarters, we have changed our strategy and our new order booking. We are being extra careful. However, whatever the previous orders are there, one has to kind of complete because one, there is a contract, two, there are guarantees given, so we have to manage that. I mean, at least in this case, we do not see any major bankruptcies as such, but following a conservative approach to taking provisions, we take the provisions. So as and when these collections will come through, which we are very hopeful, we should be able to, you know, reverse these provisions.
However, going forward, the margins also, we are targeting to be on the higher side, which kind of reflects or will reflect a risk premium in the region. We remain, you know, committed to continuing with this, you know, business with a growth mindset, and also looking at the profitability in a big way, because we do have a large presence over the, I would say, last 4 decades, and that would help help us in getting projects of our, you know, our choosing, which we would continue with, that and hope to not having to face the similar situation.
It's basically a selection of good customers which we have to focus, and that's what we are focusing while taking the new projects. On the domestic project side, where the bigger focus is there, we are also having the similar, you know, controls and strategies being followed.
Sir, so should we assume that the newer projects will come at similar margins?
Yeah, similar or better margins, I would say.
All right. Sir, my second and last question is, so you've been mentioning that, along with market share protection, you'll also ensure that your margins are protected. And then in the recent times, we read Noel Tata's narrative that market share loss may be on account of, you know, not giving discounts or ad and run promotional spends, and therefore losing a bit of volume there. So just want to get some clarity as to what's the long-term strategy going to be for us from here on?
Raksha, the long-term strategy remain intact. Sorry, this is Manish over this side. Long-term strategy remain intact to have the balance in both on margin as well as on the market share. The market is becoming more fragmented, and I would say becoming more, market is becoming more consolidated now, with the top 7-8 brands fighting for the piece of the market share. So some kind of volatility or some kind of, intensity can be seen in the market, but the long-term objectives will clearly are leadership in both market share as well as margin.
All right. Thank you so much, sir. All the best.
Thank you.
Thank you. Our next question is from the line of Siddhant Behera from Nomura. Please go ahead.
Yeah, sir. Thanks for the opportunity. Sir, my first question is on the UCP side. So we have talked about a 20% volume growth, and our overall revenue growth has been 15%. So, can you just tell me where, how is the growth in RAC, and if you can break into the remaining segments like CR and CAC, how the growth has been?
Siddharth, our growth in the AC industry, in the AC, we have a growth of around 15% or so. The overall growth, what we talk about, the 20%, is largely driven by the air cooler and the self commercial refrigerator category, like water cooler and water dispenser. Commercial refrigerator remain almost, having a neutral growth over the last year. This is the composition we have. Since the growth in air cooler is in excess of what we have given in our investors still, these are tilting towards the higher turnover, higher overall volume turnover for that matter.
Okay. Overall volumes include air coolers as well as ACs in that.
All categories have seen a growth largely, but in that, among all, the air cooler is the biggest one or the highest one for the market.
Okay, got it. And, sir, going ahead, in terms of the commodity benefits, which you have talked about, can you highlight, I mean, in when do we sort of factor in and get back to that earlier levels on double-digit margins at some point with the benefits? Or do you think given the competitive intensity in the market, that may take longer even with the commodity softening now?
No. So what we have written, what we talked about it is, we have seen some kind of softness in the commodity price, but the volatility still continues. So in a way, the benefit that, which the brand or the manufacturer should get it on a long-lasting basis is still not there. However, given these situations wherein we are, the market consensus says that the supply is going to exceed demand, at least for some period of time. Thereby, we are presuming that the commodity price should get softened out. And if that happens, it should support to the, the product cost, wherein we are using the critical commodities like your aluminum and the copper. However, that question doesn't get ruled out by giving passing of this benefit to the end consumers. So, but that we have to play around any which way in the market, looking into the dynamics prevailing across country for that matter.
Got it, sir. So lastly, if you can break out the UCP revenue mix into the particular segments, like how much will be RACs and CAC and CR?
As I said, the growth in air conditioner at 15% overall in terms of volume, and in case of commercial refrigerators, some categories like water cooler dispensers are in double digit, and air cooler being the highest in excess of 50%.
Sir, sir, I'm looking for the mix. How much percentage of UCP revenues will be RAC?
So if I, the percentage almost remains the same, because I will take, if I go quarter by quarter, then you find that the AC contributes highest to it because the volume being on a higher side, the value for being on a unit on a higher side. So if between in my segment A, still my 15% odd will still come from the CAC business. Rest all from my traditional AC and the commercial refrigerator, the air cooler business. And within that, you find that the ratio between them is 80-15 or 80-17-18 and 2% between air conditioner, commercial refrigerator, and the air cooler.
Okay, sir. Thanks a lot.
Thank you. Our next question is from the line of Pulkit Patni from Goldman Sachs. Please go ahead.
Thank you for taking my question. Sir, I want to better understand this INR 86 crore provision that you have taken for delayed collection. Can you tell me how does it work? Is this ECL? Because a delay in payment would not provide you to take a provision. And can you also tell me what is the balance revenue pending in this customer? Because if there is a delay here, what more could we see in the future quarters? And I think you know, just continuing with the same question, can you also better explain, like we've been speaking about, you know, or we've been taking these provisions for quite a lot of quarters now. As a management, when do you see things turning for us in terms of you know, better profitability for this segment? Any sense on that would also be helpful.
So, Pulkit, I want to answer in two phases. The provision which we have, yes, if I talk about the ECL, following the policy, what we follow or what we normally allow to do it, it would not have amount to the provision what we have taken in the current quarter or as well as the last quarter as well in some of the periods. However, when we see some kind of stress happening on some of the projects, we go on a higher side following the cautious and the conservative policy. In addition to the ECL, we go for a specific provision on some of the projects where we are seeing the stress continuing for some more time.
And that's why we have done this specific provision in addition to what we're supposed to follow, the ECL provision in normal norms. And that's why you may find many times our policy is much more conservative compared to the other project companies operating in the similar kind of industry or similar kind of framework. Now, having said that, the second question is how long it will take into it? We are seeing stress continues over there. There are certain projects which we are watching very closely to it. Hopefully, we feel that the situation should not arise because there are commitments coming out from the customer side to have the collection or the payment plan given on the outstanding. And hopefully, we should not see such kind of provision coming back or coming or getting into in the future period.
But it's all depend upon, as I said, the plan which has been submitted today or the commitment kind of discussion or during our discussion with the customers are being confirmed or committed by them. We have to monitor, Pulkit, in a quarter-by-quarter situation. These all provisions are paying to us as well as a management, as well as the investor fraternity. That's why in the last call also we said, we have changed certain terms of doing the business in the overseas market, and the consequences of that can be seen in my order inflow.
It has come down on a quarter basis, less than INR 1,000 crore. Probably it will still have an impact, further impact as we move forward in the part of, in the balanced part of the year. But that's where we have to structure our business in the international operation till such time we feel that the, or till such time we see, you know, recovery in the outstanding or in the collection process or overall collection process.
Sir, I'll take the liberty to maybe just extend this. So there are other peers of yours also who have problems in these provisions, but they have some - they give some visibility that, okay, these, these orders will get over by X quarter of X year. After that, things should get better. Anything on that front? Because this has been a continuing thing, sir. Unless it becomes easy, if you can get some direction on, on when we think the worst could be over.
So if I, if I take you to Pulkit, this provision we are taking, not because of the running project. These all are coming in through either the projects which are completed or maybe in the last leg of completion. To give you, if I want to go on a much conservative way, the way in which we are standing today, probably you can see such kind of pain may continue for the next two or three quarters may not be as aggressive or ex-accelerated what we are seeing today. But if I want to follow the conservatism, and you're asking me that, or what I'm giving what kind of time zone you are looking for into it, so the next two, three quarters, we are feeling that some stress will continue in the international business.
Thank you.
Thank you.
Ladies and gentlemen, in the interest of time and fairness to all participants, may we request participants to restrict questions to one or two per person. If you have a follow-up question, we would request you to rejoin the queue. Thank you. Our next question-
Before anyone asks a question, Siddhartha from Nomura talked about 20% value growth something. I just want to correct them. It's both 15% volume as well as value growth. So I would like to speak to Siddhartha separately from where he has picked up the 20% value growth. Let's continue the call now.
Thank you, sir. Our next question is from the line of Dhananjai Bagrodia from ASK. Please go ahead.
Hi, sir. Congratulations on the third numbers. Wanted to ask you now regarding Voltas Beko, how are we seeing in terms of A, demand, and B, how do we see the year and next year, along those lines? And when do we think we'll start seeing, a profitability normally and market share?
So if I look from the profitability perspective, if I want to go on a in a straight line method or basis, my loss would have been quadrupled because of my higher volume, which we have done in the current year. However, if you can see our results, it has almost remained at the same level at which it was there last year, despite our aggressive spend on some of the service initiatives as well as on the advertisement expenditure. Which means that we are earning or we are balancing our cost, or we are optimizing the cost to the fullest extent in order to achieve our targeted break-even year, which is 2024, 2025 on our EBITDA front.
That's what our efforts are continuing over there, and we're hopeful that we should be able to get into or get to the particular break-even by 2024, 2025. Having said, you asked about the market share. Market share has seen growth over the last year. Since our focus is also going more on the premiumization, the frost-free refrigerators, to start with, has seen some improvement in its overall volume mix or the value mix over the last year. With this, we should be able to start gaining in the frost-free market share as well, which got impacted, and the market share which we were driving earlier was purely based upon the direct cool refrigerator.
Which means that going forward, although 10% what we kept ourselves as an objective in the year 2024 may not be attainable, and that's what we clarified in our previous call as well. Probably, we have to wait for some more 2-3 years before we get into a 10% market share. And this is largely been affected by the COVID 2 years, which has disrupted the overall distribution as well as on the, the targeted path what we kept for ourselves.
Maybe I'll follow up with an easier question, different question. What would be our retail touchpoints, let's say last year and this year, now, this quarter, year-on-year?
Into it, we used to have in the range of 6-7 thousand, which has now gone beyond 10,000.
Lastly, what is the CapEx amount we are thinking for this year?
Current year, there is no much CapEx. I would say the marginal or the normal CapEx will be there at the plant, but following year may see some kind of, CapEx, given that we are going for more and more, capital or more and more localization of the units in our Sanand factory for Voltbek. I hope your question more was on Voltbek, because we continue with the Voltbek front.
No, no, I see CapEx for the company.
CapEx. Since you're continuing with Voltbek, I'll give you on the Voltbek side. On the Voltas side, yes, the CapEx plan is in excess of INR 500-600 crore, covering both capacity expansion for our air conditioner as well as commercial refrigerator, along with PLI-led investments which we factored in.
Okay. Thank you.
Thank you. Our next question is from the line of Abhijit Akella from Kotak Securities. Please go ahead.
Yeah, thank you so much. Good afternoon. Thanks for taking my question. Just on the MEP segment, if you could please just help us with the total, maybe quantum or the value of the projects that you know are currently under stress, if that's possible to share that. And also, how much provision have you taken so far, on these?
So, as I said, Abhijit, we would not be able to provide any quantum on this matter. However, what we are trying to say over there is the and the amount of provision what we have taken is, and we are reflecting in our financials. Going forward, I just answered to Mr. Pulkit over there is, the for the next 2-3 quarters, we are seeing some kind of stress given the current situation. However, the efforts are underway to reduce or to I would say to reduce the impact of such kind of provisions as we move forward. And we are hopeful that our engagement with the customers on this front should yield the further results as we move forward.
Understood. Thank you. And the other question I just had was on the ACP side.
Again, sorry, Abhijit, why I'm saying it's difficult to provide a quantum, because some of the events which are taking place are not in the ordinary course of business, right? Like guarantees, invocations and all, are not in the ordinary course of business. So it is difficult today to provide. If I want to take the entire receivables, it will be too conservative. If I take part of it, maybe I'm giving more kind of optimistic view on that. So that's why I said we are difficult to provide quantum. Otherwise, I, we do not have a reservation in which way for that matter.
I see. Sure. And on the UCP side, just, within this, you know, 15% growth that you've reported, revenue growth, how much would just RAC growth have been? And, given that the market share that you've reported about 90-odd%, I believe last year it was about 22-odd% at the, you know, for the corresponding period. So, should we assume that, you know, the MBO sales are basically what have declined for RAC and that has been offset by growth from, say, e-commerce and EBOs and other, channel outlets? Is that how we should understand it?
So if I look from the, you asked for the first question on the value growth. The value growth is also a 15% for air conditioner, and the volume growth is almost equal. That's why I said the, the, since there is no across or uniform price action which took place over there, the volume and value growth correlates to each other. The second question, you talk about the channel participation in terms of the MBOs and all. I would say that not much significant change took place between the channel participation. Yes, the trend reflecting the distributors' strength is going down or distributor contribution is going down, getting replaced with the organized and the modern trade channel partners, including EBO as well.
Got it. Got it. Sorry, just also to just clarify, so within UCP, RAC sales have also grown by 15%. Is that correct?
Yeah, yeah, yeah. Yeah.
Okay. Okay.
It has both volume as well as value growth.
Understood. Thank you so much. All the best.
Thank you. Our next question is from the line of Anirudhha Joshi from ICICI Securities. Please go ahead.
Yes, sir. Thanks for the opportunity. So in one of the earlier calls, you had indicated the steep increase in post PLI is going to impact the overall ROC of most of the players. So just wanted to delve deeper on that and understand, so how long do you see the impact on ROC, whether it will be short-lived, or do you see the impact on ROC sustaining beyond three years or so? And also, what would be the quantum, probably, that you would have internally worked out, if you can share? Maybe what will be the impact on ROC, maybe 200 basis points, 300 basis points, or how much the impact will be? So that is question number one.
Question number two is, now we are going to reach up to 2 million units in case of RAC capacity. So is it completely backward integrated or what will be the product that we will be manufacturing component-wise? So, excluding, let's say, motors and compressors, what are the total capacity for the each of the products, let's say, cross-flow fan or plastic molding, sheet metal, copper tubing, et cetera. So is it also 100% backward integrated, or what is the extent of backward integration? Yeah, these are the two questions.
Yeah. So, let me answer your second question first. About the fully backward integrated, yes, in terms of the heat exchangers and the, cross-flow fan, some of the plastic molded components, it will be a backward integration. When you I just wonder what you mean by 100 backward integration into this component, because we are not going to manufacture the copper, or we are not going to extract copper from the mines, and we are not going to manufacture plastic to have the, these components in place. Leaving aside these two components, all manufacturing value addition will certainly take place, in a, as a part of our, backward integration.
Mm.
In terms of, you talk about the ROC impact, the expenditure will go in a phased manner, as we, as we build up the capacity. And I've already clarified earlier that the, overall capacity, what we are planning, is around 1 million, and if I want to cater the South and West market for the same, unlike other players, we may not see a under absorption of the capacity to a high extent. Yes, but, it is difficult right now to give any impact on the ROC, assuming that if I'm, if I'm fulfilling this condition of the PLI, it may not have a significant impact on the ROC.
Definitely, since my capital expenditure will be high and the recovery period time is going to be 7-8 years, to that extent, it will have some kind of impact, but get partially compensated by the PLI benefits which government is going to give.
So, sir, means any number you would like to put, let's say, 200 base or, or you don't see that as or it's too difficult to say?
I would say impact currently. Let my, construction gets over and let's start with the commercial production from the factory. At that point of time, it should be more clear in terms of what impact will be there on the ROC side. If I were to carry out the thumb calculation, probably it won't be appropriate to provide that information.
Okay, sir. Lastly, what is the total impact-
Hi, Anirudh Joshi, may I request you to mute your line after you ask your question, as there is some problem with your line.
Yeah. So, lastly, what is the total industry capacity right now? And, where do you see the industry capacity, let's say, after a period of two years, when most of the announced projects get over? Yeah, that's it from my side. Thank you.
Anirudh, I'm not sure because people are talking about capacity addition. Are they taking doing in a two phases, or they are going to come up in the first phase itself? So very difficult to find out. What is the industrial or the industry or capacity for that matter? And we can talk about our own capacity which you are looking for it. The question then comes with how the PLIs or the PLI scheme will benefit or will have, the general question is any excess supply than the demand from the consumer side. Probably we have to wait and watch, because I'm sure the industry is going to align the manufacturing plan based upon the demand what they see in the relevant period.
Okay. Sure, sir. Very helpful. Thank you.
Thank you. Our next question is from the line of Srini G. from HSBC. Please go ahead with your question.
Yeah, hi. Thank you for the opportunity. Sir, on the project business, may I ask, what percentage of your project business comes from the government-funded projects, and how much it comes from the private market? And if you can tell it for both domestic market and export market separately, yeah.
If I-
Provide it.
Yeah, what we can do is in the international business, generally, we have a quasi kind of government structure, so not like clear what we have in a domestic scenario. In a domestic business, I would say electrical and water projects, what we carry normally, they are being funded by the central and the state governments. In MEP, it's a mix. If I'm doing metro, you can say, is again, an entity being funded jointly by central and state. And for the private consumers, it will be, a non-government entities.
Great. And in all these projects, what we do in the domestic market, how much of the contracts wherein Voltas directly have contract with the, with the authority which is pending? And in how much of the cases it is somewhere the, there is a large contractor and you are a subcontractor to it?
Leaving aside water and a few electrical projects, probably we'll be acting as a subcontractor, both under the domestic as well as international market.
Okay, so there will be a one major contractor in between you and, like, eventual party who is investing.
Eventual party may be either investing or maybe building for its own capital use. So example, data center, right? We were constructing data center, is putting it for the use. He appoint a main contractor and to whom which we associated for carrying out a specific task.
Right. Right. Yeah. And on the provisions, sir, like over many quarters, we have seen that, for the very same reason, a company has been providing, and the reason which typically we give is that there has been a delayed collection. Also, over time, but we rarely get to hear that, reversing of these provisions, maybe it's the cycle. But, but what I want to understand is that in last few years, have these provisions turned out to be real cash costs? And rather than delayed collection, it also maybe the underestimation of cost overruns that you're basically calling it out as a delayed collection, but it turned out to be cost overruns.
Generally, what we state is what we mean. So it doesn't mean I'm saying we providing for the delayed collection, if the provision is coming on account of that and not on the pretext of the cost overrun. I just want to clarify very first thing on that. Second thing is, the provision being started taking into the account for the last accelerated provision, I would say, for the last three, four quarters. The results attributable to maybe the onerous one in few of the quarters, and a few other quarters because of the stress what we are seeing in this market. The reason what you said is, we are keep talking about the delayed collection, but yes, the fact is that we are seeing those kind of situations.
That's why we are going with this, with the reason of delayed collection and not anything else for that matter. The situation is how long it will continue? Probably, we as I said to the earlier participants, we're hopeful that the pain may not last for long.
Right. And just if I can build on to this question, is there a kind of a, like, a cumulative provision number that set in balance sheet, which, which can eventually come back if things improve, or, the cumulative number is not very different from what we actually book annually?
No, no, cumulative number year-on-year will definitely be higher than what I'm doing in year now. But the question is that, the other question, the earlier question what you asked, are we having any reversals? Yes, we have a reversals. But while quoting to the, probably investors, we're more transparent, and we always talk about the gross numbers which we are taking the provision. But otherwise, there is a reversal which is happening on quarter-on-quarter, may not be in quantum, the way in which we are taking the provision, but the overall P&L talks about the net number. But being transparent to the investors, we always talk about any specific projects or the gross number which we are taking in the provision.
Right. And last one, if I may, sir. You talked about being more cautious in terms of international projects, how you pick those projects. But apart from being selective, are there any other things that you have changed in terms of way you do this international business, so that one can be confident about in future, we may not have such episodes of a significant high provision cycle?
Obviously, achieved the learning came from our past mistakes, and what we realized that the, and I keep saying that, we keep saying that we have to change. We have already initiated the way in which we have to carry out the business. To give you one example, because I don't require to narrate more on this call or any which way around. The guarantees which have been earlier the unconditional, now it will have a condition suitable to the project which we are taking over there, or depending upon the customer or the project risk which we are witnessing over there. So we are replacing those unconditional guarantees with a conditional one. Like this, there are various changes we have introduced in the contractual terms.
between the contractor, and to a certain extent, we have secured the, I would say, to the main client as well, into the overall contractual terms, to ensure that the risk on such kind of events gets mitigated to a great extent.
Right. Thank you for answering my questions, and all the very best.
Thank you.
Thank you. Our next question is from the line of Keyur Pandya from ICICI Prudential Life Insurance. Please go ahead.
Sir, just want to understand as far as the room AC is concerned, so what is the situation of inventory with the channel as well as with the company?
Generally, if I look from the festival period time, definitely channel partners will be more optimistic in having this because he's witnessing or he's going to see a good amount of, or he's optimistic about the consumer demand in the festival period. So it won't be appropriate to talk about channel partner inventories, because festival period will decide, or the secondary during festival decides about the inventory which is going to have in his hand. If I look from the trend on the primary side, looks like the inventory of the channel partner is in much comfortable position, and we are seeing good amount of indents coming from the channel partners for the forthcoming before the festive seasons.
As far as the inventory with the company is concerned, yes, it is, in the range of 75-90 days, but that generally need to be, considering the supply chain disruptions which we have seen in the past, and to safeguard, I would say, our future sale. Because we don't want a situation that we are losing sales on account of not having inventory with us, in the opportune time.
Okay. And on the project side, the way the difference is there in, say, domestic and the overseas, order book, similar is the execution. I mean, how are the domestic projects doing, and will they be enough to offset all this kind of one-off? With net, net, any outlook on the project side, net of, all the provisioning?
So I would say domestic provisions are doing much better, and probably they are inching towards the targeted, I would say, ROC, as well as on the EBIT margin. Hopefully, in the next year we can see, inching closer to what we set ourselves as a target to be there in the project business, as far as the domestic operation is concerned.
Okay, thanks a lot, and all the best.
Thank you. Our next question is from the line of Bhavin Vithlani from SBI Mutual Fund. Please go ahead.
Yeah. Afternoon, gentlemen. Thank you. So this question is on the total provisions on these projects done, because when I'm looking at the cash flow statement for six months is about INR 180 crores, and whole of last year, that number was about INR 360 crores. So I want to understand how much of this is the total provisions pertaining to the projects business, and do you believe and what percentage of this would you believe that can get reversed as these are provisions for delayed payment?
Bhavin bhai, I just wonder from where you are seeing INR 360 crore of, for collection last year?
No, no, no. The provisions for doubtful debt was INR 360 crore last year, whole of last year. For the six months in your cash flow statement, that number is INR 179 crore.
Yeah. So, what's your question, Bhavin bhai? I missed your question in this.
So the question is, of these, the cumulative provisions that you have done over the last 18 months, of roughly about INR 540 crore, how much of this is the provisions for the delayed payments, and where you believe that there is a good chance of it to return, being returned back? And how much of this is actual loss, which has been already incurred for?
So I would say that. I'm not going to witness or not going to comment on the cumulative provision amount which you talked about. But if I take out the INR 250 crore or INR 260-odd crore of provision, which we picked up because of the onerous condition, wherein the project got either canceled by the contractor and or maybe under the DLP period, the main contractor has encashed our bank guarantees. These are the provisions probably which will take slightly longer time to come back, because it will go into a legal kind of settlement on the court side.
However, just to inform to the investors, the last quarter or the quarter of a similar period last year, the provision what we have picked up for the project wherein the main contractor or the client has terminated the main contractor, the same project has been re-awarded to Voltas, being the subcontractor. So hopeful that we should be able to recover not the entire provision amount, but should be able to mitigate or should be able to recover some of the provision what we paid out on the same, I would say, of the same project. Because when we carry out the provision, it was outstanding against the main contractor, not the main client.
But I hopeful that as we progress on the project, some loss may get kindly mitigated, but it will take some more time in terms of recovery, because these are the mitigation cases, which probably take longer time than what we expected. In terms of the other provisions, we hopeful that the collections should start flowing into it in the near future. I would not like to give Bhavin bhai any timelines to it, because the efforts are in a much accelerated way to source or to do this collection, and we're hopeful that it should be done in the near future. But definitely, the way in which we are giving information about the provisions, we hopeful that we'll definitely provide you the information about the reversal as well, when the substantial amount gets reversed in the future period.
Sure. Just one last follow-up on this is just to understand our ECL policy, when is it that we book a provision? And, like, what is that outstanding number of days threshold, so after that, we kind of book a ECL provision?
I would not like to narrate the policy, Bhavin, because every company has a different policy and different look or outlook on the receivable side. What I need to do in a summary way is we follow—when we say conservative policy, for us, even a minor stress in the overall collection triggers the assessment on the entire outstanding, say, on the client side, and accordingly, based on the assessment, we start providing a specific provision, and not the ECL provision, which otherwise follow in an ordinary way.
Great. Yeah. Yeah. Thanks, thanks for taking my questions.
Thank you. Hopefully this is the last question because we've reached to our closing time.
Yes, sir. Our next question is a follow-up question from Keyur Pandya from ICICI Prudential Life Insurance.
Thanks for the opportunity again. Sir, just one follow-up. I think last year, all the project business, domestic project business subsidies were consolidated into one subsidiary, and I think a similar arrangement has been done for, say, overseas business as well. What is the future plan of action, I mean, post all the, say, project businesses are into one or two subsidiaries, do we plan to demerge it or, any thoughts on future plans on this demerger?
So, Keyur, the primary objective is to consolidate the business in the subsidiary company and have the management bandwidth released for, focusing upon the consumer-facing business. That was the prime objective when we start doing this transfer of the, some of the verticals to a 100% subsidiary company. Domestic transfer what we carried out started giving some kind of positive results in the last 6-9 months. Our order book has gone up. The execution is taking, as targeted or as planned, and the, results are also showing or reflecting out of it. International business, we just announced the one quarter before. The process regarding that has already been started, has already been initiated, and hopefully should get over in the near future.
The entire objective, as I said, to release the bandwidth time of the current management, to focus more on the consumer side business. If the opportunity arise in the future, in order to value enhancement to the stakeholders, definitely it will get evaluated in a much deeper way, and considering in the mind or keeping in mind the shareholders' overall interest into it.
Sure. Thanks a lot. Thank you.
Thank you. Ladies and gentlemen, that was the last question for today. I now hand the conference over to the management for closing comments.
So I hope we have answered to the most of the questions. I do understand there is a kind of more anxiety or kind of concern on the provisions which we are taking up in the international business. Let me assure that the management is taking all necessary steps to reduce or to mitigate the risk to a great extent. As we said, there are some pain area which is still continuing it. However, hopefully, as we move forward, the such kind of impact will see, I would say, get mitigated to a larger extent. If anything remain unanswered, on the participant side, we are just a phone call away. I wish all the participants a happy weekend and a Dussehra, which is in the next week. Have a great evening. Bye.
Thank you. On behalf of PhillipCapital India Private Limited, that concludes the conference call. Thank you for joining us, and you may now disconnect your lines.