Voltas Limited (VOLTAS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Voltas Limited Conference Call hosted by DAM Capital Advisors. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Bhoomika Nair from DAM Capital Advisors Limited. Thank you, and over to you, ma'am.

Yes. Good afternoon, everyone, and a warm welcome on behalf of DAM Capital to the Voltas Limited 2Q FY '25 Earnings Call. We have the management today being represented by Mr. Pradeep Bakshi, Managing Director and CEO; Mr. Jitender Verma, Chief Financial Officer; Mr. Nikhil Chandarana, our Head Corporate Finance; and Mr. Vaibhav Vora, Head Treasury. At this point, I'll hand over the floor to the management for their initial remarks, post which we'll open up the floor for Q&A. Thank you, and over to you, sir.

Hi, this is Jitender Verma, I'll be taking a few minutes to give you analysis of results, and then we will take the question and answers, along with our MD and CEO, Mr. Pradeep Bakshi, who is also on the call. So as you are all aware that global growth remains resilient despite a sluggish outlook for the Eurozone and China. Stronger-than-expected growth in the United States among advanced economies, along with robust performance in India within developing economies is sustaining overall growth momentum. However, uncertainties stemming from disruptions in production and shipping, geopolitical conflicts and extreme weather events, upcoming U.S. elections may influence the global economy in the near term. Domestically, the economy is projected to grow between 6.5% and 7% in FY '25. Rural demand is improving, driven by high FMCG sales, while urban consumer sentiment appears to be softening. The recent surge in inflation can be attributed to a temporary spike in prices. However, core inflation remains within a comfortable range and several food items such as pulses have declined in price due to government initiatives. In the current quarter, considering underlying global and domestic factors, the Reserve Bank of India has shifted its stance to neutral focusing on inflation targets while supporting growth. Nevertheless, inflation projections may face headwinds from renewed volatility in commodity prices, particularly due to fiscal stimulus in China, which could impact RBI's inflation targets and potential rate cuts. Voltas has delivered another remarkable quarter. Two quarters ago, the company achieved the milestone of selling 2 million air conditioners within a 12-month span. Impressively, this achievement was reached in just 8 months during this calendar year in 2024, highlighting strong market demand for the company's products and a year-to-date growth of 52% this time. During the traditionally lean monsoon season in the current quarter, Voltas reported a 15% growth compared to the same quarter last year despite a higher base. The Unitary Cooling Products division continued to outperform the market, maintaining its growth momentum with an overall volume increase of 56% over the previous 6 months period. For the 6 months ending September 30, 2024, the company achieved a 33% increase in consolidated total income, reaching INR 7,726 crores, up from INR 5,794 crores in the same period last year. Profit before tax surged by 128% climbing to INR 657 crores compared to INR 288 crores previously. Net profit after tax also experienced significant growth, reaching INR 468 crores, up from INR 165 crores in the corresponding period last year. This marks the highest half yearly profit in the company's history. Earnings per share for face value per share of INR 1, for the 6 months period ended September 30, 2024, was INR 14.15 compared to INR 5.02 in the same period in the previous year. In the same quarter, consolidated total income grew by 15%, reaching INR 2,725 crores compared to INR 2,364 crores in the same quarter last year. Profit before tax surged by 142%, increasing to INR 205 crores from INR 85 crores. Net profit after tax saw a substantial rise climbing to INR 133 crores from INR 36 crores in the corresponding quarter last year. Earnings per share for the quarter ended September 30, 2024, was INR 4.05 compared to INR 1.11 in the same period previous year. During the quarter ending November 30, 2024, the Board of Directors approved a long-term incentive scheme for 2024 aimed at driving company performance and retaining key talent. This scheme, which commenced in the financial year '24-'25 would end in the financial year, '26-'27, has resulted in a provision being added to employee benefits of INR 24 crores for the first 6 months in the current quarter, which moderately impacted the bottom line. These actuarial valuation will be reassessed periodically. Overall, the corporate balance sheet remains healthy. A snapshot of our results for this quarter and for the financial year is already aware to you guys. In segment A, in the Unitary Cooling Products, the second quarter typically marks a lean period. The early heat wave in the northern regions helped sustain the growth momentum in the company's air conditioning business. However, persistent rains across country during this quarter, slowed industry progress. Despite these challenges, the segment performed relatively well, reporting revenue growth of 30% compared to Q2 FY '24 and 44% compared to H1 FY '24. All products within the room air-conditioner category experienced strong demand, driven by consumers' desire for comfort and convenience, both window and split air conditioners saw robust growth with demand emerging from across the country. The premium segment, particularly five star-rated products continue to thrive, leading to an improved overall sales mix for Voltas. With the new CT operational, we aim to enhance sales and service through our extensive distribution network. Leveraging our supply chain has enabled us to maintain our leadership position with an exit market share of 21% as of September 2024. Over the past few quarters, we have consistently strengthened our brand proposition and product placement across all channels. During the season, our performance in the RAC segment has remained strong. We also noted significant volume growth in other cooling products, including air coolers and commercial refrigeration items. The commercial refrigeration industry currently faces headwinds due to a reversal in the capital expenditure cycle after 2 to 3 years of consistent growth. Products such as chest freezers and chest coolers have reported moderate growth. Nonetheless, demand for water coolers and dispensers within this category has remained supportive. Thanks to our new plant and the higher base from the previous year, commercial refrigeration products showed a healthy performance. Our new offerings in cold room and medical refrigerations are gaining traction, bolstered by a solid order book. While revenue growth was commendable, challenges in the market stemming from reduced capital expenditures by customers have led to a decline in margins during this quarter. The air cooler and water heater categories continued to outperform, achieving substantial growth compared to the previous year. Strong sales in the first half, coupled with healthy order commitments from our channels set the stage for an exciting year. Aggressive initiatives to expand our distribution network combined with quality products and favorable climatic conditions have helped us establish a robust foothold this season. Our new cooler models were well received, further fueling growth in this category. Recent reports indicate that our market share has grown to 11.11% exit September, positioning Voltas as the #2 brand in September 2024. In the water heater segment, partnerships with distributors and sub-dealers have also contributed to strong performance. The commercial air conditioning, CAC vertical maintained steady performance during the quarter, driven by sales of VRF, cassette, and ducted ACs. The higher volume of margin-accretive product sales, value engineering initiatives and the current mix of AMC jobs have positively impacted our bottom line. Consumer-centric financing schemes significantly contributed to sales growth this season. However, elevated commodity prices and a depreciating USD-INR exchange rate have affected profitability. Our investments in BTL advertising have helped keep margin steady aligning with our expectations. Simultaneously, various value engineering initiatives and cost control measures have contributed to stable margins. In summary, segment revenue grew remarkably by 45%, reaching INR 5,384 crores, up from INR 3,723 crores during the same period last year. The segment result increased by 48%, amounting to INR 443 crores compared to INR 300 crores in the corresponding 6 months of the previous year. For the quarter ending September 2024, segment revenue grew by 31% totaling INR 1,582 crores compared to INR 1,209 crores in the same quarter last year. The segment result for the quarter was INR 116 crores, up from INR 93 crores in the corresponding quarter last year. On the capacity expansion front, we are pleased to report that production at our new factories in Chennai and Waghodia is progressing as planned. These facilities provide us with strategic advantages in location, enabling us to effectively cater to markets in South and West Asia. Segment B, for Electro-Mechanical Projects and Services. This segment -- the segment revenue for the quarter was INR 880 crores, compared to INR 924 crores in the previous year corresponding quarter. The segment results for the quarter stood at a positive INR 46 crores, a significant improvement from a loss of INR 49 crores during the same period last year. Over the 6-month period, segment revenue increased by 14%, reaching INR 1,829 crores compared to INR 1,603 crores in the same time frame last year. The segment result -- the segment result also turned positive, amounting to INR 114 crores, a substantial turnaround from a loss of INR 101 crores last year, primarily due to provisions made of receivables. During the current quarter, heavy rainfall affected project execution across all verticals, leading to marginal growth for the business. Delays in job progress and collections from government tender jobs impacted profitability. However, domestic business performance for the 6 months showed improvement. A focus on collection of dues and better working capital management has resulted in strong profit growth. The business anticipates a return to normal execution levels and aims to achieve its targets and growth by the year end. For the Domestic Projects segment, we secured an order of INR 822 crores with a current order book standing at INR 5,014 crores. In the International Projects sector, operations in the U.A.E and Saudi Arabia continued to perform well, driving the revenue growth. Strong project execution has ensured robust bottom line performance as well. We have adopted a cautious approach to order booking during the quarter. As of September 30, 2024, the carryforward order book for international business stood at INR 2,473 crores, predominantly in the U.A.E. and Saudi regions. The total carryforward order book for the segment was INR 7,487 crores as of the same date. Segment C, Engineering Products and Services. This segment faced certain challenges during the quarter, while revenue increased to INR 308 crores from INR 277 crores the previous year. Segment results fell to INR 84 crores from INR 108 crores during the same period last year. For the quarter, segment revenue grew by 9%, reaching INR 147 crores compared to INR 134 crores in the corresponding quarter last year. The segment results for the quarter was INR 40 crores, down from INR 54 crores in the previous years. The mining and construction verticals showed positive momentum on the new pipeline, ensuring continuity in operations and maintenance jobs as well as sales of power screen machines. However, challenges in revenue mix and job renewals and healthy margins limited the ability to translate top-line into EBIT. The textile industry faced headwinds due to fluctuations in cotton and yarn exports. Consequently, capital expenditure across the sector decreased leading to reduced utilization level for spinners and a corresponding decline in demand and margins for our agency business. Despite these challenges, our aftersales and post-spinning business have showed positive performance. Voltas Beko. Our joint venture, VoltBek Home Appliances Private Limited, also emerged as a beacon of growth, a volume growth of 54% in the first half of the year. This was complemented by a significant increase in market share in the refrigerator and washing machine categories year-over-year. As of YTD September 2024, our market share improved by 7.5% for washing machines and 5% for refrigerators. The home appliances industry in India experienced steady growth driven by demand for both large and small appliances. However, as compared to industry; Voltas Beko strong growth by offering an impressive product range to meet consumer need. The launch of the HarvestFresh campaign along with enhanced social media efforts focus on e-commerce, exhibitions, and dealer meetings, significantly boosted overall our business performance. Improved traction from modern trade has further supported this growth. In terms of profitability, increased volume has led to a gradual reduction in losses. VoltBek continues to work towards minimizing loss per unit, aiming for EBITDA breakeven in the coming future. VoltBek remains committed to enhancing its market presence across various product categories through customized market penetration strategies and growth initiatives. These efforts include expanding distribution reach, adopting channel-specific tactics to enhance market presence in key regions and maintaining a strong focus on boosting e-commerce and omnichannel development. On the cost front localizing production for a larger portion of its product portfolio implementing product efficiencies, value engineering and optimizing that mix have contributed to a positive outlook for the company. The period from October to December, that is quarter 3 FY '25 for the company is generally a lean season for cooling products due to winter. However, the onset of the festive period may bring an early surge in demand in part of the quarter. It will be interesting to observe the interplay of various factors including inflation, fluctuation in crude oil prices, currency behavior, and geopolitical. The current economic environment is marked by uncertainty and volatility. Inflation remains a focal point, influencing future monetary and nonmonetary actions that will impact overall economic growth and consumer demand in the upcoming quarters. Nevertheless, we remain optimistic given the supportive factors for the businesses we operate in. Thank you. Maybe we can open up for questions and answers.

[Operator Instructions] The first question is from the line of Nitin from Axis Mutual Funds.

Just as you articulated market share coming back as you stated in the press release and the primary growth looks pretty promising. Can you talk about, Nikhil, how the secondary market has gone during this quarter? I understand this is something, not a season but generally, if primary has been on such a higher side, how is the secondary market? And number two, given festive you've already seen -- must have seen last 10, 15 days or 20 days of festive, how has been the response on overall sentiment wise on the product itself and how you're doing it? That's my first question.

Shall I answer?

Yes, sir, then I'll take up the second question.

What do you want? You want to go ahead with questions first or answer one by one.

Sir, one by one, if you say.

So I -- okay. I'll go ahead. Firstly, you asked about the secondary sale. So this year right from the March onwards, of course, last 7, 8 months, the sales have been brisk and the market share, which we are sharing with you, that's the secondary sales market share only, which is by third party syndicated research international agency. So that shows that we have continued to do well by clocking in 21% market share exit September. So this shows the sales has been quite robust. It's not that we are just pumping the material in the market or we are doing only primaries, secondaries have also been happening quickly for the equally good but could be better. Also for your information, you wanted to know as to how Diwali period, festivity has been happening around it? If seasonal, kind of AC business is not -- it doesn't give a great number during these festival period, however, it is more of a other appliances, refrigerators, washing machines and all. So we've continued to do pretty well on our appliances segment, VoltBek product and we have clocked very good numbers even during October period also because of Diwali, sales start happening from September onwards, which is even 30 days in advance. Actually, generally, we take as we say November 1 or 3 or whatever maybe the Diwali, whatever we are counting of. So this last 1 month, appliances sales has been very brisk. All appliances across both have done very well. AC also have done well compared to last year, we have continued to grow. But more to talk about, we are currently talking about quarter 2 and half yearly results. So our primaries and secondaries have done well. Yes, of course, in the quarter 2 because of rains actually in several parts of the country and extended rains [indiscernible] this time a bit of disruption was there in certain areas. However, overall, we have done pretty well for ourselves as a brand and even industry has done reasonably okay, everybody has shown growth, whatever numbers we have seen for both of the brands. So that's the answer for your question. .

Okay. Sir, why I ask specific AC because when you were talking to a few channel partners and all, surprisingly, they're talking about October, festive is some 20%, 25% growth in AC. So I was pretty surprised to hear that, so I thought I'll ask you if...

Yes, that's what I'm saying that but I'm controlling my growth -- earlier months right from March until May, June, I was growing 70%, 80%, 100%. Compared to that 24% is a bit muted growth for me. But yes, looking at the -- I don't hope very high on the festival period for ACs, to be honest. All along, I have been for last 4 decades, I been in the market, ACs grew well only largely during summer seasons only.

Yes. Got it. Second, in terms of...

I am sorry to interrupt, sir. Can you please follow back on the question. The next question is from the line of Saumil from Kotak Mutual Funds.

Sir, 2 question. First, in terms of VoltBek now obviously, you have alluded to the rising market share both ref as well as washing machine. But the losses while they have come, will continue to be at INR 30 crores on a quarterly basis. Now, 2 years or 3 years out at what revenue threshold or at what market share do you believe that...

I am sorry, I am getting lot of echo in this call. Earlier on, we were very clear with the first questions but now I'm not able to hear. I'm not sure whether my colleagues are able to hear them properly? If somebody can repeat that question to me or maybe in case, Jitender, you have been able to hear, you would like to start?

No, I could also not hear. There was a lot of voice from his background. So I could not hear.

So, a lot of echo is there in his call.

Sir, is it better?

No, it's same.

Is this better, sir?

Yes, it's better.

Yes, sir, 2 questions. First on in VoltBek, obviously, you have alluded to market share going up both in AC -- both in ref as well as washing machine. But the losses seems to be a INR 30 crore on a quarterly basis. Now at what revenue threshold or at what market share you believe you can achieve at breakeven? That's my first question. Any broad indication of that.

So firstly, as we said in initial 3 years, we are investing into the brand actually, and we are building the revenue and the numbers. Yes, I would believe that very soon we are likely to reach 10% market share in the washing machines and probably 7%, 8% in the refrigerator segment because we are already 5%, and roughly 7.5%, 8%, it's has been hovering around month-on-month basis in the washing machine. And in case you talk about only semi-automatic washing machines, it's been there about 14%, 15% all along across the month after month for almost a year now. So I think when we -- overall, from the washing machine segment, we -- by probably next year, we should see some EBITDA positive. So that's what we had committed to the -- and we have given the guidelines also. We've been working towards it. Probably in a year's time, we should cross this threshold numbers, which I'm saying, roughly 8% to 10% market share in both the categories. And from there onwards, probably you will see a better result on that front. Yes, of course, but these are per design -- as per design only the design that we're going to invest into the brand. So you will see that we have been continuously building network. We are continuously building [indiscernible] making the consumers aware about these category, about the products, which we have been offering. Our products have been accepted very well. No complaints whatsoever from any segment. All the channel partners across segments, across channels, including e-commerce, including modern trade, including organized trade, everywhere this product seems to be doing very well. And then also, hopefully, we'll get good news very soon.

Saumil, just to add to what Mr. Bakshi said. We have always been maintaining that somewhere in this year, we should become break -- we should break even in EBITDA, and that is looking highly likely and as is also evident by the fact that with higher volumes, our losses per unit are also coming down gradually. And if I were to actually put a number, I would say somewhere closer to INR 2,500 crores, INR 2,600 crores kind of a turnover, we should be definitely breaking even. But don't take my -- this as a gospel truth because there can be many factors, which work on this. But generally seeking, at this number, we should be starting to break even. And also the market share we have.

Perfect. And sir, my second and last question now, obviously, once the new plant, which is already operation in Tamil Nadu. In year 2 or year 3, what could be the utilization rates in the volumes sold, really any broad number? And subsequent to that, what could be the broad margin differential versus where we are today?

So let me answer to this. If you look at our sales -- current sales, it is well past 2 million in the first 240 days of this year. And we've been growing at a pace of almost 50% in this category in the room for which we have set up this Chennai factory. So if we continue to grow with this pace, we are likely to cross 2.5 million, 3 million units soon. So this particular factory, what we have set up is only at the moment, 1 million units. And my existing factory at Pantnagar is able to produce about 1.4 million, 1.5 million. So put together, as it is, I'm running short of the capacity, and we are augmenting it further. Probably we are very soon going to take it to 1.5 million and 2 million by '26. So therefore, it will just be sufficient for my needs. So when you're talking about full capacity, it has to any which way run on the full capacity and continue to cater to the demand, and that we are and obligation on that factory. So you don't worry this will be running at full capacity and this full capacity will be utilized also. Coming back to you say how the profitability is going to improve through this factory. Honestly speaking, I am not looking at -- I'm not greedy by setting up this factory. I want to first fulfill the consumer requirement. I want to provide comfort and convenience to my consumers first and profitability this has been reasonably good as of now. And I'm not hassled about that. To be honest, first need is to fulfill the requirement and expand the market. That's what guidance and I've been providing you this input all along. Our endeavor is to expand the market continuously because India's penetration level is pretty low as compared to similar kind of geography with similar kind of population-based and consumption based China if you look at. So we need to expand the market. Our owner -- it's our ownership on the brand, which is a leading brand to expand the market and to please provide the comfort to these consumers. That's the objective of this factory. And we've been given -- we've been giving reasonably good profit to the investors. So I don't think we should be hazard about that.

But sir, direction is trying to assume that the margin is likely...

Sorry to interrupt you. Saumil sir, can you please fall back in the queue.

No worries. No worries. I'll.

The next question is from the line of Naushad Chaudhary from Aditya Birla Sun Life.

Two questions then I'll come back in queue. Firstly, again in VoltBek, I take your point, sir, but just to help us understand more, at what gross margin we operate this business. And what specific steps are we taking to make it profitable? How much capital we have deployed so far in this business? This is first question, sir.

So I think partly, we have already between me and my CFO, we've answered on through this, how we are -- when we make it profitable, et cetera. I think it was answered. If you are asking about what kind of gross margins we've been making on these categories. See, different products make different kind of gross margins. It ranges between, I think, if I'm not mistaken, somewhere, Jitender can add to it, roughly around -- roughly around 10%, 12% to 15%, 18% type margins are there in each of the categories. And as we said is EBITDA positive -- EBITDA breakeven we're going to make probably this year, by this year-end, that's the endeavor at the moment, and that's what we are applying for. And profitability, as we said this in terms of revenue, my colleague has said something INR 2,500-odd crores or so, whatever, whenever, last year we had done about INR 1,500 crores. This year, most probably we will cross -- we will be close to the number, which Jitender said, and next to next year. We are growing very fast in this category. We are the fastest-growing brand. So you can be rest assured we will be profitable in this category. So this is initial investment in formative years where you need to build the brand because we are a bit late entering into the category, you will appreciate that there are mighty Koreans and other brands are -- other Chinese brands are available and American brands are available. So we have to make our mark into the industry first. And we have to expand this industry also because this industry has also been not growing with that speed. So our endeavor would be to grow this industry also. We've been doing about 13 million, 14 million, 15 million refrigerators all along. If you look at 80, how fast is it growing? A couple of years back, we were 5 million, 6 million. We are going to cross 14 million, 15 million now.

How much capital we have deployed in the business, sir?

I think you for Voltas Beko and Jitender correct me, it's about INR 1,300 crores, if I'm not mistaken, metro level.

Yes, about INR 1,300 crores.

So, put together by both partners, out of which 50% is by Tata, including Voltas and Tata Investment and 50% by the partners in a similar proportion of 49% by Arcelik, Beko and Koch Group by 1%. That's how it is.

Yes, it is INR 1,300 crores. Yes.

I have a follow-up on this. I'll come back. But second question is on the raw material side, sir, if I see from last one -- from Q1, there is slight gradual inch up in raw material cost. So do you think the market is ready to absorb that cost or we may see some challenges in coming quarters in terms of passing on that raw material?

No, the raw material -- see, I'm sure you know that in all the categories, including air conditioners, refrigerator, washing machine, get the pricing by some percentage points because raw material cost, yes, you're right, obviously, the [ results ] has gone up a bit in the last few months. So we have passed some part of it already and we will continue to see, continue to observe. Partly, we are trying to cover up through value engineering in our factories as to how can we minimize the cost of production. And similarly, part of it needs to be passed on, we passed on also, and we'll continue to do so depending upon how we can mitigate that. Of course, the brand cannot absorb everything. Something has to be passed on to the market as well.

The next question is from the line of Natasha Jain from Nirmal Bang.

So my first question is on the domestic side of the EMPS business. Now historically, in the past couple of quarters, we've seen quite strong growth. And honestly, very bullish commentary as well. But this quarter, in the domestic side, the growth has just been 6%. I understand the incessant rain could be a factor but could there be a possibility that there is some slowdown in certain projects that we are executing. And on a related note, how do you see order book execution for domestic business in the second half? That's my first question.

Natasha, to answer that very quickly. I think in your question itself the answer was there, the incessant rains, that is the real reason, and I will, therefore, call it a kind of a one-off thing. And the H1 was good. We don't have any issues on that. Yes, a slightly bit of a lesser growth than as we have been showing. But the H2, we should be able to recoup all these things because in the Projects business, sometimes we don't have to look at it quarter-to-quarter because different projects have different kind of speed. And therefore, on a yearly basis we should be able to recoup, and the order picking on the domestic side also has been really good, and we have picked up some nice, good margin orders. And this has also been our strategy to be selective and pick up only those orders, which we believe are having good measure on KYC and all those factors. So we have been on track for that.

So let me add to what Mr. Varma has said is order side has been reasonably healthy. It is at the same number as it was last year. And 31st March, we are about hovering around INR 5,000-odd crores worth of order pad with us. And while we have said that during the rainy season, there is always a bit of a disturbance because right off way, et cetera, et cetera, at times is not available and therefore, you cannot complete those deadlines, et cetera. However, if you look at H1 numbers, we've been way ahead of our commitments and numbers and targeted numbers in this category. H2 also looks very promising. We have got very healthy orders from Tata Electronics worth almost INR 1,000-odd crores, which we need to execute during the course of next few months. So I think we have got very good order pad, and I'm very confident and bullish on that segment as well, Domestic Project Business. We will do well in this segment as well.

Understood, sir. So that helps. And my second question is on the RAC side, while you've mentioned earlier in the call that there was tertiary demand in the sense that end consumer demand did pick up. Sir, I would just bring in a lean quarter like Q2 when practically your August and most of your July was also completely washed out because of rain. Still, we've had healthy growth in the RAC category. So sir, should read it as, there could be some bit of channel filling also because inventory was low. And if that has happened, how do we see the near term because now we will end the quarters wherein, we sit at a very high basis. So what is the kind of growth that we can expect in the second half from RAC as a category?

Natasha, we -- in my report and in my initial comments, I mentioned that we did exit in September of 21% market share. So when we are reporting that, that's the secondary data only, which we pick up from the market. And that will also show you that secondaries have been doing pretty well. Of course, there would be some stocking up but those are like normal levels. It is not that people are or the dealers are building up unprecedented inventories or anything, and this market share data actually alludes to that fact. I'll let Mr. Bakshi add to your question.

Yes. Actually, the market knows the dealers are very smart people. These are too businessman, and they understand what to stock up, what not to stock up. The history shows that there is a greater demand of appliances. Therefore, they invest more into the other appliances than the air conditioners during this period. So I don't think -- but of course, they need to prepare themselves for each category and therefore, air conditioner also, they would have kept in stock and they have been able to sell and liquidate part of it. I'm not sure that inventory is being built up in the channel. And going forward also, right from now another 2, 3 months, February onwards, the season picks up. And of course, West and South, there is a second summer also in October, November. In October, November, West has done very well for us actually. While North, of course, I can understand because of Diwali, festival and all, there is a more focus towards appliances. But West and South, their second summer catches up and there is demand of compressor products there. So I don't think I'm worried about any stock and I have not been reported as of now by my team also that there has been additional stock or high stock in the marketplace. So you can be rest assured that we'll continue to do well in the next 2 quarters as well.

The next question is from the line of Ravi Swaminathan from Avendus Spark.

Most of my questions have been answered. One question on the engineering product side. So our profitability, which used to be in that range or band of 33%, 35% and an EBIT level has come off to 27%, 28% in the first half. Is it because of the fact that the profitability in the textile side is generally way better than that of the mining side? That is the major reason. Or is there something else that we need to really do it? And how sustainable -- or should we read like the margin should be in this band at least this year to 27%, 28%?

So, textile industry includes having a little bit of a challenge at the moment because Bangladesh because of tension there, Bangladesh -- a lot of yarn goes to Bangladesh. And that was -- actually had come to a halt there. That's one. Secondly, yarn prices also have suffered. And therefore, the margins have shrunk during this period. Looking at, the even the policies, et cetera, et cetera, probably we are assuming that the margins are going to be around this level for the next few months until situation starts picking up, yarn prices needs to get corrected. And of course, the Bangladesh starts operating in the normal fashion, that will be the ray of light for this particular category. But it's been a healthy number. We have been delivering about INR 100-odd crores for the last 2 years, this year also slightly lower than the previous number or the revenue numbers. But we are likely to catch up in the game by the year because we are focusing on vast value-added services, also part sales, also doing the energy audit for the textile needs. My team gets engaged whenever these kind of situation comes, once we start doing some other things, which continues to give us some revenue and profit, which makes up for a bit of a loss which may happen because of all these events. So don't be worry, actually, we are reasonably growing in this category as well. And by the year-end, we should be well close to our targeted numbers.

The next question is from the line of Keyur Pandya from ICICI Prudential.

Sir, one question on the UCP margin side. I mean you mentioned last quarter that industry has increased the prices near the end of the season. And year-over-year, 30% kind of growth. And despite that, if margins are lower Q-on-Q, if you can just throw some light on what is driving the margins in this narrow band? Is it competitive pricing? Or this OpEx of the new plant or something else, and in that backdrop, how should we think of margins going ahead also?

There are a couple of reasons, I'll cite and then I'll request my colleague, Vermaji to answer on this. There are much of reasons for this. One, as we explained in initially also that we have additionally provided for long-term incentive for our team -- for the team because to continue to keep them motivated and highly charged up to continue to keep giving us growth. So that's an additional number, which has come in this quarter. Besides the fact, yes, of course, we have passed on some cost to the market. At the same time, this is an additional cost, which has come up and for both complete H1 has been put into this quarter only because the team got finalized and approved by the Board now only. So that's one piece. Secondly, of course, there are some investments being made but of course, we have not taken any depreciation as of now. I don't think, may if Jitender know, he'll correct me or add to this. So that's one part. But thirdly, of course, because of lesser volume. So this cost doesn't get absorbed. There is a number, which needs to be operated upon. Quarter 1 is huge. Quarter 2 is very less as compared to that. So there are -- therefore, you can't presume similar kind of margins in quarter 2. Quarter 2 margins will -- if you compare with last year, last year also you can see and compare, margins were about the same level in this quarter. So I think that's the answer from my side. Jitender, in case you want to add to this?

Yes, sure. See, we have to also see that we are building up for future growth. So therefore, we are investing in ISDs also, which are our in-shop demonstrators. So that's one part of the thing. And we have kept -- even during the lean season, we have continued to work with them. And as Mr. Bakshi said the long-term incentives for our employees like it's sharing of things with our employees as well. We also mentioned in my speech that the commercial refrigeration bit, which is part of the UCP, didn't really come up to the party for this quarter, and we are seeing a bit of challenge there. Yes, depreciation impact has been there but I wouldn't say that anything major on the RAC side. Commodity prices also has been slightly bit up the period we couldn't pass on. So all that things impacted but the margin was not a very big drop. And as we have been saying, that rather than focusing on these quarterly minor adjustments on these kind of margins, I think we should look at the rupee profit rather than a margin percentage. And If you would look at and focus on that rupee profits, we have done pretty well, and these numbers are really remarkable in that sense.

So some in substance of what both of us have said is, we continue to invest in brand promotion and also on building the -- and expanding the market and building the market share and also on our team to keep them motivated, engage and charge up and investing into all these things, and this is what is going to pave the way for our success in the coming years. So that's what it's an investment, and I don't think we should be hassled about that as well. And I'm sure all of you would be happy the kind of results the team has put up -- Voltas team has put up in the first half, it's unprecedented. I've been for about almost 24, 25 years with this organization, this is absolutely awesome numbers, which team has been able to put up.

Understood, sir. Just last and second question on the commercial, actually commercial refrigeration, you mentioned that it did not pick up as it was expected. So is it because of some product gaps or basically internal reasons? Or there is slowdown at the macro level or industry level?

See, the part of these strategies like, Jitender, also said in the beginning, water coolers and water sensor, water cooling products have done well. However, part of this commercial refrigerators, which is freezers and bottle coolers, et cetera, have not been doing well. This is the industry driven, that's what I have been given and when we get to see results of the other people also, we will get to know more about it. But this is the feedback, which I have been gathering from the market and from our team. The demand for this category has been a bit subdued because CapEx has been put on a bit of a hold at the moment because last 2, 3 years, it's a cyclic sort of business , where people invest into this category 2, 3, 4 years, and again, a bit of a slowdown, like that this continues the cyclical nature of this business. And therefore, this is a bit of but -- however, we still registered some growth in this, not that we've degrown. I think about 13%, 14% growth we registered in H1. So that's a bit of a consolation to me overall in this category. And however, yes, when we compare with air conditioner growth or other appliances growth, which is more than 50%, is a bit muted growth that I agree with you. However, we are happy because probably our market share, we have continued to remain within in this category. Most of the freezers, we have been about 35% -- between 35% and 37% all along in this category for last several years. Water dispenser, we have been more than 55%, 60% in this category all along. Water coolers, we've been more than 40%, 45% market share. So I think we continue to do well in this category as well. But yes, of course, relative performance if we compare with other categories, it's a bit muted one.

Yes, I think that's the most important point that it is not that probably a degrowth or anything. It's not as high growth as in other products. So it's stays as the nominal thing. And 2, 3 years, it was a very high growth. Therefore, there is a bit of a slowdown. We are not bother with this a lot. And the margin, in fact, if I were to just simply mathematically remove the LTI number, my margin percentage also would have been higher. But anyway it is a cost, which we have decided to defray to our hard-working teams. So we will keep that and that will be feature. And we have also said that these value would be reassessed by the actuarial valuation as -- every period as the accounting norms are. So we'll take that as it comes.

The next question is from the line of Aditya Bhartia from Investec. As there is no response from the participant. We'll move on to the next question. It's from the line of Siddhartha Bera from Nomura.

Sir, on this margin side some color in terms of commercial category, you indicated last quarter there were some inventory led adjustments and that led to margin pressure. So now with this type of competitive intensity, which you are seeing, do you see some improvement from the commercial category also in terms of margins going ahead? Or this is something, which may continue to be there in the next few quarters?

See, you to understand, which commercial category we are talking about, commercial refrigeration, commercial air conditioning or commercial project. What exactly the question is about, which category you are referring to?

So sir, the problem is basically commercial refrigeration, right? There, we have seen some margin softness in the quarter.

Okay. Jitender, you were answering. Will you want to continue or...

Yes. I said commercial refrigeration last year -- last quarter when we talked about, it was a QCO things, which have been brought in by the government on components. So therefore, there was some inventory and that inventory needed to be liquidated. So that was the issue in the last quarter, so that's now gone. That's not an issue anymore. And from here, we'll have to see if there is really a slowdown on the capital investments within the industry, whether it be the ice cream manufacturer or whether it be other consumers or other business users of these products. So this quarter, we have seen there is a kind of a slowdown on that investment and we will wait and watch on this thing. We have some orders, which we will be willing to complete which we will be fulfilling going forward.

So what we -- I believe we observed during this last 2, 3 quarters in this category, as also mentioned by my colleague, people were holding stock and they were building stock for the summer season. But, as unfortunately the QCO came in place actually and they wanted to liquidate those inventories, they will be best at some of the brands. And since they were selling, they were reasonably placed in terms of inventory and all because our sales and secondary sales have been reasonably good. But because the competition, as you rightly said, competition intensity or the anxiety to liquidate those stocks, which were not QCO compliant. So they were trying to liquidate at discounted prices in the marketplace, so -- which was exactly based on all of us to compete -- to remain competitive in the marketplace. And therefore, the margins are bit shrunk in this category -- margins are sorry, a bit shrunk in this category for the moment. So I think now we have passed that stage. Most of that has been cleared by the brands. And now I think we will start looking up in this category also going forward.

Got it, sir. Sir, lastly, if you can highlight what was the price increase, which we have taken to pass on the near-term commodity cost pressure, which you indicated that it will be out of...

So in which category, sir, you said we have been able to pass on the commodity.

UCP. Sir, you indicated that....

UCP as in room ACs, I'm saying. Firstly, I'll talk about, roughly around 3% to 4% price increase we had passed on in the marketplace in the last quarter, quarter 2, and in probably refrigerator and washing machine, also, if I'm not mistaken, roughly around 2.5%, 3% of margins have been -- the commodity price or hike has been passed on to the market.

Ladies and gentlemen, this was the last question for today's conference call. I would now like to hand the conference over to Ms. Bhoomika Nair for the closing comments.

Yes. Very thank you to everyone, and particularly the management for giving us an opportunity to host the call. Wishing all the very best, and a very happy Diwali to you and all the participants. Thank you very much, sir.

I will take this opportunity -- I would also like to take this opportunity to wish all of you a very, very happy Diwali and all the festivals around this period. And also, I'd like to thank all the investors and our consumers to this call for posing faith in this brand and continue to allow us to grow this with speed. Thank you very much once again.

Happy Diwali to all of you. Thank you.

On behalf of DAM Capital Advisors Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.