Voltas Ltd
NSE:VOLTAS
Earnings Call Analysis
Q2-2024 Analysis
Voltas Ltd
The management emphasized reshaping the business structure by consolidating project businesses into subsidiaries, aligning with an overarching goal to boost managerial focus on consumer-facing ventures. Domestic project transition has begun yielding positive results, demonstrated by improved order books and consistent execution in line with targets. For the international segment, the transfer process was recently initiated, and the objective to refocus on consumer businesses remains clear. The latent possibility of a future demerger, aimed at enhancing shareholder value, hints at strategic agility and a willingness to adapt corporate structures for optimal performance.
There's a sense of optimism surrounding consumer demand ahead of the festive season, with a narrative of comfortable inventory levels reported both at the company and among channel partners. This is particularly important given recent supply chain disruptions. The company maintains an inventory range of 75 to 90 days, ensuring they are prepared for potential sales opportunities and are not caught on the back foot due to stock shortages.
A considerable portion of the discussion centered around financial provisions, particularly those related to delayed payments within the projects business. While specific cumulative provision amounts weren't disclosed, the executive hinted at a conservative policy for triggering assessments on outstanding client dues. It was revealed that provisions stemming from onerous contractual conditions or project cancellations may be harder to recover due to potential legal settlements. However, there is hope of recovering some provisions from subcontracted projects as the company progresses. No specific timeline was given, but efforts to enhance collection are said to be intensified.
Addressing investor anxieties, especially concerning provisions taken in international business, the management reassured that steps are being taken to mitigate risks significantly. Though there are existing pain points, the implication is that impacts of these issues will be lessened moving forward. Management is approachable and encourages investors to reach out with any unresolved queries.
To conclude, the company appears to be navigating current market challenges with a careful balance of optimism and prudence. Their strategic restructuring and enhanced focus on the consumer segment, combined with conservative financial management and a progressive attitude towards inventory planning, demonstrate a company agile enough to adapt to changing times while steadying investor confidence in its operational resilience and long-term value proposition.
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Ladies and gentlemen, good day, and welcome to the Voltas Limited Q2 FY '24 Earnings Conference Call, hosted by PhillipCapital India Private Limited. [Operator Instructions] 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. Hand over to you, Mr. Deepak.
Thanks. Good afternoon, everyone. On behalf of PhillipCapital India Presents Limited, I welcome you all to Voltas Limited Q2 FY '24 earnings call. Today, we have the best management represented by Mr. Jitender Verma, Chief Financial Officer; Mr. Manish Desai, Head of Corporate Finance; and Mr. Vaibhav Vora, Manager, Corporate Finance.
I would like to thanks management for giving us the opportunity for this call. Now I'd like to hand over the floor to the management for their opening remarks, post which we'll open the for 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 '24 began with a slow economic recovery across major economies but at sluggish pace. The action taken by the central banks across the globe on tightening of the monetary policy by increasing benchmark interest rate has helped pain 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 that further caused some disruption in the 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-led 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 crores due to delayed collection in the overseas business.
Consolidated total income for Q2 FY '24 was INR 2,364 crores, as against INR 1,833 crores in quarter 2 FY '23, growth of 29% year-on-year. Profit before tax and after tax was INR 85 crores and INR 36 crores, respectively. Earnings per share or face value per share of INR 1 not annualized for the quarter ended 30th September 2023 was at INR 1.11 against a negative EPS of INR 0.22 reported last year. The consolidated total income for the 6 months period ended 30th September 2023 was higher by 25% at INR 5,795 crores as compared to INR 4,627 crores in the corresponding period last year.
Profit before share of profits, loss of joint ventures, associates and tax was at INR 352 crores as compared to INR 340 crores in the corresponding period last year. Profit before tax was at INR 280 crores as compared to INR 174 crores last year. Net profit after tax was at INR 165 crores as against INR 103 crores in the corresponding period last year. Earnings per share, not annualized for 6 months ended 30th September '23 (sic) [ '22 ] 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 crores 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 nonconvertible debentures to the tune of up to INR 500 crores for funding the capital expenditure plans. You have already seen our snapshot of results. I'm not repeating that in more detail. As the segment goes, in segment A for Unitary Cooling Products, the second quarter of the 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-plus 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 billings 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%, emits 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, chocolate 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 tepid, 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 #2 position in the industry.
In commercial air conditioning vertical, the quarter has witnessed 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 '23. The segment reported an EBIT of INR 93 crores in quarter 2 FY '24 as compared to INR 76 crores in quarter 2 FY '23, a growth of 21%. And for the 6 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 '23.
Segment result was INR 300 crores in first half of FY '24 as against INR 243 in the first half of FY '23 , a growth of 24%. In segment B, which is electromechanical projects and services, the segment renewal for the quarter was INR 924 crores as compared to the previous corresponding quarter revenue of INR 554 crores, a growth of 67%. These segment results, however, for the quarter reported a loss of INR 49 crores due to a provision of INR 86 crores made on account of delayed collections 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 NAP as compared to INR 475 crores during the previous quarter. Commencement of new projects and planned progressively 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 IOBD for quarter 2 financial year '24 were INR 449 crores as compared to INR 119 crores in the similar period last year. The carryforward 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 30th September 2023, stood at INR 3,368 crores, largely in the UAE, Qatar and Saudi Arabia region.
Total carryforward order book of the segment stood at INR 8,677 crores vis-a-vis INR 5,496 crores of outstanding orders as of 30th September 2022. Segment C, Engineering Products & 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 Corporation contributing significantly to the results. However, our sluggish iron ore market and a slower pace of infrastructure rollout has muted the domestic mining business performance.
In case of textile machinery business, capital machinery rollout from the principles remained positive, although a reduction in [ Jan ] price and deceleration 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 been accelerated expansion -- have seen accelerated expansion over the last 2 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% from washing machine, representing an increase of 0.9% and 1.4%, respectively, over the previous -- 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 level despite higher advertisement spend and spend on BTL activities. Various cost reduction efforts, coupled with increased in-house production of SKUs will improve the overall gross margin, leading to the better profitability for rest of the year.
Outlook. The early indicators of tertiary sales indicate a strong demand during the upcoming festival months. The downtrend of inflation, segment interest rates and a fulfilling monsoon season may help in reviving rural demand during this officious 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 -- for the question-answer session. So I'll let request Manish Desai to take it forward. Thank you.
[Operator Instructions]
Our first question is from the line of Natasha Jain from Nirmal Bang.
So my first question is regarding the EMPS segment. So are these delays in collections happening because we were possibly looking 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. So does it mean that in order to get surety of payment, we might bid for the new projects that probably a lower EBIT margin than historically taken?
If you look at the slowed collections, 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, 1 has to kind of complete because, one, there is a contract, two, there are guarantees given. So we have to manage that.
There is -- 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 provision. So as and when these collections will come through, which we are very hopeful, we should be able to reverse these provisions or 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 committed to continuing with this 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 us in getting project of our choosing and which we would continue with that and hope to not having to face the similar situation. There'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 controls and strategy is being followed.
So should we assume that the new projects will come at similar margins?
Yes, similar or better margins, I would say.
All right. And 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 heard Varun Malhotra narrative that market share loss, maybe on account of not getting discounts or add in then promotional spend. And therefore, losing a bit of volumes there. So just want to get some clarity as to what's the long-term strategy going to be for us from here on?
Natasha, the long-term strategy remains intact -- sorry, this is Manish over this side. Long-term strategy remains intact to have the balanced view both on margin as well as on the market share. The market is becoming more fragmented and I would say becoming more -- sorry, market is becoming more conservative now with the top 7 to 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 a leadership in both market share as well as margin.
Our next question is from the line of Siddhartha Bera from Nomura.
Sir, my first question is on the UCP side. So we have talked about a 20% volume growth and our overall leverage growth has been 15%. So can I just tie where -- how is the growth in [ RSC ] and if you can break into the remaining segments like CR and CAC how the growth has been?
So Siddhartha, our growth in the -- in the AC, we have a growth of around 15% or so. The overall growth that we talk about, the 20% is largely led by the air cooler and the sub commercial refrigerator category like water cooler and water dispenser.
Commercial refrigerator remain almost having a muted growth over the last year. So this is a composition we have. Since the growth in air cooler is in excess of what we are doing in our investor spin result tilting towards a higher turnover, higher overall volume turnover for that matter.
Okay. So 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 1 or the highest 1 for that matter.
Okay. Got it. And sir, going ahead, in terms of the commodity benefits which you have talked about, can you highlight, I mean, in general, do we sort of factoring and get back to that earlier levels of double-digit margins at some point with the benefit? Or do you think given the competitive intensity in the market that may take longer even with the commodities softening now?
No. So what we have written -- what we talked about is we have seen some kind of softness in the commodity price, but the volatility still continued. So in a way, the benefit 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 consistent sales with the supply is going to exit 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 product cost wherein we are using the critical commodities like aluminum and the copper. However, that question doesn't get ruled out by giving passing of this benefit to the end consumers. 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. Sir, lastly, if you can break out the UCP revenue mix into the particular segments, like how much will be RACs and TAC and CR?
As I said, the growth in air conditioner at 15%, overall in terms of volume. And in the case of commercial refrigerators, some categories like water cooler dispensers are in double digit and air cooler being the highest in excess of 15%.
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 the higher side, the value for being -- unit on a higher side.
So between -- in my segment A, still my 15% order will still come from the CAC business, rest all from my traditional AC and the commercial refrigerator and air cooler business. And within that, you'll find that the ratio between them is 18%, 15% or 18%, 17%, 18% and 2% between air conditioner, commercial refrigerator and air cooler.
Our next question is from the line of Pulkit Patni from Goldman Sachs.
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 up 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 just continuing with the same question, can you also better explain like we've been speaking about or we 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 better profitability for this segment? Any sense on that would also be helpful.
So Pulkit, if I want to answer in 2 phases, the provision which you -- 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 in the last quarter as well in some of the period. 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.
So 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 a similar kind of industry or similar kind of framework.
Now having said that, your 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 a situation 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 hopeful we should not see such kind of provision coming back or coming or getting into in the future year. But it's all dependent upon, as I said, the plant, which has been submitted today or the comment kind of discussion or during our discussion with our customers are being confirmed or committed by them.
We have to monitor a full case in our quarter-by-quarter situations. These all provisions are pain to us as well as a management as well as to the investor paternity. 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 in a quarter basis less than INR 1,000 crores. 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 the feel such time we see recovery in the outstanding or in the collection process overall -- overall collection process.
Sir, I'll take the liberty to maybe just extend this. Sir, there are other peers of yours also who have problems in these provisions. But they have some -- they give some visibility that, okay, these orders will get over by x quarter of x year after that, things should get better, anything on that sort? Because this has been a continuing thing. So as analysts, it becomes easy if we can get some direction on when we think the worst could be over.
So if I take you the -- to take it -- this provision we are taking not because of the running projects, these all are coming in to 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 win which we are standing today, probably you can see such kind of pain may continue for the next 2 or 3 quarters, may not be as aggressive or accelerated what we are seeing today.
But if I were to follow the conservatism and you're asking me that overall on a giving what kind of time zone you are looking for into it. So the next 2, 3 quarters, we are feeling that some stress will continue in the international business.
[Operator Instructions]
Before anyone ask the question, Siddhartha from Nomura talk 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 pickup the 20% value growth. That's -- continue the call now.
Our next question is from the line of Dhananjai Bagrodia from ASK.
Congratulation on a good set of numbers. I wanted to ask you regarding holdback, how are we seeing in terms of a, demand? And b, how do we see the year end or next year along those lines? And when do we think we'll start seeing a profitable regarding this in market share?
So if I look from the profitability perspective, if I want to go in a straight line method, 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 also -- will remain 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 breakeven a year which is '24, '25 on EBITDA front.
And that's what our efforts continuing over there, and we're hopeful that we should be able to get into -- get to the particular breakeven by '24, '25. 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're having earlier was purely based upon the Direct Cool Refrigerators, which means that going forward, although 10% what we kept ourselves as an objective in the year '23, '24' 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 has largely been affected by the COVID 2 years, which has disrupted the overall distribution as well as on the targeted path, what we kept for ourselves.
Then maybe I'll follow up with an easier question. So what would be a detailed touch point, let's say, last year and this year now this quarter year-on-year?
If I look into it, we used to have in the range of [ 6,000 ] to [ 7,000 ] which has now gone beyond [ 10,000 ].
And lastly, what is the CapEx amount we are thinking for this year?
Current year, there is no much CapEx, I would say, is a marginal or the normal CapEx will be there at the plant. But following year, you may see some kind of CapEx, given that we are going for more and more -- capital are more and more, localization of the units in our Sanand factory for VoltBek. I hope your question more was on VoltBek because you continue to do the VoltBek front.
CapEx for the...
But for the CapEx. So since you're continuing VoltBek side, so I have given you a reply on the VoltBek side. On the Voltas side, yes, the CapEx plan is in excess of INR 500 crores to INR 600 crores, covering both capacity expansion for our air conditioner as well as commercial refrigerator along with PLI-led investments, which we factored in.
Our next question is from the line of Abhijit Akella from Kotak Securities.
Just on the E&P segment, if you could please just help us with the total maybe quantum or the value of the projects that are currently under stress if that's possible to share that? And also how much provision have you taken so far on the...
So as I said, Abhijit, we would not be able to provide any quantum on this matter. However, we are trying to say over there is the -- and the amount of provision what we have taken is anyway reflecting in our financials. Going forward, I just answered to Mr. Pulkit over there is the -- for the next 2 to 3 quarters, we have seen 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 provision as we move forward. And we are hopeful that our engagement with our customers on this ground should yield the favorable results as we move forward.
Understood. And the other question I just had was on the UCP...
Again, sorry, Abhijit, why I'm saying it's a difficult to provide a quantum because some of the events which are taking place are not in the orderly course of business, like guarantees, invocations and all are not in the orderly 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 it. So that's why I said very difficult to provide a quantum. Otherwise, we do not have a reservation individual for that matter.
Sure. And on the UCP side, just within this 15% growth that you've reported revenue growth, how much would just RAC growth have been and given that the market share that we have reported about 19-odd percent, I believe last year, it was about 22-odd percent for the corresponding period. So should we assume that 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 at 15% for air conditioner. And the volume growth is almost equal. That's why I said the -- since there is no across or uniform price action which took place over there, the volume and value growth collaborates to each other. The second question, you talked about the channel participation in terms of the MBOs and all. I would say that the -- not much significant change took place between the channel participation. Yes, the trend reflecting the distributors strength is going down or distributable contribution is going down, getting replaced with the organized and the modern trade channel partners, including EBO as well.
Got it. Sorry, just also to just clarify. So within UCP, RAC sales have also grown by 15%. Is that correct?
Yes, yes, yes. And it has both volume as well as value growth.
Our next is from the line of Aniruddha Joshi from ICICI Securities.
Sir, in 1 of the earlier calls, you had indicated the steep increase in [indiscernible] post PLI is going to impact the overall ROCE of most of the players so just wanted to delve deeper on that and understand so how long do you see the impact on ROCE, whether it will be short-lived or do you see the impact on ROCE sustaining beyond 3 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 ROCE maybe 200 bps, 300 bps or how much the impact will be? So that is question number one. And question number 2 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 let's -- excluding, let's say, motors and compresses, what are the total capacity for each of the products, like 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? Yes, these are the 2 questions.
Yes. So let me answer your second question first. You say about the fully-backward integrated, yes, in terms of the heat exchanges and the cross-flow fan some of the plastic molded components, it would be a backward integration. When you -- I just wonder what you mean by 100 backward integration to this component because we are not going to manufacture the copper or we are not going to extract copper from the mines and either we are not going to manufacture plastic to have the -- these components in place. Leaving aside these 2 components, all manufacturing, value addition will certainly take place as a part of our backward integration. In terms of -- you talked about the ROCE impact, the expenditure will go in a phased manner as we build up the capacity. And I have already clarified earlier that the overall capacity what we are planning is around 1 million.
And if I were to cater the South and West market for the same, unlike other players, we may not see under absorption of the capacity to a high extent. Yes, but it is difficult right now to give any impact on the ROCE, assuming that if I'm fulfilling this condition with the PLI, it may not have a significant impact on the ROCE, definitely since my capital expenditure would be higher and the recovered payback time is going to be 7 to 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, in any number you would like to put, let's say, 200 bps or you don't see that as a -- or it's difficult to say?
I would say the impact currently, let my construction gets over and let's start with the commercial production from the factory. And at that point of time, it should be more clear in terms of what impact will be there on the ROCE side. If I have to carry out a thumb calculation, probably it won't be appropriate to provide that information.
Lastly, what is the total...
[Operator Instructions]
Yes. Sir, lastly, what is the total industry capacity right now? And where do you see the industry capacity, let's say, after a period of 2 years when most of the announced projects get over?
Aniruddha, I'm not sure because people are talking about capacity additions, are they taking -- doing it in a 2 phase 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 capacity for that matter. We can talk about our own capacity, which we're looking for it. The questions then comes that how the PLI scheme will benefit or will have -- the general question is any excessed supplies and 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.
Our next question is from the line of Shrinidhi from HSBC.
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.
If I -- 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 domestic scenario. In a domestic business, I would say electrical and water projects what we carry normally. They are funded by the central and the state governments. In MEP, it's a mix. If I'm doing metro, you can say is again, our entity, being funded jointly by central and state. And for the private consumers, it will be a nongovernment entities.
Great. And in this -- all these projects, what we do in the domestic market, how much of the contracts where in Voltas directly have contract with the authority, which is spending? And then how much of the cases it is some -- there is a large contractor and you are a subcontractor to it?
Leaving aside, a few electrical -- leaving aside, water and the 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 1 major contractor in between you and like eventual party who is investing.
Eventual party may be either investing or maybe building for its own captive use? For example, data center, right? We are constructing data centers which is putting it for the use. He appoint a main contractor and to whom with we associated for carrying out a specific task.
And on the provision, 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. So over time, we rarely get to hear that reversing of these provisions, maybe the cycle but what I want to understand is that in the last few years, have these provisions turned out to be real cash cost? And rather than delayed collection, it was maybe the underestimation of cost overruns that you basically call 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 -- when I'm saying we're providing for the delayed collection, 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, the last accelerated provision, I would say, for the last 3, 4 quarters. And the reasons attributable to may be 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 and that's why we are going with the reason of delayed collection and not anything else for that matter. The situation is how long it will continue, probably, as I said, to the earlier participants, we're hopeful that the pain may not last for long.
Great. And just if I can build on to this question, is there a kind of like a cumulative provision number that sit in balance sheet, which can eventually come back if things improve? Or the cumulative number is not very different from what we actually book annually.
No, no, cumulate numbers year-on-year will definitely be higher than what I'm doing in year. But the question is that -- the other question -- the earlier question what you asked, are we having a reverse? So yes. We have a reversal. But while quoting to the probably investors, we are more transparent, or 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 which we are taking the provision. But the overall P&L talks about the net number, for being transferred to the investors, we always talk about any specific projects or the cross amount, which we're taking in the provision.
And last one, if I may, sir, you talked about being more cautious in terms of international projects, how you take those projects. But apart from being selective, are there any other things that you have changed in terms of where you do this international business so that 1 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 1 example because I don't require to narrate more on this call or any which way around. The current deals which have been earlier the unconditional, now it will have a conditions 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 1. 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 be 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.
Our next question is from the line of Keyur Pandya from ICICI Prudential Life Insurance.
I 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 this is 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, it looks like the inventory at the channel partner rate is much comfortable position, and we are seeing good amount of intense coming from the channel partners for the forthcoming season before our festive seasons. As far as the inventory with the company is concerned, yes, it is in the range of 75 to 90 days, but that generally need to be considering the supply chain disruption, which we have seen in the past. And to safeguard, I would say, a future sale because we don't want a situation that we are losing sales on account of not having inventory with us in the opportunity time.
Okay. And on the project side, the way the difference is there in, say, domestic and overseas order book. Similar is the execution, I mean how are the domestic projects doing? And will they be enough to offset all these kind of one-offs 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, ROCE as well as on the EBIT margin. Hopefully, in the next year, we can see reaching closure to what we kept ourselves as a target to be there in the project business as well as the domestic operation is concerned.
Our next question is from the line of Bhavin Vithlani from SBI Mutual Fund.
So this question is on the total provisions on these projects done because when I'm looking at the cash flow statement for the 6 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, just wonder from where you are saying INR 360 crores of collection last year?
No, no. The provision for doubtful debt was INR 360 crores last year, whole of last year. And for the 6 months in your cash flow statement, that number is INR 179 crores.
Yes. So if I -- 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 crores. How much of this is the provisions for the delayed payments and where you believe that there is a good chance of it return -- being return back and how much of this is actual loss which has been incurred for?
So I would say that the -- I'm not going to witness I'm not going to comment on the cumulative provision amount, which you talked about. But if I take out the INR 250-odd crore or INR 260-odd crores of provision, which you picked up because of the onerous conditions, wherein the project got either canceled by the contractor. Or maybe under the DLP period, the main contractor has -- and cash or bank guarantees. These are the provision 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 last -- the quarter in a similar period last year. The provision what we have picked up for the project were in the main contract, the client has stemmed as a main contractor. The safe project has been reverted to Voltas being the subcontractor.
So hopeful that we should be able to recover not the entire provision among but should be able to mitigate or should able to recover some of the provision what we carried out and the said, I would say, for the said project because when we carry out the provision, it was outstanding against the main contract and not to the main client. But I'm 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're hopeful that the collection should start flowing into it in the near future.
I would not like to give Bhavin Bhai, any time lines 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 win which we are giving information about the provisions we're hopeful that we'll definitely provide you the information about the reversal as well when a substantial amount gets reversed in the future period.
Sure. Just 1 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.
So I would not like to narrate the policy Bhavin Bhai, 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 a conservative policy for us, even a minor stress in the overall collection triggers the assessment on the entire outstanding 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. Hopefully, this is the last question because we reached to our closing time.
Yes, sir. Our next question is a follow-up question from Keyur Pandya from ICICI Prudential Life Insurance.
Sir, just 1 follow-up. I think last year, all the project business -- domestic project business subsidiaries where, let's say, consolidated into 1 subsidiary. And I think singular arrangement has been done for overseas business as well. So what is the future plan of action? I mean, post all project businesses are into 1 or 2 subsidiaries. Do we plan to demerge it or -- so any thoughts on future plans on this demerger?
So Keyur, the primary objective is to consider the business in the subsidiary company and have the management bandwidth released for focusing upon the consumer-facing business. So that was a prime objective when we start doing this transfer of the -- some of the verticals to 100% subsidiary company.
Domestic transfer what we payed out started giving some kind of positive results in the last 6 to 9 months, our order book has gone up. The execution is taking as targeted or as planned. And the results are also showing or effecting out of it. International business, we just announced in the 1 quarter before. The process regarding that has already been started -- has already been initiated, and hopefully, should get over in the near future. But the entire objective, as I said, to release the bandwidth time for 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 will get cumulated in a much deeper way. And considering in the mind -- or keeping in mind the stakeholders' order interest into it.
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 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, such kind of impact we'll see -- I would say, 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 happy weekend and [ 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.