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Ladies and gentleman, good day, and welcome to the Voltas Limited Q3 FY '19 Earnings Conference Call, hosted by IDFC Securities Limited. [Operator Instructions]Please note that this conference is being recorded.I now hand the conference over to Ms. Bhoomika Nair, from IDFC Securities. Thank you, and over to you ma'am.
Yes. Good afternoon, everyone. On behalf of IDFC Securities, I would like to welcome you to the Voltas' Q3 FY '19 Earnings Call. The management today is being represented by Mr. Abhijit Gajendragadkar, CFO; Mr. Utsav Shah, Head, Corporate Finance; and Ms. Asawari Sathaye, Corporate Communications and Investor Relations. I would now like to hand over the call over to the management for their initial remarks. Post which, we'll open up the floor for Q&A. Over to you, sir.
Thank you, Bhoomika. Welcome, everybody.Analysis of results quarter and 9-months period ended 31st December, 2018. It was a mixed quarter for the global economy. While on one hand, the Fed is signaling a pause to increasing its policy rates, on the other, growing trade tensions between U.S. and China and uncertainty over Brexit has clouded investor sentiments. Reports of a Chinese slowdown is likely to impact global markets. The consequence was the strengthening of the U.S. dollar and the subsequent negative FII inflows to India. The recent OPEC decisions on controlling oil production to increase prices has revised growth prospects in the region. In the recently announced interim budget, the government expects India's economic growth to accelerate to 7.5% in 2019, '20. The transfer of subsidies to farmers and increase in exemption limit will increase disposable income and is expected to have a trickle-down effect on increasing consumer spend. The trust on infrastructure projects will, over a period of time, benefit our projects business.The latest rate cuts from the RBI with a neutral stance seems to be a step in the direction for reducing interest rates. During the 9 months ended December 2018, Voltas achieved a turnover of INR 5,000 crores and a profit before tax of INR 512 crores.Analysis by segment. We present below our comments on the performance of our business segments.Segment A, Unitary Cooling Products. This fiscal has been very challenging for the industry. As you all are well aware, the performance of this segment was muted due to erratic summer conditions. Adding to this, not only was the Diwali festive season very soft, but we also did not have a strong second summer. With higher inventory in the channel as well as with manufacturers, the pressure on prices and, thus, on margins continued to be high. Increasing input costs and depreciated rupee added to the industry's woes. One must also remember that we're coming off of a very high base of the previous year, with the same quarter last year recording sales growth of 32% due to pre-buy on expected changes in energy efficiency norms for fixed-speed AC. All of this has led to the industry degrowth. In such an environment, Voltas continued to be the undisputed market leader, and as the #1 brand in the room AC segment, increased its market share across multi-brand outlets to 24% YTD from 22% in the same period last year. The company continues to introduce cost-effective and smart products with attractive consumer finance schemes. This has helped the brand to remain on top of the mind for the customer. During the quarter, Voltas expanded its brand shops in cities, such as Ranchi, West Bokaro, Faridabad and Jamshedpur. The brand shops will house all the latest consumer durable products, including ACs, air coolers, commercial refrigeration products from brand Voltas as well as the white goods, such as refrigerators, washing machines, microwave ovens and dishwashers from brand Voltas Beko.The company also announced on 10th February, its intention to start construction of the new manufacturing facility spread over 65 acres in Tirupati. This facility will initially manufacture and assemble air conditioners and related cooling products. Continuing its trust on research and development, Voltas aims to create technologically advanced products, which are expected to start rolling out from the second half of 2020. The chosen location provides dual benefits of superior market access and cost-effective connectivity via road and port. The proposed factory will cater primarily to the south and west markets. The company plans to invest over INR 500 crores over a period of time while simultaneously creating local employment opportunities in the region. Air coolers faced even more difficult 9 months, given their very seasonal nature. Nonetheless, based on recent independent retail audit, Voltas is now the #2 player in the air cooler category. Segment B, Electro-Mechanical Projects and Services. Segment revenue for the quarter was higher by 16% at INR 875 crores as compared to INR 753 crores in the corresponding quarter last year. Segment result was also higher at INR 69 crores reflecting a margin of 8% coming from better quality carry forward orders and efficient execution. Order book of the segment stood higher at approximately INR 5,000 crores as at 31st December 2018, as compared INR 4,850 crores in the corresponding quarter last year. International operations. This business has been recognized recently by a number of awards, including the District Cooling Company of the Year and the Facilities Management Company of the Year as well as the MEP Contractor of the Year. Besides MEP, we are now looking at strengthening our order book on projects in facility management and water management solutions. Order inflow for the quarter is at INR 340 crores and orders on hand are at INR 1,900 crores. With oil prices picking up, Middle Eastern economies are showing signs of a small recovery. One of the company's subsidiary in the Middle East is currently executing some of its MEP projects as a subcontractor, wherein one of the joint venture partner of the main contractor has filed for compulsory liquidation in U.K. in January 2018. There have been delays in certification on these projects. Based on management assessment and prudence, a provision amounting to approximately INR 13 crores has been made and disclosed as an exceptional item. The management will continue its efforts to recover the same. Domestic Projects. The Domestic Projects business continued its steady performance this year, with majority of orders coming in from the electrification sector and infrastructure space. Our strategic focus is on procuring government and government-funded projects with reasonable assurance of cash. Domestic Projects booked INR 731 crores of orders in the quarter with pending order book standing at INR 3,100 crores. With the increasing support and an approaching time line on electrification program through the Saubhagya scheme, we are seeing even more tender announcements and completion for rural electrification projects. The recent announcement in the interim national Budget 2019, on investments in infrastructure, smart cities, cleaner water, healthcare and educational institutions is expected to increase opportunities. Segment C, Engineering Products and Services. The segment performance was steady in the quarter at INR 22 crores in comparison to the corresponding quarter last year. As highlighted earlier, the textile industry is passing through a difficult period, and our focus on after-sales business continues. In Mining & Construction Equipment, Mozambique operations remains the performance driver.Voltbek Home Appliances Private Limited. The JV launched a basket of products in the second quarter, including 44 SKUs of refrigerators, 40 SKUs of washing machines, 12 SKUs of microwaves and ovens, and 7 SKUs of dishwashers. The launch was supported by a strong product and marketing campaign. This campaign focused Voltas-Beko as partners of everyday happiness with the consumer benefit of nutrition preservation for refrigerators and cleaning efficiency for washing machines. Simultaneously, the JV is also building up its distribution network with special efforts underway this quarter. The civil works have already begun in the Sanand factory, and the products are expected to roll out from end CY 2019. In summer, while the air-conditioning industry has faced headwinds in the current year, the longer-term prospects will be driven by the increasing consumer confidence, disposable income and lower penetration. Our thrust for energy-efficient products and large distribution network will enable us to benefit from this strategy. On the projects side, we remain focused on securing good-quality, commercially viable, risk-mitigated orders. Thank you, and we're now open for questions.
Sure. Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Renjith Sivaram from ICICI Securities.
This JV, when we look, it has around INR 30 crores in terms of losses, which have been reported. So what is it? Was there any one-off in that? Or should we assume -- what kind of run rate should we see going forward? If you can throw some clarity on that JV portion.
I think there are 2 clarities that I can say. I think the number of INR 30 crores that you have taken is the total profit of all of Voltas' joint ventures and associates. So it includes -- we have 2 other JVs within international business portfolio as well. So this the combined number of all of those JVs. That's the first clarification. Secondly, if you look at specifically, I think you are referring to our Voltbek joint venture.
Yes.
You may recall, and I think as we have even stated in the note that we have circulated to you, which we just read out, the JV had a launch in the -- in September of this year. And immediately after the launch, there were a lot of expenses in terms of brand building and marketing, primarily to announce the launch as well as to announce the product, to educate the consumers on the product features and also timed it for some of the festive season sales, which happened around November when the Diwali season was on. So it's a combination this. There has been a lot of advertising and market-related spends, which have happened during the quarter, which have also contributed to the number, which you just spoke about. So while we are not giving you the exact number of how it will be in terms of the quarter, if you would see this number on a sequential basis, you'll get an idea of the -- some of the expenses that have hit the P&L in this quarter.
But of this, how much is pertaining to that Beko JV of this INR 30 crores?
Well, I think we will not split it, but...
I think Renjith, Mr. Abhijit has already given you a fair idea. Please see sequence in sequence, and you'll, more or less, be able to reciprocate that number.
Okay. And also we haven't seen much reduction in the capital employed. So what should we read? Is there inventory still in the system? Or what's the reason the capital employed is still not reduced much?
I think, we have been, in earlier calls also, mentioning that it would take up to the quarter 4 for the inventory to come down. Primarily, I mean, the AC industry, as you're aware, we have very strong sales particularly in quarter 1 of the year and quarter 4 of the year. Quarter 2 and quarter 3 are traditionally being very lean quarters. I think that trend would -- has not changed in this year as well. So while there has been some movement in the inventory, the quantum of sale -- I mean, if you just look at even the number of our sales revenue for 9 months and just break it up into quarters, you'll get a fair idea of the -- of how the -- of how much of the seasonality is there in the air-conditioning industry.
Okay. Because in the last call, you had mentioned 2.5 months of inventory left. So how much is now, as on this quarter, of inventory?
2 months of inventory.
The next question is from Rahul Gajare from Antique Broking.
A couple of questions.
Rahul, can you be a little louder, please?
Is this better?
Yes, this is much better now, Rahul.
Okay. Sir, basically, there was some price hike, which were planned. So wanted to know, what has been your thought on that? And second thing is, see what has happened, as you know, your peers have reported double-digit growth in the AC business. Now I understand that could be a function of a lot of things. What is your thought on the industry growth rate in this quarter?
Well, either has been...
Those are the 2 questions.
If you are referring to this quarter, I presume you are just referring to quarter 3.
Sure.
Right. I mean, I almost think that my answer overall would be on similar lines to the way I answered the earlier question, that this is really a very lean quarter. To look at growth rates and even any price increase, one has to look at the summer months and the months when we really sell higher volumes of air conditioners. So I would think that growth within one quarter, et cetera, particularly in a quarter, which is a very lean quarter, I would think is not the right way to slice and dice the data.
Okay. That's okay. But you could give some sense on how the market has performed.
Overall, for the 9 months, the estimates that we have is that the industry has degrown by 4%. That is based on independent secondary surveys of secondary sales. And that is the figure of how the entire industry has degrown.
Okay. Sir, while industry has declined by 4%, you've declined by -- or you've been flat, basically. Now the market share that -- number that you have given, you have given the market share number for the 9-month period, which is 24%. In the second quarter, you indicated the market share number was closer to 25.6%. And so can you help us with the exact market share of this quarter?
Well, I think we have even looked at it, and I would say that it is a representative market number that we've given you in terms of analyzing the market share for the 9 months of the period because it includes the market share effect of -- I mean, it's just mathematics. If you look at some of the big quarters then the market share number would change. And I think that would be a more better indicator. Both quarter 2 and quarter 3 are relatively lean quarters, and a little sort of you know movement here and there could upset the market share since the denominator tends to be much smaller.
The next question is from Jay Kakkad from Ambit Capital.
Sir, has there been any impact of increase in custom duty during the quarter on the cost?
On the cost, no. I think on one hand, one of your colleague just asked a question about inventory. So I would think that a lot of our material would have been bought -- has been procured, mainly planning for some of our high-season months. And so there would be very minimal amount of the impact, I would say, on the -- on the custom duty. Though, I would -- I mean, definitely the question would be if you're asking in terms of its impact over the longer run.
Yes.
Yes. It is an impact since that the custom duty has gone up. And if you recollect the way it has gone up, it has gone up on completely built units. So really the manner in which we source our products, the manner -- and what size we source, would definitely -- we are relooking, as I'm sure everybody in the industry is relooking at in the light of the hike in customs duty.
Sir, just in addition to this question. So since you source so much from outside of India, and you get volume discount because of your huge volumes, so then why manufacture now? Wouldn't this lead to reduction in your sourcing benefit? Or -- I'm just trying to understand this manufacture decision now versus sourcing earlier.
Partially -- you have partially, I think, you have the answer to your question in the first question itself. You know, on one hand, you said what has been the impact of custom duty.
Yes.
There we have -- and when you say that we have been sourcing a lot from overseas, from outside of India markets, we have been -- our sourcing is a mix of some of the critical components that we source and some amount of completely built units. So some of those critical components have -- will continue to be sourced from other countries, given the economies of scale of manufacture of these components in these countries. A good example would be compressors.
Right, right.
I had also, in my earlier calls, mentioned that over the longer term, the entire thrust would be on localization as a theme. That is also not just because of the factors of cost, but it is also because of factors of planning in terms of being more responsive in a quicker time to any market conditions, et cetera. So it's a combination of all of these decisions which would have gone into the decision to invest in a manufacturing plant at Tirupati. So even if you see our Pantnagar plant, our model had been to import some of the critical components and assemble the product at our Pantnagar factory. And -- so it is not true to say that a lot it was completely built units. It was a combination of both of these.
Yes. Why I was asking this was because last year, you did around INR 800 crores worth of...
Sorry. I lost your line a bit in the last question.
Sir, sorry. Am I audible?
Mr. Kakkad, I'm sorry to interrupt you...
You're audible. I think we lost your last sentence.
Okay. Just that last year, we did around -- you did around INR 800 crores worth of imports. And if the impact of custom duty is very less on your -- in this INR 800 crores worth of imports, then manufacturing decision in India, wouldn't it impact your return profile? Is what my...
I think the INR 800 crores of imports is a figure, I presume you have picked up from the annual report. Am I right?
Yes, sir. Yes, sir. Yes.
Right. And it would include all of the imports, as I mentioned. It would include imports of completely built unit as well as imports of some of the critical components. Now to hit a specific answer to your question about linking it with custom duty hike is that the custom duty has gone up from 10% to 20% on completely built unit. The increase is less. There is an increase, but increase is less when you compare for some of the critical components. So it's a combination of this. It's something which we watch out for, and we do, do these sums in terms of prior to taking the decisions on make versus buy.
[Operator Instructions] The next question is from Venugopal Garre from Bernstein.
I just wanted to continue on this question on manufacturing of air conditioners. Now what I wanted to know is this factory, you mentioned close to 1 million units that you intend to sort of have in terms of capacity. What is the level of integration of the product, by which I mean that, is it going to be initially assembly? And thereafter, you would move on to manufacturing heat exchangers and the entire thing internally, except compressors? And if that's the case, how does it map for you in terms of your existing sourcing, which a lot of you do -- which a lot of it you do from India? So I'm assuming this will be a main sort of a factory where you want to do everything on your own, even from an India perspective. Is that the case? And I'm assuming this will lead to some margin benefits too. So that's my first question.
Okay. I think you have a number of stuffed questions within the main question. So let me try and piece it one by one. I think the first thing that I would like to answer is really in terms of the factory and the location. We have a factory, which is located in Pantnagar, as you're well aware, and this has been largely an assembly operation. And India is -- as you know, is a very large country, and we have particularly a product which is very seasonal in nature. So with the one factory, we have had to transport the product from north to many other parts of the country. And sometimes, just given the length of the distance that is to be covered, it takes a few days to transport the product, particularly to the markets in southern India and parts of western India. One of the advantages, which we see of having a factory in another location, in the southern part of the country, is in terms of the logistics cost, not just the logistics cost, but also the logistic time and maybe other opportunities, which will be fall-out opportunities in terms of how we can rejig and reconfigure our distribution setup in the light of having to distribute from 2 factories over a period of time rather than just one factory. So that's the first advantage. Obviously, we will be investing the amount that we mentioned over a period of time, starting out as an -- initially as an assembly operation at Tirupati and then gradually moving on to other levels of manufacturing. That is the plan. And the advantages as I've enumerated in terms of lead times, in terms of logistics, et cetera, one would also benefit. The other advantage which is, I think, in our press release, which I've also talked about is, that this -- that the location of this plant also offers connectivity to some of the ports on the eastern side of the country. And that would be an advantage in terms of sourcing some of our components, which typically come again from China and other countries in Southeast Asia. So that would also be another advantage. So this offers us an opportunity now to really relook at our logistics network, and how we move material around this line.
Okay, okay. Sure. My second question is on Voltbek. I can -- I understand that you would not be keen to share the initial losses and numbers, et cetera, which we'll anyways figure out over the next few quarters. But if you can give us a qualitative flavor because the launch happened very, very close to the Diwali season. So what I wanted to know is in terms of the quantum that you wanted to sort of -- you reported and wanted to sell, et cetera, how has the reception been from the distributors? That's number one. And number two, any peep into the initial retail sort of sales? Or any feedback from customers that you've got in your service post the launch? Anything would be of help. That's my second and last question.
Right. I think, I would say that, as you very rightly put it, the launch of these products happened sometime in mid-September. And as I mentioned in response to an earlier question, post the launch, we have been supporting the launch with a lot of marketing campaigns, both in the form of mini-launches in different centers across the country as well as in terms of advertisement and other marketing support. So that has initially helped to build the -- or at least build the awareness about the brand and build the awareness that the brand Voltas-Beko is in the market, which is with refrigerators and washing machines. Post the launch, of course, the product has been -- is being placed across distributors and various dealer points. What also happened was that some of that start was -- well, it took time in certain parts of the country, particularly since many of the retailer's shelves were already blocked for the Diwali festive season. And therefore, we had to work with the distributor -- or with the dealers, particularly in terms of renegotiating some of the retail space. That's on the distribution side. In terms of the product feedback from the customers, the customer feedback has been good. The customers have felt that it's a technically superior product. Many customers have also commented on some of the look and feel of the product, which feels very contemporary. The designs feel fresh. The advertising had also been very well received, and I think one of the features of any decent launch, I would say, is for the advertisement to be noticed. So I think that has happened. You will find that there have been -- these ads are being forwarded on YouTube, et cetera, so through the social media. So there is a lot of buzz created around the advertising. So the initial awareness about the brand has been good. The distribution efforts continue underway. Another thrust of our distribution effort that we have talked about in our write-up has also been around the brand shops because we have always been saying that with only air conditioners -- sort of combination of air conditioners and commercial refrigeration, we had a limited number of brand shops. Now many of these brand shops are now been offering our entire range of products. So we have been looking at opening these brand shops in many other cities of the country, also in tier 2 and tier 3 cities of the country. And that is another way that we are making the brand very visible across the length and breadth of India. As I think it's very obvious, I would say that we are in an investment-phase in this chain. So investment, I would say, not just in terms of money in the factory, but investment in terms of brand building, marketing brand, product awareness, customer feedback and everything else which really takes to make it a superior product, not just in terms of its look and features but also in terms of its performance over the longer term. Did that answer what I think your question was?
Yes. I think broadly, I get a color. I mean, it would have been great to hear numbers, but I think it's probably too early to ask that so both retail level as well as distribution, but maybe in the next couple of quarters.
The next question is from Keyur Pandya from ICICI Prudential Life Insurance.
Sir, I have 2 questions. One is, because -- so the inflation that we have seen is because of the RM and currency and second is because of the customs duty. So the current season sale which is being done in Q4, is it being done at higher prices to pass on that inflation?
I think your question is very -- is a little inaudible. I think there is some problem with the line, probably.
Is it audible now?
Yes. You were referring to raw material. I'm not sure what...
So my point -- so we have seen RM inflation and price -- and cost inflation because of the increase in customs duty. So are they being passed on in the current quarter for the new season? That is first question. And second question is the inventory, as you are saying, which is still above normal level in the system, so would that be in the distribution or would that be with the company.
So I would think that -- well, the second question -- the second part of your question is where is the inventory. The answer is it is both at the company level and at the channel level. I think it is -- in the earlier calls, we had mentioned to you, and we have then told you that the distributors only take up a certain amount of inventory because it also involves a tie-up of capital for the distributors. And so I think everyone in the company -- I mean, all the companies in this business, they do have a level of higher inventory. The second part, I think, why you have said is in terms of price hikes. I think that's, in a way, a kind of an ideal world because as -- if we have seen one of the things, which has been a feature of this industry, particularly this year, it has really been that the sales have been very slower. In the response to an earlier question, we talked about a figure of degrowth of the industry. So I would think that what -- the effect of all of this has been to make the market much more competitive than it was. I mean, it is a competitive market. So there is a number of brands in the air-conditioning segment. And with the sales being slow, with the industry degrowing, naturally, the intensity of competition has increased. I have also been talking to you that from time and again there are always competitive activities by one or more competition, both at the regional level as well as at the national level, which further tend to have its own effect on prices. So in all of this context, I think while we have been having some selective price increases over the last 2 or 3 quarters, particularly in the response to one of the other, as you know, increases in terms of cost, I think everyone would be waiting for a good season. Everyone would be waiting for the industry to come back on track for the summer season to set in. And I think it is only then that the pricing decisions would be -- would unfold as we speak. One other factor, of course, which -- I think which we have talked about in earlier calls has also been that, particularly for fixed-speed products, there has been a rating change from January 1, 2018, which, obviously, meant that the product that is being sold as a 3-star, fixed-speed AC is a much -- I would say, much more energy-efficient product as compared to the same product being sold a year back. So it's a combination of all of these, which would -- which have led to the industry's situation what you see today.
The next question is from Prashant Kutty from Sundaram Mutual Fund.
I just wondered, in the previous conference call, you've spoken about several measures being taken in terms of -- to probably improve the local sourcing part more significantly and taking longer-term steps towards improving your -- or reducing the volatility in terms of margins. Just wanted to know, on what part of journey it is exactly? One. And the second part being, incrementally when you look at margins going into the seasoned quarter, are we still on track with regard to the layout of that margin trajectory of 11%, 12%, which you're earlier talking about?
I would take your first question. You were asking what is the local sourcing and where are we on that journey?
Yes, yes.
[ Well, multiple ] journey update. I think it would be a -- some of the actions are more spread across quarters and -- but we are progressing.
Okay. No, the reason for asking that is, we've seen a sequential improvement in the margins without really no change in the overall top line performance. So just trying to understand...
You are saying -- alluding to the improvement in the EBIT margin percentage from 6.3% to 8 -- to over 8% in this quarter. Am I right?
Yes. That's right, sir.
So I would think that, that's a combination of factors, including competitive intensity, spends, et cetera, marketing spends in the quarter. But both are relatively lean quarters. So on this journey of local sourcing, we have been -- as we have said in earlier calls, we are investing in our own molds for some models of IDU, particularly the better selling models of [Technical Difficulty]all of this is work in progress right now. Some of these actions are more medium term in nature.
Sir, sorry. I think this got cut off. We couldn't really hear you. Apologies.
So I would say that -- did you get my point relating to the molds?
No. I think it got cut off. Sorry.
So just to repeat what I said for the benefit of you and maybe for the other, as I have told you that we have been investing in our own molds, both for indoor units as well as for some of the air cooler models. It's work in progress, and these molds we are trying to bring on production at the earliest. Some of even in time for the seasonal -- it will be a big step in terms of localization. So the IDUs, which were imported from China, would then be -- some of the IDUs would be made locally. In terms of some of the other longer-term actions, in terms of localization, in terms of the [Technical Difficulty]there with you. So it's a combination of all of these medium-term actions that we talked about when we mentioned about localization.
Sure. And the second question, sir?
Yes. Again, you have got cut off, Prashant. I don't know if I'm hearing.
Yes. I was just referring to the second question which was just asked about. Going into the seasoned quarters, will you still maintain that 11.5 -- 11%, 12% kind of margins that you're talking about?
Yes. I would say on a combined basis for the year-to-date basis, this is -- we are -- we have always talked about a margin in the range of 11%. I think we would be in that -- I mean, we would stick to that range right now.
The next question is from Sandeep Tulsiyan from JM Financial.
Sir, my first question is pertaining to the price increases, just sorry to harp on that particular aspect, mainly what we're trying to understand is based on the current competitive intensity that you're seeing in the market and whatever increases you've seen on the cost side, be it higher forex rates or partly import duties on the CBUs that we import, do you think all of it can be completely passed through in form of price hikes over the next 1 or 2 quarters? Or do you feel the channel inventory and then competitive intensity is quite high and some of it needs to be absorbed by the AC manufacturers?
I think you started your question by the phrase that "Sorry to harp on it." Now when I give the answer, I would also start with the same thing, sorry to harp on it. I would say that -- I think you've touched upon all the right points in your question. And I think you also partly answered that question. The price increase is in a way -- we are in a market today -- I mean, as today, as we speak, where we are waiting for the peak season, as we call it, which will -- which would be starting from, say, March in the south and then the summer season sort of moves north through all of India. So it's really how the season unfolds. It's really how much the competitive intensity is. How quickly the products fly off the shelf in a manner of speaking. That will really determine the ability to increase prices to be able to get the right price. We have no doubt -- like any other manufacturers, we have no -- we are aware of all of these factors that you referred to. There have been significant price -- cost increases added. I think -- and you've talked about all the factors. So I will not repeat those factors. But yes, it is something that we keep, wait and watch. And wherever we have opportunities, either selectively, either in terms of a model which has certain unique features, either in terms of a region or in terms of combination of the 2, we have been very proactive I would say, and we have taken the right level of price increases. So it is not one across-the-board decision. It's more product, region type of a price increase.
Understood, understood. The second question, sir, is pertaining to the Voltbek JV. Based on the investment that we are making in Sanand, instead of fixed costs would increase in FY '20, and also the higher E&P expenses would continue at least for a few more quarters. So what is the fair revenue run rate where you think this JV would breakeven? And from there, probably, we can look at positive contribution from Voltbek.
I would say -- I mean, the first thing -- I mean, when you talk of revenue run rate and cost hitting the P&L, I'm sure you are aware that this is a JV. And so in terms of the accounting standard, what we really have for this JV is a single-line accounting of the net impact of all of what you have referred to. So the increase in cost, the increase in advertising spend, et cetera, will be in the Voltbek financials and will not be -- I mean, the net effect of that on a single-line will be in the Voltas' financials or at least the proportionate set's share of Voltas in that will be in the Voltas' financials. That's the first point. The second point, I have also mentioned that this Voltbek joint venture and the Voltas-Beko brand, we have just launched in the month of September, and we have said that we are in an investment phase as far as this entire venture is concerned. And we expect that this investment phase will continue, at least for the next few quarters. The economies of scale, obviously, will -- they will have better economies of scale once the plant comes on stream, which we have said in our write-up, will be towards the end of calendar year 2019. So with all of that, I think, we will see improvements. There will be other factors also like gradual product acceptance, widening of the distribution. And I talked of some of the initiatives that we are doing in that area. So it is a combination of all of these which will help a joint venture. There will be the normal issues in terms of the cost control initiatives, et cetera, which the JV will implement. And it's a combination of all of these which will improve the financials of the JV. As we have said in the past and at the time of the launch, we have said that both the partners are committed to this joint venture to ensure that it takes -- to give it the best and to do everything that it takes to establish a good position in the consumer-durable marketplace in India. I think the more longer-term thing that one needs to look at is really the growth and the market potential for the products that this JV has in its basket and the availability of even more products from our -- from one of the joint venture partners. So I think it's a combination of all of that and which will help -- I mean, which is how one should look at and see this joint venture where Voltas has invested in.
[Operator Instructions] The next question is from Venkatesh Balasubramaniam from Citibank.
The first question is, now we're already almost like 45 days into the last quarter of the year, and you're like just 15 days away from your March season start. So how has the initial 45 days been? I mean, your outlook for the peak season this time around, I mean, is it looking weaker than usual? It is looking like a normal quarter? It's looking stronger? Some kind of, not a quantitative, maybe a qualitative feel for the season as of now, as you see it right now.
Well, I think, Venkatesh, the short answer to this is that we will -- it's too early to comment because even though we are in the -- in 45 days, and I think you have very quickly counted the days in this quarter. I think we have -- as I mentioned in response to an earlier question, the summer starts typically from March, and I think we would have a wait-and-watch approach. We are seeing a pickup -- some pickup in the market. I mean, if you talk in terms of qualitative terms, primarily, the festival of Holi, which is in the month of March, that should be one another trigger for us. So even within this quarter, it is really the month of March, which has historically for us been a high month of sales.
The next question is from Rahul Murkya from Jefferies.
Sir, can you tell me how many -- like out of your total sales for room AC, how much would be window AC?
Yes, roughly about 20% is window AC.
And of the 80% split, like, 40% you have mentioned would be inverter.
Right. Right. Yes.
And the next question is from Pulkit Patni from Goldman Sachs.
Sir, since you said that the Voltbek JV actually started in only mid-September, would it be fair for us to assume that as we look at the current quarter, the ad spend, et cetera, done on this JV would be in the similar range? I'm not talking about numbers for top line, et cetera. Just trying to see how much the negative impact of this JV could be for the next few quarters.
Yes. I think, one, we would do whatever is -- I think I would answer it in this way that I think we would do whatever is required to make this -- to sell our products. We have also mentioned that in this -- in the quarter, we just spend there is, particularly in quarter 2, a lot of the marketing spend, not just the advertisement, but I would say, use the word overall marketing spend was there just immediately following the launch of the product. So obviously, we will not have the launch expenses. But obviously, we will have a combination of APL and BPL, primarily because of the summer months, which also like for air conditioners, it also tends to be somewhat peak season for the refrigerator market where we have a significant presence with models ranging from 230 liters to upwards of the 500 or 600 liters plus. So obviously, there will be both APL and BPL spend to support the sales.
Sure, sir. But that would also come with incremental sale. So what I'm trying to understand is that we made minus -- assuming minus INR 25 crores of negative contribution to associate income. Can that number go up meaningfully in the next few quarters?
As I said, they go up or go down, you're talking of indicatives. So I think you have -- I'm a little confused.
Okay. So basically, the peak in terms of spend is done as a proportion of the sales we expect that business to generate.
I would say that, I mean, I think that is -- I have given you the general broad contours in which we are planning this JV. I would think that -- specific questions on whether the peak is done or not, I would say would be -- would not be the right questions. I think it's for you to say when we have given you the -- a good understanding of the type of market we are in, the competitive forces that we're in, and I think all of that will drive the advertising and the APL, and not just advertising but also above-the-line and below-the-line spend.
The next question is from Naveen Trivedi from HDFC Securities.
Sir, FY '19 is a very challenging year for RAC business. Therefore, the UCP EBIT margin would have been like down by around 300 to 350 basis points in FY '19. So there have been lots of various reasons for this dip. It could have been because of the negative operating leverage, can be because of higher margins of trade partners, higher marketing spend also, maybe unfavorable product or market pace. So just to understand, like -- which all headwinds can be normalized or reversed in FY '20, if you can just give us some idea about where do you see this -- the pressure was more because of which reasons?
I think it's, in a way, a kind of a vicious circle, isn't it? Because you've very, very well enumerated many of the factors, right? You've talked of operating leverage. Yes, that was the factor. You talked of industry degrowth. Operating leverage was a factor. I think you talked of increased spend into in -- become -- the market becomes more competitive, we all -- I mean, all of us need to have our presence in the market, so there are various methods by which people would do a variety of, say above-the-line and below-the-line activities. So it's really a combination of all of these, which would account. But single most important driver, as you have answered that question, it is in terms of the volumes in the industry. I think once the volumes come back, and I would reflect, and I think some of you have talked about it that in this very competitive market, we have been able to build our market share, improve our market share. So the combination of all of the strategies and tactics that we have had in the last 9 months has led to this kind of improvement. And I would say that, that is one of the big positives as -- so it's really a combination of all of this as the operating leverage improves, as volume improve, as volumes are supported by the kind of spend one needs to do in the market. There is a lot of pull from the end consumers, all of these factors play a role in improving the financials.
Next question from Shrinidhi Karlekar from HSBC.
And I have just 2 questions. First one, would it be possible to share how has been the industry secondary volume growth in this quarter and how has it been for Voltas? And my second question is on the project business. Sir, you took some INR 13 crores provision on that Carillion JV project. Does that take care of all of your receivables and balance work that you're expected to do on that project? Or there could be another likely to come? These are my 2 questions.
No. I would say that I think we have answered your first part of your question, that we have mentioned in response to an earlier question that the industry has degrown by 4%. And...
I think that was 9 months, right? Sir, I want this one, Q3 number...
Well, I have the 9-month number, and as I've mentioned to you, I think that's a more representative number because we have a good -- a quarter of relatively higher sales, which is the seasonal -- the summer quarter and then 2 quarters of relatively lower lean sales, as has been the pattern of this industry for the last many years. So we have given out that number for the 9 months. And in that 9 months, our market share has improved from 22% to about 24% and has increased our numbers that we've also mentioned in our investor write-ups. So it is in this context that one has to look at the Voltas performance.
Fair enough, sir. And sir, the second one on the provision? Yes.
On the Carillion JV, I would submit that the provision that we have done is on a matter of prudence. It is not that there has been any major event or anything like that. It has been -- there has been a delay in some of the certification. And as a matter of caution and prudence, it is where we have taken this provision. So we are in discussions with both the main contractor on the project as well as the final client on the project. The project is in advanced stages of completion. And we will, -- we are, obviously, in dialogue with all of these parties to find the right solution to this problem. So this is our assessment of the provision that we needed to take, and this has also been subjected to a limited review.
The next question is from [ Akash Vipora ] from Reliance Mutual Fund.
I have had just one housekeeping question. In the Electro-Mechanical Projects and Services...
Your voice is very faint, and maybe you're very away from the speakerphone or whatever.
Is it better now, sir?
Little better, but go ahead. I think we'll try to piece together your question.
Yes, sir. In the Electro-Mechanical Projects segment, the order book size was mentioned at INR 5,000 crores-odd. Can you please give me the break up in domestic and international terms, please?
I think it is given in the write-up itself. It's about INR 3,100 crores in case of domestic, and about INR 1,900 crores for international.
The next question is from the line of Abhilasha Satale from Dalal & Broacha.
Sir, I just have one question. During the quarter, other income has gone almost like double, INR 254.8 crores. So what is it then guided? And whether it is a sustainable number?
I mean, if you see where our other income is coming from, you are -- you must have seen our balance sheet in the half year of September. So we have investments in mutual funds. And obviously, as per the accounting policy we have to recognize the mark-to-market movement of the net asset value of these mutual funds. So that is what gives a rise to some of the ups and downs in the other income. Although, one must add that we keep a very close watch on the yield to maturity of all of the mutual funds, and the -- and we have an investment committee of the board, which guides us on the investment norms, et cetera. So we are conservative in this investment, but it's really the movement in terms of the mark-to-market, which really influences the movement in the other income from one quarter to another.
Thank you very much. We'll take that as the last question. I'd now like to hand the conference back to the management team for closing comments.
We thank everybody for being a part of this conference, and I'm sure if you have any further questions, you can please connect with all of us. We'll be ready with the answers. Thank you very much for joining in today.
Thank you very much for joining in on this call. Pleasure to interact with you.
Thank you very much. On behalf of IDFC Securities, that concludes the conference. Thank you for joining us. Ladies and gentlemen, you may now disconnect your lines.