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Ladies and gentlemen, good day, and welcome to the Voltas Limited Q4 FY '21 Earnings Conference Call hosted by Asian Market Securities Limited. [Operator Instructions] Please note that this conference is being recorded.I would now like to hand the conference over to Mr. Amber Singhania from Asian Market Securities. Thank you, and over to you, sir.
Thank you, Janice. And good afternoon, everyone. On behalf of Asian Market Securities, I welcome you all for Q4 FY '21 earnings conference call for Voltas Limited. We have with us today, Mr. Anil George, Chief Financial Officer; Mr. Manish Desai, Head Corporate Finance; Mr. Vaibhav Vora, Manager Corporate Finance, representing the company. Without further delay, I would like to hand the call to Mr. George for his opening remarks, and then we shall proceed to Q&A session. Over to you, sir.
Good afternoon, and thank you, Amber. Let me -- allow me a little time to take you through the analysis of results so that we are all on an equal footing in terms of understanding of the results. Towards the end of Q3 and more so in the early parts of Q4, the Indian economy was able to evidence certain green shoots and signs of revival, coinciding with the easing of the COVID-related lockdown. On a broader scale, we saw a recovery in business and the festive season brought joy socially and for the economy as well. India's GDP began to look better after 2 consecutive quarters of decline. Aided by a low prior year base, economists and corporates alike underlined their expectations for robust growth in Q4. Several other macroeconomic factors demonstrated signs of revival. GST collections were consistent and remained well over the INR 100,000 crore benchmark month after month. Direct tax collections grew ahead of expectations. Exports in March rose to a new high. And private cum commercial vehicle sales showed forward momentum. Optimism was also evident across equity markets supported as they were by significant FII inflows and a growing number of retail participants. However, the pace of recovery was defined by its own challenges. The extended lockdown situation during the earlier part of the year resulted in scarcity of resources, and trade-related issues led to a surge in commodity and freight charges. Prices for copper, aluminum, steel and plastic surged anywhere between 60% to 80% as compared to the previous year's levels and ocean freight charges increased multifold. The resultant increase in input costs, especially for consumer durable items, was unavoidable, and the industry in general had to take multiple price hikes to try and sustain their margins. Then came the surge in COVID cases and around the end of the current quarter, the earlier sense of optimism was waning. Factory output shrank to a 6-month low in a jittery economy. Inflation rose and the second wave of COVID forced prominent financial institutions to revise India's growth forecast sharply downward. Meanwhile, the government attempted to support the fragile economy by introducing Aatmanirbhar Bharat and initiating various incentives to induce capital spending and revive investments.The much weighted Production-Linked Incentive Scheme, or PLI, as it's commonly known for white goods, was formalized, allocating approximately INR 6,200 crores, hoping to boost incremental investment and generate over INR 49,000 crores of revenue and add some 4 lakh new jobs. Supporting these measures, RBI retained existing rates and adopted an accommodative stance to infuse liquidity.In this overall context, Q4 witnessed a healthy upswing in the growth of the business. Not only have sales across all our 3 segments improved pointedly compared to the corresponding quarter of the previous year, but also the impact of the significant degrowth cost to the company on account of COVID-related restrictions in the beginning of the first year -- of the year, which you will recall was high season for AC sales, was dramatically reduced. We were thus able to end the year at a turnover growth of -- degrowth of just a marginal 2%.In terms of a snapshot of our results this quarter, you would notice that the total income from operations was INR 2,628 crores compared to INR 2,078 crores. The profit before tax was INR 321 crores compared to INR 217 crores in the previous quarter. In terms of the full year results, the revenue was INR 7,457 crores compared to INR 7,627 crores in FY '20, and profit before tax was INR 709 crores compared to INR 744 crores in the previous quarter. In terms of results to revenue, in Q4, we have improved our results to revenue from 10.4% to 12.2%. And notably, the UPBG segment delivered a 15.76% result to revenue.Moving on. Consolidated total income of the company grew by 25% to INR 2,683 crores in Q4. Profit before tax was even higher by 48% at INR 321 crores. Profit after tax was similarly higher by 49% at INR 239 crores and nonannualized earnings per share with a face value per share of INR 1 for the quarter was consequently far higher at INR 7.18, with the full year being at INR 15.87, also ahead of the previous year. The corporate balance sheet continues to remain healthy with minimal borrowings, which are required mostly for our overseas operations. While operational cash flow during the first half of the year had been relatively weak given the context of the lockdown, revival of economy thereafter, combined with several cost control measures helped in generating surplus cash on our balance sheet. As of the year-end, cash and cash equivalents in our books stood at INR 2,465 crores as against INR 1,939 crores in the previous year.Allow me to now move to the segments and also some comments. Segment A, unitary cooling products, full marks due to our sales team for a significant recovery post lockdown. Nimble on their feet, they were quick to take subtle advantage of the pent-up demand amongst channel partners amidst fears of supply chain disruptions and price escalation. The [ general anticipation ] was also one of a hot summer that had the potential to spur secondary demand. The business thus recorded revenue growth of some 21%, up from INR 1,179 crores in Q4 FY '20 to INR 1,426 crores in Q4 of FY '21.As against the full year industry degrowth estimated by external agencies at around 29%, given the context of the lost sales in the high season of quarter 1, Voltas was able to exit the year with a much lower degrowth of some 15%. Similar to the growth in the top line, the bottom line also accelerated by some 28%, this being the result of driving better product mix on its cost efficiency coupled with lower holding cost of carryforward inventories and subdued marketing spends. While the changes in custom duty rates enhanced input and supply chain costs took the toll on margins, timely price increases and smart customers themes helped improve EBIT margins by 90 basis points to 15.8% in the quarter. For the full year, margins had improved by as much as 160 basis points from 12.6% last year to 14.2% in the current year. Appropriate focus on the inverter subcategory with competitive pricing and a larger number of SKUs has yielded a favorable outcome. Inverter sales growth was 22%, well ahead of the previous year and now contributes over 77% of all split air conditioners sold. Overall in the AC segment, Voltas continues to retain undisputed leadership with a YTD February '21 market share of 25.6% at multi-brand outlets. Channel expansion across categories, together with a healthier model mix from B2B accounts helped the commercial refrigeration vertical deliver a strong performance of 17% volume growth in Q4. In the case of air coolers also, increased number of new variants and SKUs and rise in direct billing points boosted the growth to 37% in the current quarter. Segment B, projects -- electro-mechanical projects and services. Segment revenue for the quarter increased to INR 1,104 crores as compared to the previous corresponding quarter of INR 805 crores. The increase being contributed both by domestic and international operations. Better bid margins across newer projects, combined with a good pace of execution also resulted in positive growth across the bottom line. Segment results improved INR 93 crores as compared to Q4 FY '20, which stood at INR 11 crores. That said, [indiscernible] levels of fresh investment given the general liquidity stress and our conscious internal need to remain risk mitigated has translated into subdued order booking during the year. Nevertheless, total carryforward order book at INR 6,635 crores as on 31/3/2021 provides an adequate level of forward revenue visibility together with the important promise of improved margins. The carryforward order book for domestic projects at INR 4,200 crores contained a bouquet of orders across water, HVAC, rural education, solar and urban infra activities. The international order book of INR 2,435 crores represents MEP work mainly across UAE, including the prestigious Sheikh Zayed Museum, Qatar and Oman. Project work being in the nature of designated essential activity in the Middle East has helped ensure good progress in that geography despite the constraints of COVID. Better availability of labor and appropriate access to project sites has simultaneously translated into faster execution resulting in improved turnover and margins. At the same time, a centrally driven focus on cash has ensured better collection, helping to restrict ECL provisions across both international and domestic geographies.Segment C, Engineering Products & Services. Segment revenue and results for the quarter were at INR 98 crores and INR 34 crores, respectively, during the quarter. While revenue showed a 3% growth, bottom line stood out with a stellar growth of 26% as compared to corresponding previous quarters. The Mozambique operation, Vale, continued to contribute handsomely to the performance of the mining and construction vertical. At the same time, the push by the government of India on infra projects have reenergized the demand for crushing and screening equipment. Ban on imports from China plus competitive price of cotton, coupled with renewed government focus on textiles, has improved forward sentiments, reviving capital equipment demand. After-sale support services also performed better despite supply constraints during the quarter.Let me now move on to Voltas Beko. Post COVID-related relaxation, production at Sanand factory has been optimized at around 50,000 units a month. Our products continue to be accepted well in the market. And we are happy to evidence significant demand pull from the trade. Despite the lockdown and limited selling window, direct cool refrigerators were sold in excess of 3 lakh units during the year. The quarter also witnessed significant demand for washing machines, microwaves and dishwashers. We are also happy to share that as per a recent study by a global research company, Voltas Beko dishwasher tops the category in India despite the disadvantage of being a relatively late entrant. The report estimates a market share of 30%, which speaks volumes for the product build quality, appropriate price and end consumer acceptability. At the same time, market share in the highly competitive segment of refrigerators and washing machines has also improved to 3% and 2.5% year-to-date, respectively. In terms of distribution, billing points have been scaled up to exceed 1,000 numbers, accelerated introduction of exclusive outlets and experience zones, along with cost-effective digital marketing should help in increasing reach and augmenting brand awareness. Distribution and other synergies with Voltas continued to be aggressively leveraged. Costs are well in line with the budget, and the business is confident of beating its targets, including that of 10% market share by year 2024-'25.Other matters and outlook. As informed earlier, the Board of Directors of the company had, in February 2021, approved the transfer of the domestic B2B businesses of the parent company, relating the product projects business comprising MEP and plumbing, HVAC, water, mining and construction and textile to its wholly owned subsidiary, that is Universal MEP Projects & Engineering Services Limited, which was formerly known as Rohini Industrial Electricals through a BTA, or business transfer agreement. The company executed the BTA on 24th March 2021, and the transaction is expected to be consummated by September 2021. The overall business of the company, thus restructured allows additional/specific focus on both B2C and B2B verticals with an emphasis on sustained profitable growth.In the near term, going into Q1 of FY '22, the general industry business outlook remains somewhat ambiguous in the face of lockdowns and various restrictions imposed across the length and breadth of the country. Although the uncertainties looming around the second wave of COVID are difficult to call, suffice to say that our teams are on standby to quickly step over the accelerator as soon as the situation eases. Our view is that the pandemic will and must come to an end hopefully sooner than later, and economic activity and revival will ignite again.Speaking longer term, Voltas continues to be in the sweet spots of the economy, be it across the underpenetrated consumer durable market or across infrastructure development, which will invariably be a priority in the foreseeable future. We have always operated a tight ship and have, more importantly, used the pandemic to find even more cost-effective ways of doing business, optimizing discretionary expenses in the process. In difficult times such as these, our Tata lineage, the resilience of our brand, the strength of our balance sheet, the competence of our time-tested systems and the capability of our people provides a definite measure of confidence. We, therefore, remain cautiously optimistic about our future.Thank you. I'll now open it for questions that you might have.
[Operator Instructions] The first question is from the line of Charanjit Singh from DSP Mutual Fund.
Sir, on the UCP business, if you can -- you have reported very good set of numbers. Now if you can just help us understand how are the things shaping up because various end markets are going into lockdowns. And you've also been able to report very good margin. So from inventory levels perspective, we would have exhausted our older inventory and how the margin can shape up in the future as we start sourcing maybe a little higher cost inventory? So that's my first question on the UCP front.
Yes. Do you want me to answer that before you take the second? Or you want to ask the second question. And then -- yes?
Yes, sir. Please go ahead with the answer first. Yes.
Okay. So I think it's a very good question to kick off the debate for the day. Actually, as I mentioned, I think the situation today is somewhat ambiguous because if you look at the map of India, almost every state is completely locked down or is at least partially locked down. So in a manner of speaking, sales have come to a little bit of a dribble, I might say, particularly in this particular point of time. It's -- whenever there's an opportunity, we try to maximize and you know that the summer has been setting in well. And if things have not been but for the lockout, we would have had really booming sales. And it is kind of -- it's a little bit of an opportunity loss. But as you know Voltas, we don't cry over spilt milk. And what we have said is that as soon as the lockdown restrictions wane a bit, we will quickly capitalize on the situation just the same way as we did in the second and third and fourth quarter of this year. So you can trust us for it. And I think our sales force is absolutely charged and will take it on. Coming to the situation on the margins, it is always a balancing matter because as you know, I spoke about 60% to 80% in terms of various commodities that we have dealt with. But if you look at copper LME prices, it's close to about INR 10,000 now. So it becomes a bit of a problem in the way that we will be able to manage going ahead. And the answer is really that we will have to take price increases. A certain amount of cost efficiency and cost improvement programs will be and is being conducted. But nevertheless, I think we have to push price increases. We have taken a 5% price increase in the first tranche, and we have, thereafter, also taken a 3% price increase. But let me hasten to add that the 3% price increase is not across the length and breadth of the country. It is very much balanced and depending upon what the competition is doing, et cetera, et cetera, et cetera. So we are not in a position currently to assure you that the quarter 4 margin is the go-forward margin. No. It will not be because as I mentioned, we've had a lot of advantage from -- 2% advantage roughly from the carryforward of inventory. We also spent less on advertising and all of these things. So we have to see how it goes forward. But as you know, and Charanjit, you have been a long time follower of the company. You know that we have all the time managed our business in such a way that it is well balanced between market share and margin aspiration. Because like we are fond of saying, we -- market share is not something that we can put in the bank, but profits and margins definitely can go into the coffers of the company. May I have your second question?
Yes, sir. Sir, the second question is about the projects business. So there, again, we are seeing that there are certain -- maybe the urban areas seeing weaker execution, manpower issues. Nonurban areas, we are still seeing maybe some execution continuing. So on our project execution, how is the impact in terms of labor availability, in particular segment getting impacted more on the project side? And in the project margins, are there any one-offs or provision write-backs, if you can quantify that?
No. As I've always said, that when you look at projects, you should never review it on the basis of one quarter's performance. You should always look at for over a longer period of time. We have between Manish and myself, we have always guided saying that we aspire to push our project margins to something like 6% to 7%, and that's the trajectory we are on. Coming to the specific question on execution. Truth be told, migration is happening, and there is a problem in terms of the availability of labor and particularly skilled labor. People who can afford it are leaving -- going back to their home and villages. Now having said that, how are we managing the situation? What we have done is that because for us, time is very important, and we would like to ensure that the projects get executed on time and to the best possible extent. And therefore, what we have done is that we have made arrangements at various project sites to house the labor within a certain community so that they are available to work, and they are, at the same time, suitably protected against the consequences of the pandemic. So that's the way that we are managing it. There is no single one-way rule of how we handle projects. Each site has got its own peculiarities. But our managers are really up to the task, and they're doing whatever is required to be able to ensure that the ultimate client is finally kept happy, and we do not have unnecessary costs being piled up in our bottom line. I hope that answers your question?
Yes, sir. That's helpful.
The next question is from the line of Mayur Patel from IIFL AMC.
Congratulations for such a good set of results. But is it able to quantify what part of UCP market or revenues are currently disrupted? Just a bit of a feeling that what is the kind of damage currently?
See, practically nothing much is really moving. Whenever there's a small letup in areas where there is a partial lockdown only and where the shall I say it because you know that ACs and consumer durable goods are not treated as essential commodities. So there is a very active problem in movement of these and delivering it to the ultimate customers or even to the trade. So we are living on a day-to-day basis and seeing what can be done. And as I said, if there is any window of opportunity, then you can be rest assured that our regional manager will be on top of it and will be dispatching and selling. Given the summer, there is no dearth of demand, but we have a practical problem in terms of logistics. And that is something that is not unique to us. It is for the entire country and for every competitor that we can think about. And if you look at the -- going forward, we are hopeful that after the peak, maybe some of the lockdown will be listed. We will quickly get into that and make sure that we are able to make up the lost time. But full recovery in a manner of speaking, in a way that what we could have done, had it been an open summer, well, that's not going to happen for the industry or any of the consumer durable players.
Sure, sir. Sir, just one more thing. You normally guide us on a steady-state margin range for UCP, given that we are currently -- we have done a great job in terms of the margins in the UCP business. But what level do you view more comfortable and use that headroom to maintain and expand market share? If you can just [indiscernible] a bit, it would be helpful.
No. We have always been saying around very often and people like you have come back and asked us the question as to why are you guiding for 12%, 12.5%, that kind of margins while you are actually doing much more. The thing is that we are not sure about how the dyes will actually road. The good thing but what we have is that we have sufficient margins. Therefore, we can afford to spend. We can afford to counter competition to grow our own market share if need be. We are not deterred by a sharp price decline that our competitor takes because we have the cash, we have the resources to respond appropriately and in due time. This is the big advantage that we have. And because of this, we don't want to be bullish about it and say that, well, we are looking at 14%, et cetera. The market is -- in fact, every day, we are actually facing a new ball being bowled to us from the market, from the competition, from the environment, from COVID, et cetera. So it takes a lot of agility, a lot of flexibility to remain on -- in the game. And that is something that we will do. And I hesitate to give any kind of a long-term margin statement. But we should be able to keep our market share. We will also be -- and grow it, and we will also be able to maintain our margin at a 12% kind of environment going forward. This is what our internal expectation is barring very unforeseen activity -- events.
The next question is from the line of Ravi Swaminathan from Spark Capital.
Congrats on a good set of numbers. Just want to -- yes, sir, well, more on the kind of volume growth that you expect for this full year vis-à-vis last year in the UCP, in the air conditioning space. So basically, will it be matching last year's volume? Or probably we will do kind of 2020 kind of air conditioning volume? And if you can give the volume numbers for what we did last year, it will be really great, sir.
You can take the last year volume numbers, et cetera, from Manish separately. That's fine. Yes. But as far as forward estimations on volume is concerned, very, very difficult to say, Ravi. I mean can you really look today and then predict as to what -- how the share market is going to do. If any of us were able to have that kind of a foresight, we would, in a manner of speaking, be very happy and be millionaires. It's not possible. Yes, in the reality. So one that I'm trying to say, and this is what I want to emphasize again and again. Gentlemen, please understand that we are running our business successfully for several years. We have taken market leadership in the year 2013. And since then, we have grown our market leadership consistently year after year. We have done all this without giving up our bottom line or margins. So have some faith with us. Stay with us. We will try and ensure that we surprise and positively surprise. But I can't give you, at this point of time, simply because I don't know how the market will turn up for the rest of the year.
Got it, sir. And in terms of costs, so basically, employee costs last year had seen a 10% decline. How is it likely to be this year? And is ad spends and other semi variable expenses. So how is it likely to pan out next year? If you can give that clarity, it would be really great, sir.
We have had some savings in employee costs, et cetera because especially on the project side, et cetera, we have optimized. I also spoke about many of those things where we have saved money, for example, travelers come down. We have found different ways of working, optimizing and all of those. Yes. Looking forward, these costs will come back to a kind of a minimum. If you look at our total employee costs as compared to the turnover, et cetera, you will find that we are very, very careful company in the way that we spend, in the way that we actually incur expenses. And as I mentioned, we have taken a very hard look at discretionary expenses, and we continue to -- we'll continue to do that. But some amount of increases will come up because we are also trying to develop not just for the next year, but over a longer term, we are looking at a strategic business plan where we want to grow far beyond what we currently are. And that will mean bringing in capability, bringing in people who are -- who have the right kind of aptitudes and competencies. So all of this will mean that our employee costs, et cetera, might go up a little bit. But again, please be assured that over a longer term, this will be very well balanced with the bottom line.
Got it, sir. And my final question is with respect to Voltas Beko revenue -- just bookkeeping question, Voltas Beko revenue and CapEx next year, how much is it likely to be? And with respect to the air conditioning facility with -- in South India, how is it likely to pan out?
We have totally invested something like about INR 410 crores in Voltas Beko. And as I mentioned, the problem that we have in Voltas Beko at this point of time is actually a good problem, and that is that we don't have sufficient products to feed the market. So when you look at Voltas Beko, we have not expanded to all the 20,000-plus kind of touch points that probably exist that we can easily go to. We have only touched about 6,000, and we have only 1,000 billing points. The reason is that we don't have sufficient flow of product. Because the factory that we set up last year. And in that time, we have performed a wonderful job. But going forward, we are investing more. We are trying to increase the throughput of the factories, through both our OEMs as well as the own manufacture. We are now starting frost frees in the factory and so on and so forth. So I think you -- it is our -- the synergies that we see with the Voltas marketing team and the sales team is phenomenal. And we are getting a lot of mileage from joint activities without actually incurring that kind of additional cost.There are not many other companies which have gone into production and sales without having huge credits in the market. But Voltas Beko, no, they follow the same model that Voltas is doing, and you'll find that our working capital, our capital employed, all these numbers are pretty well contained and that should give you some amount of confidence about the future.
Got it. Sir, this INR 410 crores is revenue of Voltas Beko or the CapEx that you have done?
Mr. Swaminathan, I'm sorry to interrupt, may I please request you to rejoin the queue for your follow-up as we have people waiting for the turn.
This is just a clarification.
Ravi, please connect with Manish. He will give you the whole full everything.
The next question is from the line of Rahul from Haitong Securities.
I have 2 questions. One, on the AC side. Now you've talked about multiple price hikes that you have taken. When we were talking about the general dealers, they were indicating high levels of inventory, obviously, because of the lockdown and all. What is your stance on the inventories that are there in the system? And how long will this really go on for?
See, when we ended the March in the inventory and -- in the pipeline was pretty low close to something like about 30, 35 days. Now I believe that the inventory will probably be in excess of 45 to 50 days, yes? And -- however, as market leader, because 1 out of every 4 ACs that is sold on an average market belongs to Voltas. So we don't face too much of pressure from the trade as maybe some other competitors do in terms of saying, reduce the inventory or those kind of issues don't happen. The moment the market opens, our products will sell, and there will be a demand for more inventory from the primary trade.
Okay. Sir, on the project business, we've seen a very strong comeback in execution and therefore margin. What do you attribute this massive improvement in margin? Now this is especially on the back of the way commodities have moved. And I believe a large part of your order book is on fixed price storage.
Rahul, sorry, I missed the first part, which business are you talking about?
I'm talking about the project business. I see very strong comeback on execution. So my question is, what do you attribute the significant improvement that you've seen in margin especially the way commodities have moved? And large part of your order is actually on fixed-price storage. How do you...
So let me just -- Rahul, let me try to answer that question. One is that you would recall that at one point of time, we had said that one of the strategies that we will adopt going forward is that we will bid more for government projects, yes? And that was a conscious strategy for 2 reasons. One is that our money would be secured. Number two, in many of these contracts, there is also a pricing clause that is indexed with the cost of commodities. So to that extent, there is a certain amount of insulation that you get going forward. I'm not saying that it is across the length and breadth of all projects that we do.But in many of the large projects, which -- where we consciously decide that especially when it's longer term of execution of 2 years, et cetera, we kind of ensure that there is an indexation that is built-in. And this is only fair, and most of the clients, particularly in government agencies where they see that you need to complete the project, agree to this. And there is a diligence mechanism that ensures that this is appropriately done so that it's not a profiteering. But at the same time, it is actually compensating for unavoidable things that have really happened in the environment. That's one. The second thing is that in terms of the projects, once again, I'd just like to mention please don't look at it from a quarter-to-quarter because what happens is that you are negotiating with someone for the closure of a project. And that project gets closed in that quarter. It might result in a higher profitability. Something else might go into -- you might take an ECL provision on something. So there is -- the project business, by its nature, will always have some ups and downs in the way that it is dealt with. However, that said, our longer-term aspiration is that to make sure that there's at least 6% to 7% kind of margin, and that's where we'll be heading to. And let me also assure you that while the order book numbers are a little subdued and muted, this is also because of the fact that we spend a lot of time in reading the environment appropriately and taking only those risks which we feel confident about and that we think that we can overcome. And so the quality of the order book that I have today is far better than it was possibly there in earlier periods. And most of the legacy projects are kind of wound out.
Sir, the government projects that you're talking about, this might be how much share in the total backlog of 6,500-odd...
Again, I think I think Manish will give you that. But broadly, if you look at it, of the pending orders that we have in the domestic projects, water, which is mostly government-based or funded by, let us say, types of World Bank or JICA or something is about INR 1,390 crores. We have rural application, which is about INR 780 crores. We have urban infra of another INR 750 crores. We have [indiscernible] of about INR [ 1,100 ] crores, et cetera, et cetera. So this is the way it is. Yes?
[Operator Instructions] The next question is from the line of Venugopal Garre from Bernstein.
On the -- the first question is on UCP, just to get a better idea of the [indiscernible] trends. I just wanted to understand, is there a way to quantify? I'm sure you would have the data on the number of retail stores, which is percentage of retail stores, which are closed versus open. I'm more particularly keen to understand in the stores that are open and also have inventory, how is demand compared to what it usually should be during the summer season? And the reason I'm asking this is more to understand and strip out impact because of lockdown versus impact because of consumer sentiment?
Yes. I understand. But unfortunately, Venu, that's a very, very difficult question that you're asking because it's a changing environment every day. Some places get into lockout, something is getting announced somewhere, et cetera, et cetera. I would say that almost about 90% of the outlets, et cetera, are closed or under lockdown and some kind or other. Manish, can you help me with this? You're there?
Yes, sure. And, sir, what you rightly said, it is difficult to quote any number, but to just add to the satisfaction to the participant, many of the channel partners, largely, they have gone to the e-portal as well. So it's a mixed kind of scenario under lockdown situation. But rightly so, 75% to 80% of the prominent retailer counters are under the lockdown.
Okay. So I think fairly clear on the extent of impact. The second thing, I want to check is on the margin front. And actually, this is also on MEP as well. Now whenever a project business tends to see this sort of issues around execution because of the factors like COVID. Could you walk us through how these negotiations happen with the customers with respect to time line increases, with respect to the costs you're incurring at this juncture, which is not really leading to much of an output, which should be sort of mobilized in certain of these projects. So how did this go last time? And how is it sort of phasing out right now in the COVID time? And I'm assuming there should be no impact at all of this on your future margins.
Venu, I think to be truthful, there will be an impact. I cannot deny that, okay? Because the standard thing, to answer your question, what do we do when a project gets delayed or we don't have people to do the project. We go back to the client, and we ask for an extension of time. Some of the clients give us an extension of time. And most of them give us an extension of time, but some of them give us with costs. Some of them give us without cost and they say, okay, I'm sorry, but this is the way that the cookie crumbles, you have to take it. But what we do is that we try and make sure that we are able to accelerate our execution at the right time, maybe work a little over hours or try and get economies of scale by doing various other things that are normal in terms of a project and then try and make up the deficit that comes in. Because the magnitude of something like COVID that has hit the length and breadth of the country is amazing. I mean it is unprecedented in the history of the country. So we have to manage. And I don't think it is -- it would be truthful if anyone told you that we are 100% insulated or if anyone told you that we are -- the reverse is true that everything or whatever excess of costs will be met by the client. No, it will be subject to negotiation. And when government and other people are concerned, there are -- there is a certain understanding also of it. Even private people, we have been able to make moves. So extension of time with or without cost is a mote question that we deal with.The other thing is that, as I mentioned to -- earlier, in terms of commodity price increases, et cetera, most of the cases, particularly government, we've got indexation benefits, which kind of insulate us from wide swings. But the truth -- the same is true the other way also that if the commodity prices come down, we also have to pass those benefits back to the government.
[Operator Instructions] The next question is from the line of Siddhartha Bera from Nomura.
My first question is on the AC market share. So if you see over the period, while initially, we had some good gains overall over the period, it had normalized, and this is despite a very strong performance we have seen in the inverter business. So I wanted some of your thoughts on how to look from here? Where are the catalysts, which you think which can lead to further market share gains from where we are as on FY '21? And that will be my first question, sir.
Yes. The -- I've often had this question. And there is a certain amount of also doubt that comes up in the minds of many people saying that, oh my God, you guys are already 26%, can you grow further? The answer in my mind is very vehement yes. And in our own industry, you have FMCG companies which have got from where I came from earlier, have 60% market share in things like shampoos or you take -- so it can be growth. But the answer to that is twofold in my mind. One is that you need to have excellent distribution, and that is something that I think this company has worked on and perfected. We have good people who roam the markets, who make sure what is happening and are able to respond in a very flattish kind of structure in UPBG to take decisions and to do what is required. The quality of our products are extremely good. In fact, I would go one step further to say that when you juxtapose the quality of the product with the price at which the offer is being made, I think we are doing pretty well in this area. There are things like customer service, there are other things, whole lot of marketing and all these other expenses, the efficiency of the supply chain. All of these contribute together to how you can actually grow your market share. And we believe that in a normal year, other things being equal, we will be able to edge up our shares by a percentage or so every year we should be able to do. And we have the wherewithal, we have the ammunition for it in terms of our own distributor systems by -- in terms of our people, in terms of the money that we have, in terms of our margins.
The next question is from the line of Shrinidhi Karlekar from HSBC.
Congratulations on good set of numbers. Sir, I just have -- sir, do we have some good estimate of composition of AC demand in terms of 3 buckets like how much it comes from the first-time buyer? How much is from a second and a more time buyer and how much is the replacement demand? And sir, and would it be fair to assume that a second time or a more time buyer as well as replacement demand would be a much more income inelastic and price increase should not affect this part of the demand?
Manish, can I pass that question to you, considering that you have been the Head of Finance for that business for several years?
Yes, sir. So I'll take this question. So Shrinidhi, in fact, the question what you asked about the replacement market. Yes, replacement market is growing, especially driven by the kind of energy efficiencies improvement, which we have seen in this product because many of the households are having our units more than 7 to 8 years old. And if you consider that today, energy efficiency benchmark, it can easily give a significant saving to the consumer. So that segment is increasing, but it's still not contributing significantly because considering the kind of penetration we have for this category. Second thing is the work from home, which we are going through it. Yes, it has increased the demand for the more units in the same house or one house. However, it is difficult to gather the precise information based on this, however, our own data says, the trend is increasing in the quarter 2 and subsequent periods, at least in metro and Tier 1 cities, which are largely penetrated in this -- for this consumer to offer this category as such. In terms of the new market, yes, the market is expanding because need of this unit is now no more luxurious. We all know it has now become necessity. And most kind of demand is coming from Tier 1 and Tier 2 and so who can have the affordability and [indiscernible] as well.
Great. And, sir, one factual kind of a question. Can I ask how much is the like channel finance penetration in terms of like Bajaj Finance and all those kind of things? How much of sales happen through these finance channels?
See, earlier subvention used to be something like about 20% of the total sales. Over this COVID period, there has been a little bit of a drop in that because big companies like Bajaj Finance, et cetera, have -- are being a little more careful, let me put it that way. At the same time, credit card company shares have also increased. They are becoming a little more bullish about it. So it's in and around about 20% is what I would say, of total sales is what goes through channel financing.
The next question is from the line of Bhoomika from DAM Capital.
Yes. Congratulations on a good set of numbers. Sir, my question is on the recently announced PLI scheme, which is more towards components than finished goods. So if you can throw some light on what is our CapEx plan, particularly keeping [indiscernible]? And also from a percentage of components that we import, how much of this can be actually indigenized? That's my first question. And my second question is, if you can throw some light on commercial refrigeration, that has been a key focus point for us and has grown quite well during the current year. What is our outlook towards the same?
Manish, over to you.
Okay. So the first question, Bhoomika, what you asked about the PLI scheme. The PLI scheme is largely understood, yes, it is for the components and not for the finished goods as such. However, if you look from there, the PLI scheme depends on the 3 kind of investments which you want to carry out: small, big and kind of medium, what they're looking for. What we are seeing is a clear synergy in terms of to go into components like heat exchangers, PCBs, motors and all, which we are capable to do it. The components like compressor and controls, which require a highly kind of skill or I can say, technical adaptability, probably, it will take some more time, not for Voltas as such, but we are looking from the industry also, put together. So in a way what we are seeing, Bhoomika, is a kind of backward integration or kind of expansion in the components of the heat exchangers, PCBs and motors. The steps being taken in those directions, awaiting for a further clarity on the PLI because there is no cap being defined so far in this scheme for individual companies. So those clarifications are still awaited in order to make our plant more formidable.
Commercial refrigeration also, please.
Yes. Commercial -- sorry, I missed out the second question, sorry. The commercial refrigeration, yes. What is happening is the OEMs, we are revising some of the OEMs still. We are strengthening our position in the product positioning -- product portfolio going into a larger capacities or the freezer. Looking into the market competition scenarios and others, there's a good opportunity in this category. We are not there to give you any numbers for that matter, but certainly, it's going to remain a focus area for this category to expand and to take the opportunities which is available to us.
That was the last question for today. I would now like to hand the conference over to Mr. Amber Singhania for closing comments.
Amber, can I just make a couple of comments before you close?
Yes, sir, I'm coming to you. Just wanted to thank you for giving us opportunity and thank all the participants for participating. Over to you, sir, for closing remarks.
Yes. I realize that when we started the conference call, Amber mentioned that there were well over 220-odd participants on the line. And I realize that there might be many questions that might be with you, which have not been answered. May I encourage you to please write in to Manish, and we'll be more than happy to answer your questions as and when you would like to do -- have that, yes? But thank you once again for all your interest in Voltas and for your good wishes, yes? We hope to be able to do and no better than what was expected in the months ahead. Thank you.
Thank you very much, sir.
Thank you. On behalf of Asian Market Securities, that concludes this conference. Thank you all for joining. You may now disconnect your lines.