How are you prioritizing capital allocation between capacity expansion, R&D and shareholder returns? And what long-term cost efficiencies are being put in place to safeguard margins amid rising input and financial costs?
K. V. Sridhar: The capital allocation is done diligently across all 3 segments. From a pure capex point of view, it's Segment A which needs periodic investments. Our focus is to drive top line very actively because headroom for growth within the larger cooling segment and appliances is very high. We hope to have efficiencies of scale where the margin profile will keep growing on an ongoing basis. Voltas as a company had started working on an active cost reduction program almost 9 months back. Some of these programs take time for efficiencies to come in. We've started seeing the benefits, though some got offset by inflationary measures and currency impact. A continuous program of cost improvements is something we are trying to institutionalize.
Unitary product margins have declined to ~3.2% for FY26 versus 8.4% in FY25. How should we model margins for FY27 and FY28 given cost rationalization measures and better utilization at facilities?
K. V. Sridhar: The margin dilution seen in the segment was predominantly from Q1 and Q2 where there was significant overhang with regard to the summer, erratic early monsoons because of which there was stock overhang in the channel. What we have communicated is a progressive improvement in absolute margins and also a gradual improvement in the profile. Should it get better from the number we highlighted in FY26? It should get better. But some of the challenges are fairly structural — continued issues from supply chain or currency. We are monitoring extremely actively and taking corrections in terms of pricing opportunities. We want to gradually improve the top line and margin profile and reach to a level closer to what it was in FY25. It's a gradual improvement.
Any indication on the blended price hikes taken so far on new models?
Mukundan Menon: The first round was a blended 6%-7% — 5% for 3-star (which is 75% mix) and 10% for 5-star (around 25%). In addition, there were impacts because of copper and commodities going up even before the war started. So there's been another 1% or 2% further increase. As of now, last month, we had again taken an increase because of rupee devaluation. The trend is certainly on an upward trajectory. The reduction in GST, tantamount to a 7.8% on selling price, was a welcome thing. Otherwise, the entire affordability thing would have really led to a contraction of demand — we are not seeing that at all now.
What was the impact of FX losses (~INR 55 crores in H2) in Q4? How much was incremental spend on marketing/brand ambassadors? What conviction on margins improving going forward given Q1 cost inflation?
K. V. Sridhar: On old inventory vs new inventory for Q4 — we had opportunities to sell old inventory during the first half. We consumed pretty much the entire older inventory by around the first 4 to 6 weeks of the quarter. After that we started selling new inventory. There was a mix between old and new during the quarter. In terms of inflationary pressures, these happened even before the Middle East crisis and got compounded by subsequent increases and currency devaluation during March. Multiple things happened which impacted margins for the quarter. We are progressively passing this on through price increases. In terms of marketing, it was sort of managed within the overall marketing pool, comparable to what we've been spending — nothing out of the ordinary, including brand ambassadors.
You mentioned blended 5-6% price hike but inflation is much higher. How should we see profitability journey for FY27 — is FY25 profitability more of an aspiration?
Mukundan Menon: The blended 5% and 10% increase was purely on account of the table change. In addition, we had taken another increase for commodity prices that went up pre-war. Now as stock of old materials gets over, we are watching pricing. The price increase is quite significant and when brands start using new commodity prices, it will be a pass-through for most brands. These numbers are not small — we are seriously talking about double-digit inflation. It will get passed through as and when costs start hitting us. Regarding FY25 margins — this will be a gradual step-up. We are very clear about the overall quantum of gross margin we generate and being in a leadership position, we want to keep that as a goal rather than look at percentage gross margin. The quantum of gross margin is where we are looking at. We have a 5.1% primary market share gap between us and the next cluster of 4 brands.
Has increased costs related to war started hitting you? Can Q1 margins dip significantly before price increases? Why did unallocated costs go up very sharply this quarter?
K. V. Sridhar: This quarter will be a mix of pre-war and post-war costs. It will be sort of progressive. We have passed on certain price increases and are monitoring the price situation actively. We will be open to pass on any further price increases needed. Our intent is to progressively work on the top line and margin profile. We are not expecting any sharp downturn in terms of the margin profile for the quarter. On unallocated costs — one of the reasons is the forex impact and the mark-to-market from the treasury angle.
Can you quantify exact price actions taken? What was RAC volume for FY26? What is the broad mix of MEP order book between domestic and international?
Mukundan Menon: On price actions — new table: 5% for 3-star, 10% for 5-star. Topped up with 2% to 3% increase for copper pricing. The next round depends on how overall prices stabilize, which depends on the war situation and rupee-dollar movement. We are watching it almost on a weekly basis. On volumes — 2.25 million units last year. There's a gap of roughly 5.1% between us and the nearest bunch of 4 competitors, all of whom are within 10,000 machines of each other. Order book INR 6,200 crores — INR 4,500 crores domestic and the rest international. A very prudently selected order mix which will deliver robust profitability going forward.
When you say you don't expect margin pressure, what is the level from which you are making that commentary — normative margins were ~8-8.5%, this year's were 3.5%?
Mukundan Menon: The overall margin percentage profile will gradually inch up towards the FY25 number. How many quarters it takes depends on overall market demand. What got us to that high margin profile was demand. What caused the pain was poor demand. Commodity volatility and price changes will generally get passed through by all brands. What will really affect is demand. If there is an inflationary trend and affordability is affected, margins will take much longer to inch up. The third important variable between brands is who has stocks to service channel partners. We seem to be in a much better place — better prepared in terms of inventory for peak demand. We seem to be a few steps ahead of most competitors, which will play a positive role in that inching up.
How is Voltas preparing to capture future opportunities in cooling appliances and consumer durables while addressing rising competition, input cost pressures and evolving customer choices? What strategic levers do you see as most important for sustaining growth and being a market leader?
Mukundan Menon: On the appliances business, we have a joint venture with Arcelik called Voltas Beko. The strength of this partnership is that Beko is a world leader in appliances — technology, product portfolio, engineering, supply chain and manufacturing is what they bring. We use their technology and our very strong moat, which is our distribution and understanding the Indian market. As far as the air conditioning business, the strength of Voltas brand coupled with our distribution reach is phenomenal. This year, we launched a series of new products more feature-rich with AI, including Geo Fencing, Adaptive Cooling and Energy Manager. We also refreshed our entire marketing campaign this year, onboarding 2 brand ambassadors, Ranbir Kapoor and Neetu Kapoor, helping us in the journey towards becoming an aspirational brand. Almost 60 brands operate in this space, but what we bring to the table is the Tata trust plus our phenomenal distribution reach.
How have April and May progressed? How is the current season panning out at secondary and primary levels? How should we look at FY27?
Mukundan Menon: The last year Q4 was a rather weak quarter because of weak summer and unseasonal rains. In comparison, we are seeing very positive traction in April going into May. There's a serious heat wave in many parts of the country. Secondaries are also moving fast. There was a table change from January onwards and most brands started delivering new table products into the channel from March, which had taken a price increase of 5% to 10% in 3-star and 5-star. There is a further price increase going on because of the commodity thing. The saving grace is the GST rate has come down from 28% to 18%, which is some cushioning. We are seeing very positive growth this quarter.
March was the strongest month but there was lot of inventory pushing. Primaries are still soft and price-hiked inventory not yet passed to trades. How do you see margins in Q1 FY27, and could cost escalation dent demand?
Mukundan Menon: In December, the channel had stocked up heavily on the old table, which made January and February sales a little mellowed. March was a record high in our entire history. April has also been extremely buoyant — almost done very close to that number. May is also looking good. In any kind of a price increase, the first tendency of the channel is to hold back on purchase, assuming things will come down. But when secondaries start picking up and they feel there is a likely shortage, they start buying. The higher-priced products have now started getting absorbed by the channel. We feel this quarter will be a very good quarter.
Have any clients called out force majeure in international or domestic projects? Any read-through from past cycles where metal prices moved up as sharply — what happens to project margins?
Mukundan Menon: We have not had any client internationally or domestically apply force majeure. For a short period in Qatar, contractors were given the opportunity for using force majeure, which got revoked. Nobody has used it and we have not been affected. As far as domestic, nothing of that sort has happened. We do not see any impact on the margins for the MEP segment because almost 40% to 50% of our project MEP order book in India, and some even international, has a proper price variation clause. Any variation in terms of commodities, materials as well as labour, is a pass-through. So that's in a very safe zone.
How much was AC volume for FY26? What is the thinking about next year? Can you highlight CR and CAC contribution for Q4? Has CR achieved normal margin levels?
Mukundan Menon: The overall industry had a difficult year — degrowth of something like 10%, 12%. The industry saw 14.3 million units of primary sales total across all 60 brands. Projection for going forward — we certainly expect it to grow at least 15% to 20% because the last year base was a little weak. On commercial refrigeration — the industry saw a degrowth of roughly 5%. CR is a product with high impact from summer intensity. Both these categories saw a major dip last year because of unseasonal rains. This year, with a good summer, this category is likely to grow upwards of 10%. Commercial air conditioner is purely B2B business driven by AC requirement of offices, restaurants, health clubs, manufacturing sector. Industry will grow by at least 12% to 15%. We as a brand are underleveraged in this and see huge headroom for growth. Quite a lot of capex is going into commercial air conditioning — this is going to be the next growth engine for Voltas.
How is channel inventory in RAC right now? How much is domestic contribution in the INR 6,200 crores order book? What is Chennai facility utilization level?
Mukundan Menon: Channel inventory has dropped dramatically — it's less than 45 days now, probably closer to 30 days. The order book INR 6,200 crores — INR 4,500 crores is domestic and the rest is international. The Chennai Factory is now built up to a capacity of 1.5 million units, which is roughly 1.2 lakh machines a month. Overall, around 14 lakh to 15 lakh is what we are doing. We have increased capacity from 1 million last year to 1.5 million during this year. We will wait for another 1-2 years before the next investment — we've built this factory for 2 million; a small capex will increase capacity from 1.5 million to 2 million. Once the demand trajectory is visible, we will do that third round of investment.