Rationale

The reaffirmation of ratings considers Voltas Limited's (Voltas) strong business risk profile with diversified presence across its consumer and project businesses (both domestic and international projects). Being part of the Tata Group, Voltas continues to enjoy strong financial flexibility and is complemented by professional management and strong financial policies. The ratings remain underpinned by Voltas' leadership position in the unitary cooling products business, strong execution track record in the projects business, robust financial profile marked by large scale of operations, strong return and debt protection metrics, and a superior liquidity position. The ratings also consider the company's exposure to challenges in the project business, primarily in the international market, wherein it has witnessed challenges in terms of delay in project execution and moderation in fresh order inflow driven partly by selective bidding for new projects. The domestic business also remains exposed to vagaries of project management risks in terms of site hand-over and fresh order inflow, which typically follows the capex cycle of end-user industries. The company remains watchful in terms of bagging fresh projects, especially international projects due to global macro-economic conditions, liquidity concerns and stretch in receivables. Also, weakened sentiments of delay in announcement of capex plans by potential clients across operational geographies resulted in lower consolidated order book as on March 31, 2022 over that of March 31, 2021. The ratings also consider the seasonality and reliance of the unitary products business group (UPBG) to weather conditions, primarily the intensity of summers along with stiff competition from several other established players in the field. Voltas, however, continues to maintain its market leadership position in Air Conditioners (AC) with a market share of 24.1% as on June 2022 driven by its better product mix and reaffirmed consumer trust in its brand. In FY2022, Voltas reported 5% revenue growth aided by the opening up of the economy after the pandemic. The unitary segment witnessed 16% YoY growth in FY2022 while the Electro Mechanical Projects and Services (EMPS) segment de-grew by 14% amid a low carry forward order book, completion stage of major projects and the company's cautionary approach towards fresh orders. In Q1 FY2023, the company has reported healthy revenue growth (55% YoY and 4% QoQ), driven by healthy sales from its unitary segment as well as a low base. The operating margins were flat at 8.6% in FY2022, affected by unabated increase in commodity prices along with supply chain disruptions that posed a challenge in availability of key inputs overriding demand over supply, resulting in high inflation. The operating margins contracted in Q1 FY2023 to 6.4% (against 7.6% in Q1 FY2022) due to high prices of raw materials, upfronting of advertisement costs, and provisions in the domestic segment. The margin in the near-term shall remain exposed to the input cost inflation in the company's unitary cooling business as well as to challenges faced in its project business in terms of a lower opening order book and execution delays faced in select projects and consequent cost provisions. Given the inflationary scenario and uncertain global macro-economic environment, Voltas has been recently watchful in bidding for fresh projects, especially in the international arena; bidding only for projects with a minimum threshold margin and proper risk mitigation framework with a sound counterparty. This strategy has led to a subdued, albeit strong order book, with the project division's total order book of Rs. 5,811 crore as of June 2022 providing visibility to revenues. The Stable outlook reflects the company's leadership position in the AC segment along with consistent cash accruals and superior liquidity levels, which will continue to support its robust credit profile in the medium to long-term.