This Tata Group Stock Faces a Small but Serious Threat

It's not even two months into 2024 and Tata group stocks have already gained immense focus, more so now after announcing as many as five upcoming IPO listings.

January 2024 marked Tata group's commitment towards the battery energy storage system with the group announcing an IPO Tata AutoComp Systems.

Later on, Tata Consumer made two big acquisitions and even carried on a rights issue.

February 2024 marked the month where a little-known Tata stock TRF turned multibagger in 2024.

As February comes to a close, most Tata group companies have shown resilience this year and currently trading in the green.

One stock from the group that has made a remarkable comeback is Voltas - rising from Rs 850 odd levels in December to Rs 1,100 at present.

However, the stock faces one big serious threat that investors should take note of in the coming months.

Rs 750 Crore Stuck in Qatar

The MD and CEO of Voltas, Pradeep Bakshi, recently announced that the company is dealing with a significant headwind as payments close to Rs 750 crore were stuck in Qatar.

The company had failed to realise overdue receivables according to execution timelines.

In response to the situation, Voltas has requested the Indian government to intervene in this issue and help the company recover its payment.

They have approached the Indian embassy in Qatar for assistance in this matter. Further, they have contacted the Qatar Chamber of Commerce and Industry to resolve the dispute. Voltas is also in talks with its clients to end the fiasco.

Background on the Qatar Fiasco

Voltas is well-known for its engineering capabilities and is one of India's leading Mechanical, Electrical, and Plumbing (MEP) and Heat, Ventilation, and Air Conditioning (HVAC) solutions providers.

In Qatar, Voltas was contracted for MEP projects. The bills for the same currently remain uncertified and unpaid despite the projects' being successfully completed.

The company's CEO said that Voltas expected some basic ethics from its partners, who failed to adhere to the same.

The total gross outstanding payment receivables related to MEP projects in Qatar amount to Rs 750 crore. There is also an additional exposure amount of Rs 375 core in bank guarantees.

The primary reason cited by the CEO was that some contractors unethically encashed bank guarantees, resulting in the locking of funds for Voltas.

Impact on Financials

Voltas reported a net loss of Rs 276 million (m) in the December 2023 quarter. This was mainly due to the losses incurred in the EMPS segment, which amounted to Rs 1.2 billion (bn).

In FY23, Voltas was forced to make a provision of Rs 1.1 bn mainly due to the back guaranteed encashment and contract cancellation issues.

Voltas is currently facing challenges not just from a single customer. Several of its customers, such as North Gate Mall, Sidra Medical and Research Centre, and Commercial Boulevard Department, have all contributed to the poor financial performance for the Tata company.

Voltas Financial Performance

In November 2023, Voltas share price was under pressure as it was struggling to scale up its performance in the competitive market.

In the AC market, new players have started a price war which is leading to market share loss for companies like Voltas. The competitive scenario is becoming increasingly intensive.

Shares of the company also faced selling pressure after it was rumoured that the Tata group was considered selling some of its stake in Voltas.

The company has posted a loss of Rs 280 m in the December 2023 quarter compared to a loss of Rs 1.1 bn in the year ago period.

It has really struggled to keep up with its track record of posting steady financials in the current year.

In the last five years, the company's revenue has grown at a CAGR of 5.7%.

However, the net profit fell at a CAGR of 23.3% due to a rise in the prices of key inputs such as aluminium, steel, copper, and high-density polyethene.

As a result, the net margin, RoE and RoCE contracted.

Financial Snapshot

Rs m, consolidated	FY19	FY20	FY21	FY22	FY23
Net Sales	71,241	76,581	75,558	79,345	94,988
Growth (%)	11%	7%	-1%	5%	20%
Operating Profit	7,980	9,173	8,302	8,707	7,408
OPM (%)	11%	12%	11%	11%	8%
Net Profit	5,079	5,172	5,251	5,041	1,350
Net Margin (%)	7%	7%	7%	6%	1%
ROE (%)	12.8	12.4	11.4	9.6	2.5
ROCE (%)	16.8	17.2	15.1	13.0	5.6
Dividend (Rs)	4.0	4.0	5.0	5.5	4.3
Debt to Equity (x)	0.1	0.1	0.1	0.1	0.1

Data Source: Ace Equity

As can be seen from the table above, profitability is at a decadal low. The company closed FY23 with a net profit of Rs 1.4 bn while its FY12 profit was Rs 1.6 bn.

The silver lining for is that market leaders like Voltas have always proven to emerge stronger when the tide turns and investors are hoping the Tata group company could make a comeback soon.

Market experts are projecting Voltas to benefit in a falling inflation scenario as margins could improve following a cut in its key raw materials such as aluminium, steel, copper, and high-density polyethene.

Outlook for Voltas

The compounded issues due to payment receivables have prepared Voltas to be cautious about the projects they work on moving forward.

The CEO admitted that the company will only focus on well-funded projects and work with reputable clients and contractors.

For the overall outcome, Voltas expects to consolidate its presence in the reliable room air conditioner category. The penetration is still low, but the company has seen some growth in the market demand.

Several people, including those in small towns, are upgrading their window AC to split AC. As disposable income increases, people look to buy air conditioning to combat the rising heat crisis.

As a result, Voltas, which had a market share of just 3% in the sector, has improved its market to 6% this year. The younger generation is well-paid and needs comfort, enabling Voltas to capture a consumption base equivalent to that in China.

Apart from the AC category, Voltas's market share is also increasing in the refrigerators and automatic washing machine segments.

To further improve its market share, Voltas is looking to invest Rs 10 bn in this growing segment, and Rs 5 bn will be used to set up a new compressor plant.

The remaining investment will be utilised for capacity expansion in the next five years.

Voltas has guided for a positive outlook in the coming quarters. The company said in its latest earnings call that as summer season kicks in, it's ready to meet the demand across air conditioners, commercial refrigerators, air coolers, and home refrigerators.

As of December 2023, the Tata group company had an order book of over Rs 80 bn.

How Voltas Share Price has Performed Recently

In the past three months, Voltas share price has rallied over 32%.

In 2024 so far, Voltas shares are up 11%.

Voltas has a 52-week high of Rs 1,115 touched on 21 February 2024 and a 52-week low of Rs 745 touched on 14 July 2023.

About Voltas

Founded in 1954, Voltas quickly became a market leader in selling room air conditioners. Apart from that, the company has also been renewed as an engineering solutions provider.

It has a strong presence across India, Africa, Southeast Asia, and the Middle East.

To know more, check out Voltas financial factsheet and its latest quarterly results.

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