The deal will help Voltas penetrate the industry at a deeper level with diverse products in its kitty.
Voltas, a part of the Tata conglomerate, has formed a 50:50 joint venture with ‘Arcelik’, a Turkey-based European home appliances major, to introduce an all-new range of appliances in the Indian markets.
The newly formed company - Voltbek Home Appliances (Voltbek) has launched refrigerators, washing machines, microwaves and dishwashers under the ‘Voltas Beko’ brand. The products, manufactured at Sanand in Gujarat, will be made available from the second half of Q3 FY19 or in early Q4.
Future Supply Chain Solutions, a third-party supply chain and logistics service provider from Future Group, will be an end-to-end logistics service provider to Voltbek. It will handle the entire warehousing and transportation needs with an aim to improve lead times, while simultaneously optimising supply chain efficiencies.
How does Voltas benefit?
Voltas caters to a wide range of clients in Indian and foreign markets through its diversified product and service portfolio in the areas of cooling and engineering.
In the consumer segment, air conditioners (ACs) comprise a major chunk of Voltas’ annual revenue. AC sales are driven by seasonality since buying primarily takes place in Q4 and Q1. Milder summers, as seen particularly in the June quarter this year, can impact Voltas’ financials for the year.
By foraying into manufacturing products other than cooling devices, Voltas should be able to offset risks associated with seasonal volatility.
Overcome sluggish capex
Voltas' order book in the electro-mechanical projects segment (EMPS) includes domestic and foreign clients. The domestic arm predominantly includes government contracts and urban infrastructure projects (in addition to some agreements from technology and healthcare clients). The international arm handles projects pertaining to electrical distribution and water treatment in the middle-east regions.
In the past, this business has faced several headwinds owing to lengthy gestation periods, cost overruns, economic uncertainties, financial difficulties of clients/subcontractors and policy changes, among others.
The move towards 'Voltas Beko' underscores Voltas' inclination to shift its business model from capital-intensive to consumer-centric. The latter, being a relatively secular and consistent theme in the Indian context, should provide good top-line visibility.
Demand for consumer durables is usually on an uptrend in the second half of the fiscal due to the onset of the wedding and festive seasons. Timing the launch around this period, therefore, ensures adequate revenue traction.
Voltas' market reach spans across India. The company's strong logistical and distribution capabilities can be leveraged optimally to sell ‘Voltas Beko’ products too.
Voltas' market leadership in the AC space will come handy when coming up with a new set of product offerings.
Arcelik’s technical know-how in setting up product development centres, establishing research processes and setting international benchmarks has enabled it to sell its products in 145 countries worldwide.
It is Europe’s third-largest home appliance company and has some unique technologies to offer in its products. These innovative features will help Voltas achieve product differentiation.
India’s consumer durables market is a well-discovered one. Consequently, the presence of numerous brands (domestic and foreign) suggests that an apt product pricing strategy becomes critical in attracting demand.
Rising input costs
Rising metal prices and the rupee’s depreciation versus the dollar make imported components costlier.
For a new brand like ‘Voltas Beko’, to create a niche for itself and develop the desired degree of visibility, incentivisation schemes are extremely important to push products across all trade channels. This necessitates offering margins higher than usual to existing and new dealers.
Promotional activities help achieve higher conversion-to-footfall ratios at outlets and strengthen a brand’s positioning. At the outset, Voltas’ spends on advertising and discounting schemes will be high. Voltbek will incur Rs 150 crore on this in the first year of the launch.
A large population, economic growth prospects, improved electrification coverage, availability of financing schemes and higher disposable incomes. are expected to keep prospects of India’s white goods industry strong. This is one of the prime reasons why Arcelik chose to partner with Voltas, a company with a strong brand recall, extensive geographical reach and a well-established management team.
The deal will help Voltas increase its penetration in the industry. However, achieving break-even in the near-term would be challenging given the steep preliminary costs involved.
In the long run though, ‘Voltas Beko’ products should aid margin expansion by virtue of economies of scale and gradual normalisation of expenses/overheads.
The stock, which trades at nearly 26 times its two-year forward earnings, has been fairly range-bound in the recent past. Investors seeking a good long-term investment opportunity may consider going long amid the ongoing market disruptions.Moneycontrol Research pageLIVE NOW... Video series on How to Double Your Monthly Income... where Rahul Shah, Ex-Swiss Investment Banker and one of India's leading experts on wealth building, reveals his secret strategies for the first time ever. Register here to watch it for FREE.