Voltas Ltd
NSE:VOLTAS
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Ladies and gentlemen, good day, and welcome to the Voltas Limited Q2 FY '21 Results Conference Call hosted by HDFC Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Naveen Trivedi from HDFC Securities. Thank you, and over to you, sir.
Good afternoon, everyone. On behalf of HDFC Securities, I would like to welcome the management of Voltas Limited to discuss the post 2Q FY '21 results. We have with us today the senior management of Voltas management represented by Mr. Anil George, Chief Financial Officer; Mr. Manish Desai, Head Corporate Finance; and Mr. Vaibhav Vora, Manager Corporate Finance. I would now hand over the call to the management for their comments. Thank you, and over to you, sirs.
Thank you very much. We are happy that you could join us in this call. I will do a small presentation in terms of an analysis of results, and then we can go on to Q&A. For the quarter and 6 months ended 30th September 2020, as we entered quarter 2, GDP of the most advanced economies of the world had shrunk. G7 Nations receding anywhere between 7.6% in the case of Japan, up to 20.4% in the case of U.K. China had, meanwhile, managed to grow by 3.2%, also in sharp contrast to the fortunes of India, which declined by some 23.9%. Fiscal deficit of the center and states put together was estimated close to 13.5% of India's GDP for FY '21, more than double the 6.4% projected earlier. This was, of course, not a surprise considering the humongous shortfall in GST collections, averaging a mere INR 68,000 crores also in the first several months of the year. At the same time, shrinkage in all sector industries continued unabated, accentuated by significant job losses and surging CPI inflation, especially among food items impacting the common man. All through the reporting quarter, we witnessed intermittent lockdowns across the length and breadth of the country with 3-day week-per-week market operations, weekend disruptions and curfews, which affected secondary sales cross industry. That apart inconsistent weather conditions with rain and floods, particularly in South, West and East India took its toll.It is externally estimated that the COVID lockdown, combined with consumer frugality, has led to an AC industry de-growth of around 59% in the first half of this fiscal year. Labor shortage and demand reduction in sectors like hospitality, entertainment, malls and office space impacted project progress. Given the overall subdued sentiment, there were hardly any fresh investments from the private sector. And project completion has continued to remain in limbo amid serious liquidity concerns. Government efforts to infuse optimism through new project announcements increased outlay and spending were yet to bear fruit. Given the deemed essential services tag for project activities in Middle East, the pace of existing work in the Middle East remain largely secured from the travails of COVID. Unfortunate, however, that we continue to experience a conscious propensity to delay certifications, postponed grant of EOPs, EOPs being extension of time, and withhold payment against due receivables. The gradual easing of lockdowns towards the later part of the quarter provided an opportunity for recovery, which is proactively seized by our business teams. We managed to grow our revenue from operations by over 13%, improving across all 3 business segments. The UCP business extended its growth by 9%, overcoming the seasonality effect, firmly underlining the #1 leadership position. Pace of execution was simultaneously stepped up across projects to register a 15% top line growth in segment B. Even segment C, our smallest, lets no stone unturned, to grow by over 16% year-on-year. Coming to the bottom line, the UCP segment improved its results by some 37%, stepping up its Q2 EBIT by some 230 basis points. Alongside, given the business constraints mentioned earlier, time-based ECL and other conservative provisions, particularly in the Middle East, constrained project profitability. That apart, a drop in other income via mark-to-market changes, reflecting the external reality of a dip in average yield of investments have impacted resource. 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 6 months has been weak, given the context of the lockdown and AC sales lost out in the high season, availability of cash on our balance sheet is a definite strength in these difficult times. There's a small chart with the -- giving the snapshot of our results, which you would have already seen in your segment results. Let me now comment upon segment A, Unitary Cooling Products. Swift recovery post easing of lockdown helped achieve volume growth of 11% in ACs, 20% in commercial refrigeration and 28% in coolers. Volume in RAC was further driven by a 36% growth in inverter ACs, brisk sales of which helped reemphasize our overall market leadership, which stood at 26.8% exit August 2020, YTD being 26.4%. Beneficial mix benefits from higher sale of inverter ACs, together with lower material costs, supply chain efficiencies and sensible marketing spend led to a handsome increase in EBIT from 8.76% to 11.13% for the quarter. Insofar government regulations are concerned, it may be noted that the Central Pollution Control Board has, in response to industry representations, reduced the re-based collection target from 40% to 30% for FY 2021. Further, emphasizing the Make In India initiative, the import of ACs with refrigerants, CBU, has also been banned, which will negatively impact several "import and sell" fringe players, helping control market fragmentation. At Voltas, we have always remained conscious of the need to increase localization and have, over the years, consistently reduced the risk of overdependence on imports. Certain components like compressors, a hitherto import item, is now available in India. Meanwhile, together with investment in malls and balancing equipment to improve the throughput of our existing manufacturing units in Pantnagar, efforts to set up a South India-based AC factory are being fast tracked. We have, in parallel, made sufficient arrangements to ensure that there is no dearth of inventory to meet the expected demand of the upcoming festival season and beyond. Strong order booking across existing and newly appointed distributors, coupled with various offers, led the growth of sales in the air cooler category. With a 10.8% July exit market share, we are currently #2 in this category. Improved performance of the commercial refrigeration category reflects the change in consumer lifestyle, along with expanding mini "cold chain" facilities across Mom & Pop/Kirana type stores in 2-tier and 3-tier cities where chocolate coolers and chest coolers are particularly in demand. In addition to regular expansion of the distribution channel, and around 180 EBOs, the company is also setting up exclusive outlets, which will act as an experience zone, providing a hands-on feel for the complete range of Voltas plus Voltbek products. Armed with attractive consumer schemes, these outlets are expected to enhance consumer interest and footfall while augmenting brand awareness. I move on to comments on segment B, the electro-mechanical projects and services. Segment revenue for the quarter increased to INR 928 crores as compared to the previous corresponding quarter of INR 809 crores, the increase being largely across international operations. The domestic projects business saw an encouraging turnaround across various parameters in the current quarter. While INR 273 crores of new orders were booked during the current quarter, inquiries, particularly for infrastructure projects, including metros, electrical, water treatment, et cetera, have picked up. Many of these are government-led and are expected to be converted to orders in the coming quarters. In addition, there is an increasing demand for solutions in the indoor air quality space using UVGI products, automated duct cleaning, filtration, et cetera, which we, at Voltas, are well placed to provide. The pace of execution in view of the recent projects in Middle East was better, given the availability of labor and government supported access to project sites. At the same time, some of the older projects have witnessed delays which are not always attributable to Voltas, resulting in cost overruns. Although legitimate contractual claims, including EOT, are regularly raised, revenue recognition is possible only post formal approval. Apart from delay in work certification, payments are also consciously deferred by clients owing to liquidity constraints. All of these have resulted in time-based ECL and other conservative provisions, affecting results for the current quarter in this segment. We remain conscious of the risks entailed and are suitably cautious and vigilant insofar as new orders in the GCC region are concerned. Voltas currently has a carryforward order book of INR 6,852 crores, of which INR 4,529 crores pertains to domestic and INR 2,323 crores pertains to international. Moving on to segment C, Engineering Products and Services. Segment revenue and results for the quarter were at INR 93 crores and INR 29 crores, respectively, impacted by the general economic sentiment and ongoing mill operations which are below capacity. Fresh orders for textile machinery have been slow. The division, meanwhile, focused on growing the aftersales business, which, together with intelligent cost-saving initiatives, have helped maintain the EBIT. Mining support activities in Mozambique have thus far remained insulated from COVID and continues on a brisk note. The team has successfully negotiated further maintenance contracts with the clients, Vale, which all goes well for the future. Insofar as India is concerned, the ongoing commercial auction of mining blocks may provide avenues for revenue enhancement. Sale of Crushing & Screening, what's called the C&S Equipment, and parts are picking up as well. A brief comment on Voltas Beko, fast increasing demand from our channel partners for the newly launched Direct Cool Refrigerators category has been encouraging. Despite multiple operational problems related to the COVID lockdown, production from the new Sanand factory has now been stepped up to a rate of over 35,000 DC refrigerators per month, covering 27 SKUs, which will be increased further in the months to come. Production of frost-free refrigerators and automatic top [ stroke ] front-load washing machines and dishwashers will also be commenced in a phased manner. Work from home and the search for household convenience has opened up a good market for Voltas Beko products. As for the moment, we have a decent bouquet of best-priced SKUs across various categories. For example, around 50 SKUs in washing machines, 30 SKUs in frost-free refrigerators, 6 each in dishwashers and microwaves and so on. In constant thereto, a strong and cost-effective digital marketing communication platform is helping garner traction with our target audience. Going forward, we will further leverage the research and development strengths of our partner, Arçelik, to innovate and bring in India consumer-relevant products. Voltas Beko currently has some 900 billing points and some 6,000 touch points, which can be easily scaled up, riding on the might of Voltas' well-known distribution. There is ample opportunity. Together with the increased availability of products, we remain confident of meeting our internal targets, including the promise of 10% market share by year 2024-'25. To sum up, as we moved into Q3, we began to see a trickle of encouraging news, such as GST collection stopping INR 1 lakh crores, double-digit growth in power consumption, spike in sales of motor vehicles, rise and offtake of diesel and petrol and a sharp recovery in both manufacturing and services PMI. Additionally, going by the record spike in sales spoken about by e-commerce players such as Amazon and Flipkart, it would appear that consumer trends are clearly on the move. The festival season is around the corner, and Voltas has launched Mahotsav, a combination of various consumer-led schemes, including extended warranty, attractive product exchange and exciting finance schemes, making purchase even more attractive for our consumers. We feel that the consumer uptick will linger even if somewhat muted into the following quarters, and are, therefore, cautiously optimistic about the future growth of the consumer durable market. In terms of readiness, we remain well poised to seize all available opportunities to profitably grow our business in a sustainable manner. As a company, we are also keen to improve focus on the B2C product business of the company and have accordingly notified an in-principal proposal to internally restructure the B2B business. Subject to various approvals, the thought is to transfer the B2B businesses to an existing 100% wholly owned subsidiary, Rohini Industrial Electricals Limited, which will be suitably renamed to represent and reflect these businesses. Going forward in our project business, we will continue to focus on building our order book, following a cautious and risk-mitigated approach. A further pickup in pace of economic activity can be reasonably expected in the coming quarters. Various process improvements, cost control measures and efficiencies, which were strengthened during COVID, provides a degree of comfort on our future outlook. However, liquidity and environment-based near-term worries are likely to continue. That is what I wanted to introduce to you. Now I'm open for questions. Thank you.
[Operator Instructions] The first question is from the line of Sandeep Tulsiyan from JM Financial.
Many congratulations on great set of numbers, sir. Firstly, my question is on the UCP segment. We reported a handsome growth over there, about a 14% average volume growth. What I wanted to understand is one part is on the strong growth in inverter ACs that we have explained. How about the second part of the e-commerce sales. I wanted to understand what share of sales now constitutes from e-commerce? And how that has grown over the last year same period? And you had mentioned in the annual report that we have a 40% market share in the e-commerce channel. How that market share has moved in the first half?
Yes. The -- as far as ACs are concerned, it is not a product that generally fits in very well with the e-commerce channel because, as you know, there is an installation that is involved. So unlike other products, the percentage of contribution that we get as compared to our direct channel sales and other partners is not very significant. In fact, as for the quarter, we have close to about 5% of our sales that comes through e-commerce.
And how that has grown versus last year?
And last year was also more or less similar.
Understood. And second question, sir, is on the E&P segment. You mentioned of some time-based provisions that we have made in the current quarter. If you could share the quantum of this provision?
What happens in the project businesses that according to accounting convention and policies, practices and the loss covering those, the way that we look at provisions, particularly in the project business, is that if you are not able to demonstrate the collection in line with the previous trend, you generate what is known as expected credit loss and time value of money, so a provision comes by on that account. The second part of it is that in very many cases, they -- the clients might be delaying the certification of certain work that is done. So over a period of time, the certification does not come disputes takes place, and we are not really sure about the revenue that we will book on that, we tend to take a conservative position. The third part of it is that, for example, let me give you an example of the [ 2X ] project or the Dubai 2020, which was postponed. Now in that, there is -- we have an extension of time frame and we do know that we will get money against it. However, as date of the quarter ending, that extension of time has not been formally agreed. So in those cases, again, we take a conservative position and then when you have the money received that actually comes in, in terms of recognition. The fourth part of it was that I had spoken to you, people, in the earlier quarters about the problem that we had with Carillion as a party -- as a main contractor across both Dubai and Oman. In Dubai, we did not have much of a problem because the local partner was very strong and took over all the liabilities, and we were able to collect all our money without any problem. However, the situation was slightly different in Oman. They still say and hold out that they will pay us the money. But at this particular point of time, it has gone -- it has taken almost about 2 years now and those expected remittances and collections have not come through. And therefore, we have taken some provision there also. So it's a variety of these kind of things that really have made the difference.
Actually, I wanted to understand the quantum, sir, so that we can understand what will be the normalized...
I would not want to get into the quantum. What you should see is that despite this we have still made a 2.5% margin in this quarter on the projects business because this is the nature of the project business. There will be -- if I do, at any point of time, I do 20 projects, it is never possible that in all these 20 projects, I'll make money. What really happens is on some projects I will lose, on some I will win with exceptional margin accretion and some will be just where it is. So it's a combination of these. So I don't think that you should read much into the quantum of these provisions. What you should see is what is the ultimate margin that we have got in this quarter, and that's the only way that we can answer this.
The next question is from the line of Nitin Arora from Axis Mutual Fund.
My first question is more to do with the capital employed in the UCP segment. It has increased a lot or, I would say, it has increased from the March onwards, which you guided us in the Q1 because of the inventory. But how we should [ feel ] this? Is it just more of a function of inventory which should normalize once the season gets a hold? That's my first part of the question. My second question is the...
There is some background noise. I'm not able to hear you. Could you just repeat the first question again? I heard something about inventory normalization, but I'm not sure what you asked.
Sorry. I'll just repeat my question. So my first question is the capital employed of the AC segment, the UCP segment, got increased. So you explained us in quarter 1 because of the inventory it's increasing. But should we take the same argument this time as well? And this should normalize going forward once the season comes...
Carrying -- this quarter 2 is a very weak quarter. Traditionally, it's a very weak quarter. And at the same time, we are manufacturing also because we want to add on inventory and be absolutely on the ball when the market opens up for the festival season, one. Number two, when we get into the beginning of quarter 4. So as to the moment, we have something like about INR 1,000 crores of inventory sitting in our UCP books. And this is -- this represents something like about 110 days of inventory roughly. And it is not something that you should be worried about. We will easily and never in our history have we been stuck with inventory that we have not been able to sell.
My second question has 2 parts. One is transaction which you are attempting and looks like an attempt to demerge the B2B business what Voltas has been doing for so long and make -- and separate that into a separate brand or a separate company, which you have stated in the press release and keeping the B2C business as separate. Generally, we are very conservative as a group. And when you gave this on the Exchanges, should we assume that it's something in the near-term there you have got someone, you're selling that business to him and the time lines are now particularly clear in your mind that in 6 or 8 months' time, this should come in. Just need your take on that. And second part, on the MEP, as you said, we should look at the margins what you're reporting. But when we look at these one-offs and all, how we should look at your MEP margin? It should be back to 5%, 6% is where you look at it? Or you think that there will be further provisioning just because of the environment which is going on? Those are the questions.
On the first question, where you're really saying that -- there is no transaction or anything of that kind, okay? As we have explained, in keeping with good governance practices, the moment that -- we have always wanted to give extra focus to the B2C business and also ensure that the B2B business gets the appropriate focus. So what we have done, it is all within the house. It is just an internal restructuring. Rohini Industrial Electricals is a 100% owned subsidiary with every pie of money there being owned by Voltas, being managed actively by Voltas. So there is nothing in that, and you should not be assuming that we are planning to sell and this and that and all that. There are much more -- we don't have to go through all this convoluted route if we didn't want to do that. So basically, what we are doing is that we are putting the B2B businesses into a house which is a sub-house of the main property, if you want to put it that way. And therefore, you will have a proper focus on the B2C segment and on the B2B. That is the purpose at this particular point of time. And because we don't want unnecessary speculation, that is the reason why we have put it out into the public domain. Okay? The second part of it is that how should we be looking at the MEP reported margin, how should -- that should it be 5% to 6%? As I was mentioning and as I've alluded -- if you look at my notes of the previous quarter also, I have said that for 2 or 3 quarters, we are going to be having a bit of a pain because of COVID and related issues, particularly in the Middle East. Our ambition and our hope is definitely that we should be able to get back to this 5% to 6%, and I don't see any reason why we should not be able to do that. But if you're going to ask me that will I get into 6% the next quarter, the answer is no. It will be a graded swing up.
[Operator Instructions] The next question is from the line of Bhavin Vithlani from SBI Mutual Funds.
Congratulations for great set of numbers. So I have 2 questions. We have seen, over the last 2 years, government putting, increasing non-tariff and tariff barriers for RAC as a segment. In your opening remarks, you did mention about increasing indigenization and the new South India plant. It will be useful to understand how are we actually going over the next couple of years because we have been sourcing from third-party also. So are we looking at increased components within our manufacturing activity? That's one. Second is, in the quarter gone by, what would be the industry growth according to you for the RAC? These are my 2 questions.
This is Manish over here. Let me answer the second question first. As the opening remarks done by Mr. Anil George, the industry, our reading and the GFK third-party data shows that the industry has de-grown by 59% as far as the air conditioner is concerned, largely on the backdrop of the Q1 volume, which contributes significantly to the yearly volume for the AC industry. Come back on the restrictions or the imposition of the tariff duties or increase of tariff duties by the government. It was, in fact, if you look from our earlier 2 quarter notes as well, we have started our journey of localization or reducing the import from China gradually. To start with, we have touched upon the reduction of CBU, which otherwise, the volume was substantially higher, if I take back you to the 4 to 5 years back. In terms of the IDU, which is another component, which we started localization by investing in the malls. And now we are expecting, in the years to come, probably the substitution of the import IDU will be on a higher side, if I look into the localized, our investments, coming out of it. Components, there are certain components on which the dependence is still higher on import because of the absence of the value chain, which is existing -- which is not existing in India. However, we have seen that some of the component makers looking into such kind of restrictive entries are a move by the government and looking into the demographics and the market potential, are establishing their place of business in India. We have talked about the compressor in the past. In the current -- in the recent development, we are seeing that the controllers' manufacturers are also eyeing their place of manufacturing in India. So in a way, if I look forward in the next 2 to 3 years down the line, you may see that the import of component as well, which is today absent to a larger extent, will also find a place in India.Now if you look from, in terms of the Voltas perspective, we may not be so efficiently involved in manufacturing or a part of the component back-end process. However, considering the largest volume, which we are carrying in our industry, definitely we'll be at an advantage in terms of negotiation with those players who are coming and establishing the manufacturing place because we, as a brand, we don't -- can certainly achieve our volume target and ensure the business by dealing with Voltas. So in a way, if I look from the overall perspective, from a Voltas perspective and industry perspective as well, Voltas is getting, I can say, has a really targeted process and started establishing its localization drive. As far as the industry is concerned, you may see a sea change down the line, 3 to 4 years where you'll find either the local manufacturers have started developing those components or you find the multinational operators who are operating out of country right now, having their manufacturing base in India. Hope I've answered to your question.
Sure. One follow-up, if I may. Sir, what could be the capital expenditure outlay over the next couple of years, given that we are increasing localization?
If I look from the perspective of investment in more, the outlay is not so significant because what you are doing is you are creating a [ free fall ] fresh out of the mold, which itself individually can contribute a significant volume. However, as we stated in our earlier notes, we are looking for having another manufacturing setup in South to take advantage of the supply chain as well as near -- coming near to the market, wherein we have projected and we have kept saying that amount of close to INR 200 crores, INR 250 crores, including the land price in the first phase, will be deployed to that. So in a way, if I look from that perspective, Phase 1 will take almost INR 200 crores, INR 250 crores of outflow and. Depending upon the capacity and the market growth, we'll definitely look into expanding those capacities to better adequate to the requirement of the market.
[Operator Instructions] The next question is from the line of Siddhartha Bera from Nomura.
Congrats for a great set of results. Sir, my first question is on the AC business, I mean, some color, if you can highlight, how are the retail trends currently in the festive or within past 1, 2 months? And what do we expect for the second half of this year?
I did not get your question. Some color on?
So I was saying that some color on the retail for the AC business about how they have been in the past 1, 2 months? And what is the outlook going ahead for this business in the second half?
Actually, we do not want to comment on the quarter that is coming up. All that I would say, and you should see that -- know that from your experience with the company, we will -- whatever sales is there, we will beat the competition and we will get ahead and we will get whatever growth is possible. I do not want to really talk in terms of what is the -- how much is the growth, et cetera. That would not be correct for me at this point in time.
Got it, sir. Sir, basically, my second question is on the market share side. So we have gained considerable market share in the first half of the year. So I think -- will it be fair to assume that now with these import restrictions coming in and smaller players are not able to sell now, so further gains from these levels would be possible for this -- for the remaining part of the year?
The people who have been -- who are knocked out are actually very fringe players, really. And I'm sure that they must be already holding inventory also, which will -- for the immediate future and the next couple of quarters, they will have inventory already. So it's not going to be immediate follow through. But I think the government has taken a good decision on this because it also leaves out -- keeps out people who are just trading, getting in a container load full of ACs or fully activated and then just selling it here. And rather they are motivating the Make In India, which is a good thing to happen. Over a period of time, what happens is that many of these small players will find that it's no longer economical for them to do this or that they are not allowed to do it because of the fact that it's a banned product. So unless you have some way of assembling or charging the gas here or doing things like that, you will not be able to sell. So it kind of narrows the market down a bit. But it doesn't affect any of the major players because everyone was -- it's only the fringe players who are affected here.
The next question is from the line of Naval Seth from Emkay Global.
Somewhat continuation to the last question. If you can share some insights, what is the cost arbitrage which these players used to get by importing from China?
Naval, apart from the -- I would not like to say about the cost arbitrage, but what they used to get advantageous to do importance. So they are -- it's like a ready-to-cook kind of items, whereby you can immediately get the material put on the shelf. And because of which, you have seen a lot of players have started looking into this industry as such. As far as the cost arbitrage is concerned, I'm not sure they'll be getting significant amount. What they can save is in terms of movement of the raw material, which otherwise the manufacturer has to do it. And taking out the supply from one of the factories or to factories and look at the entire length and breadth of the country. Apart from that, if you look from the price perspective, I have my own reservation because all these top brands who are there having, in terms of volume, a significant manifold volume compared to these 3 players where they have contributed. The importance kind of business world gives immediate access to your market, and you must have seen in the past, because of which a lot of modern trade players have come out with a private label brand. And that was their objective because once they keep those private label brands and be competitive in the price front, they start getting a share of the entire larger client to it.
So is it fair to assume that market leaders like you and other big players will see accelerated market share gain from these fringe players? Because although now there is no difference, their go-to-market will not be as simple as it was from China. So is it fair to assume that? Or they will, again, have their own means to come back with the same pace?
Naval, I think later on, what it leads to, some kind of consolidation and maybe a restrictive entry to [ right-sized bar ] operators. Why I'm saying -- using this word particularly? Because we have seen many brands who have come and gone by putting their presence for a shorter period of time. Now all these restrictions, which government is putting, will not allow them to operate in such kind of way, which otherwise was possible before this ban has come into operative. As far as the market share is concerned, we have been consistently increasing. If I would like to put more about Voltas are putting about the other brands. Voltas has been anyway consistently increasing the market share, be the presence of the fringe player or they won't be there. Yes, this opportunity will be higher in terms of consolidated position. But if you look from the perspective of the price point, because these players were having aggressive price point as well, probably this will help us to sustain a reasonable price in the market rather going into disruptions, the way in which these players were closing in the Tier 2, Tier 3 markets.
Fair point. Second question on imports. Can you highlight what is the percentage imports for IDUs and ODUs for you at current, sir?
It's difficult because it keeps changing season by season, it keeps changing, evaluating the cost versus the cost -- make versus buy reason which company -- all companies definitely carry out. But like in terms of what we said earlier, the CDU percentage import has come down drastically. I don't want to ascribe the percentage because it's a selective SKUs which we do import, having the lower volume in the market. Many times, it goes on a higher side, considering the vulnerability of the ratio or design or a price point which we are looking in the market. IDU was at a higher stage around 70%, 80%, if I take you 2 to 3 years back. Now that also being localized, what I just answered to one of the question. And we are looking more into the future one and more, you find. In fact, if I look from the today market, we have our own investment models of SKUs available in the market and doing really well, giving us a clear way of putting more money into the molds and increase our operational drive.
The next question is from the line of Venugopal Garre from Bernstein.
This question has been asked on the B2B side in terms of shifting the B2B business to the subsidiary or any. Just wanted to understand how does this shift moving of business to your own subsidiary, which is Rohini actually increased focus on that? Is it notable with you creating some new management structure there? And also for your B2C cash flows get ring-fenced given that B2B is now part of a subsidiary? That's the first question.
So 2 things. Firstly, yes, you're right. It will get additional focus because there will a management team that is project-specific that will be looking into the affairs of the B2B business. And so it doesn't really get lost in the B2C as it gets the adequate focus and gets the adequate management attention. The central -- the management team that you have for Voltas as a whole will be operating in the same way, much as we do for other JVs and subsidiaries and wholly owned subsidiaries. But what is most important is that projects businesses will get discussed specifically, will get the importance that it needs and will get the financing, will get the focus rather than getting submerged B2C business where there is a lot of growth opportunity and impetus there.
Got it. My second question is on Voltbek. Can you give us some idea of how sales have been in the previous quarter or in the first half of the year, whichever you think is easier to answer because first half would have some part where they would have been challenges? And sir, the capacity-constraint that you sort of did face during the quarter impact sales?
Actually, the thing we are very happy with Voltas Beko is that the products have sunk in pretty well and are in great demand from the trade. In fact, it's very rare for a brand to be launched with -- in a country and not extend credit. But the truth is that in Voltas Beko, it is going through our system without any additional credit of any kind. That itself is a very big plus point. Today, our constraint is that we are not able to produce sufficient numbers. And why are we not able to produce sufficient numbers? Because we started the factory in somewhere in end January of this year and then we had to shut down because of COVID. And as COVID progresses and localized lockdowns happened, there are a number of operational problems. For example, you might have a spare part or some particular -- maybe a handle of the fridge that is coming from someone who's doing it in, let us say, in Pune, which might be under lockdown. It disrupts the production. So despite all of that, what we have successfully done, and we're very happy about that, is that we have been able to scale it up to about 35,000 refrigerators per month. And we are selling, and in many cases, it's even directly dispatched from the factory without even coming to the warehouse. It's that kind of demand. And the other thing is that the pricing is still very optimally done, and we keep watching the trends. And the Voltas brand name sells along with the Beko. They are very good in terms of the research and development. They invest a lot of money. And the products that we sell are very specific to the Indian consumer in the sense of tweaks and other things that we've changed in the product. So it's not a run-on-the-mill product, and it is having very good traction as we can see it. Currently, we operate at about 6,000 touch points and it certainly can go -- the universe for consumer durables is something like about 35 -- 32,000 to 35,000 shops, which we might really want to be participating in. And in the office, it's never the case that we want to take over all the things. But we would ideally think that the Voltas Beko distribution can go to 20,000, 25,000 kind of distribution outlets as we look at it. So there's a lot of runway for growth. But the main issue and the main thing that we will get, and it's a part of a plan, is ramping up the production. And as I explained in my note, we are looking at various things, adding frost-free refrigerators, automatic top- and front-load washing machines and dishwashers which will all be commenced in a very staged way. The other thing is that we have sufficient amount of land there, and the sheds are already built up. So all we need to do is to get the specific equipment, put it and we'll be able to swing up our production very quickly. We expect to reach an amount of about 100,000 Direct Cool Refrigerators by the middle of next year.
The next question is from the line Bhoomika of from IDFC Securities.
Congratulations on a great set of numbers. Sir, just wanted to touch upon our -- in the core RAC segment, if you can touch upon the distribution strategy. We've been growing our distribution quite well. But how are we growing that further, particularly in Tier 2, Tier 3? If you can give some color, what is the breakup versus urban metros and Tier 2, Tier 3?
Bhoomika, this is Manish over here. Bhoomika, if you look from the distribution or the distribution reach perspective, we are anywhere in excess of 50% or 55%, to best of my reading. Now that is in a consumer-driven space. I won't say it's optimum, it is most optimum over there. The reason being is because the -- each brand, these all outlets, what we have as a part of the distribution channel are a multi-brand outlet. And definitely, when you evaluate those distributors, you are doing evaluation based upon the kind of business which are -- which they are doing with the particular brand. Having said that, what we do as a part of what we undergo as an employee performance appraisal, we also carry out appraisal on the distributor side. And whenever we need it, we carry out those changes based upon what kind of market growth we are expecting in this particular territory and how this particularly grown into a particular -- in a particular year. Having said that, the growth is higher side in Tier 3, Tier 4. We do not have the readymade numbers right now, the reason being is because our third-party also is finding difficult to collect the data in terms of this current pandemic where the travel is being restricted. However, the reasonable -- or the reading clearly is the Tier 3 -- Tier 2, Tier 3 and Tier 4 are growing in a better way compared to metros and Tier 1.
Okay. And my second question is on Voltbek JV. You've seen the losses going down from last year versus this year. With the, I guess, that's got to do with the own local manufacturing that we started earlier on. So will it be fair to say with the kind of a faster ramp-up, we were only targeting to breakeven by year 5 that now this might be slightly more preponed and could turn profitable at a much earlier stage?
We always expect to do better than what our projections are. But at this point of time, you're right in your observation that the losses that we've got are better than the ones that is projected. But at the same time, there might also be the need for significant infusion of marketing spend as we go forward. One of the things that we have got now, and I mentioned this, we have got roughly about a 1.7% market share in the washing machines and also 1.7% share, 1.8% share in the refrigerators. So we are, whether you like it or not, becoming a bit of a threat to the biggies. And so we might also need to spend some substantial amounts on marketing, which still now we have been very cleverly doing riding on the back of Voltas, doing it digitally, doing it very sensibly, et cetera. So I can't really predict it that way. But again, I would just say that we will be -- we expect to do better than our own predictions.
The next question is from the line of Bhalchandra Shinde from Max Life Insurance.
Sir, regarding our cash flow from operations has actually slightly deteriorated. That is largely because of the decrease in payables. Will this phenomena change and our cash flow from operations turn positive by fiscal year ending?
No, I think it's a very good question, but let me just give you -- the quarter 1 is normally a quarter where we are full of cash, where so much of product is sold and we are able to get that cash in. And you know that we don't have exceptional credit base, terms or anything with anyone, so that first quarter did not really play up for us. In fact, as of date, we have ourselves, as compared to the previous year in the first half, de-grown by 43%. Now the industry itself has de-grown by some 50-plus percentage, that's another story, but because of COVID and the lockdown that we had. So the cash inflow that I expected in quarter 1 was not there. But at the same time, I had to make payments on LCs and import builds and other things, which I had already negotiated for. So the payments fell -- started falling due in quarter 1, quarter 2, et cetera, whereas I was not getting sufficient receipts. Now when you go back to -- by quarter 4, I can tell you that the situation will be completely different. As we sell more and more products, the money will be coming in and we will -- in an average year, we will keep adding to our financial resources, one. Number two is that in this process, there are also -- someone asked a question about capital investments, et cetera, we have spent some money in terms of investments in JVs and now we will be looking at manufacturing units. We have all these plants also that are there, so it has to be taken in total cognizance of the whole situation.
Sure. And sir, regarding our ad expenses, it has been also relatively lower in first half because, obviously, there was restrictions. But to maintain the similar kind of a market share, will we need to have the higher ad expenses or similar kind of ad expenses in second half? Or how we see that panning out?
No, I don't think that we can really project the way that business will go. What happens in these cases is, one is that we have our own go-to-market way of doing things, which might be different as compared to other companies. For example, in the first quarter and the second quarter, we have hardly advertised anything because there was no point in advertising. And -- but yes, we are able to sell appropriately well. And why are we able to do that? Because of the strength of our distribution, because of the strength of our brand, because of all that we are able to communicate to the market sensibly through digital platforms. So it's a question of how we really see the situation. If we have, for example, a very strong issue with a major multinational partner -- a major multinational players, then we will also respond appropriately. And the good news is that we have sufficient margin. The margin that we earn in AC is not replicated elsewhere. So we have the margin, we have the money in our balance sheet and we have the guts and the inclination to fight our competition to the last drop.
[Operator Instructions]
It's already 05:00, so probably last 1 question, we can take it up. The rest, if anything remain unanswered, we are open subsequently to others.
Sure. The next question is from the line of Dhaval Shah from Girik Capital.
Given this new import section, will there be a change in the way you stock the inventory? Generally, we have a lot of inventory in the fourth quarter. So will you be preponing the purchase in the third quarter, given there will be a lot of rush to recruit domestically? Just want to know your thoughts on this?
In fact, if you recollect, Mr. George already said, we are having a good amount of inventory with us right now. Just because of this change in the restrictions or a change in the government regulation, the inventory [ book ] will not undergo any change. Yes, but whenever we do plan, we have to take it -- take into consideration the capacities what our local suppliers are also having it. Having seen the sufficient inventory in our warehouse, we are not seeing any good amount of procurement starting from quarter 3. However, we need to see how the market is reacting to the festival seasons and the upcoming season. And accordingly, we have to back-end our sourcing to ensure that we are not losing the sale just because of the inventory not with us.
Got it. So sir, in FY '20, what was the proportion of your ACs manufactured in your own facility versus imported and sourced domestically?
What we have, Dhaval, is, if I look -- see, there are -- if I look into the complete CBUs, the percentage will not become so attractive. We do manufacture the component, certain back-end activities we carry out. So in terms of the outdoor unit, it's -- we always say it's 100% or closer to 100% gets manufactured in our factory. If I look from the window perspective, window air conditioner, it gets manufactured locally through our OEM, definitely under supervision and the supervision of the Voltas, including the R&D and the value engineering which will carry out. In terms of the IDU, also is getting proportion out of that gets manufactured in local and something which will get imported over there. So it's a mix of supply chain, Dhaval, because you cannot ascribe to a particular percentage to manufacture because ultimately, what the aim is to ensure that we have a sufficient inventory with us, whether we're doing sourcing locally or through import to ensure that we are giving enough ammunition to our sales team to go in the market and do the front-end sales. Naveen, we can close this call, being 05:00 now. Anything remain unanswered, they can -- any of the participants can get in touch with me or Vaibhav separately.
Thank you. On behalf of HDFC Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.