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Management Discussion  
Voltas Ltd.
BSE Code 500575
ISIN Demat INE226A01021
Book Value(Rs.) 122.66
Dividend Yield % 0.57
Market Cap(Rs. in millions) 233736.98
P/E 44.46
EPS 15.89
Face Value(Rs.) 1  
Year End: March 2015



1. The global economy continued to show some improvement through 2014-15, with the US evidently in revival mode, as seen from the various data points including the more recent strengthening of the Dollar. Europe, however, has not picked up its pace, and remains in peril of continued recession. China too seems to be losing momentum after multiple years of steady growth. Meanwhile, with the steep correction of international crude oil prices, the Middle East geographies in which the Company operates might moderate their spending, which is brsently directed more towards the social sector and core infrastructure.

2. On the Domestic front, economic sentiment has shown an uptick, amidst high expectations sparked by encouraging announcements and news, post the election of a stable Government at the Centre. The nation's macro-economic situation has improved, with inflation and the Current Account Deficit largely under control, and the GDP showing recovery. Similarly, the HSBC Purchasing Managers' Index has remained in positive territory for over a year. RBI also exhibited optimism in lowering the Repo rate and marginally bringing down bank interest rates. However, the environment of positivity failed to raise demand or investment levels. The industry remained at a sub-par 72% capacity utilization as per RBI estimates. Private sector spending remained constrained, especially on capital goods; and credit growth stayed slow. Although industrial production grew by 2.8% overall, sluggish performance persisted in key verticals such as automotives, metals, infra and real estate, while IT and pharma slowed down in Q4 (2014-15) after building up growth momentum earlier. Nevertheless, there is hope of a revival, based on the Government's announcements of intent.

3. Against this backdrop, the Company unveiled its newly-crafted Vision 2020, 'Driving value through smart engineering', defining a new identity for the Company to govern future growth. The focus will be on enhancing the value proposition, with 'smart' and 'sensible' engineering solutions based on consumer insights. These offerings will feature best-in-class technologies, delivered by a dynamic and engaged workforce that believes in improvement through innovation. The new Vision will be supported by 5 SWIFT pillars: Smart thinking, Winning attitude, Innovation, Flexibility and Teamwork.

4. Revenues and Operating Profits (Profit before exceptional items) of Voltas (consolidated) for the period between financial year 2009-10 and 2014-15 5. The business segments of Voltas (Consolidated) are:

5. The business segments of Voltas (Consolidated) are:

'A' - Electro-mechanical Projects and Services

'B' - Engineering Products and Services

'C' - Unitary Cooling Products for Comfort and

Commercial use 'D' - Others

An important feature across all its segments is that the Company pursues an asset light model, focusing on cash and operating with low levels of capital employed. The Company has accordingly generated 'Return on Capital Employed' (ROCE) of 22% in 2014-15 as compared to 16% last year.


6. GCC countries have managed to keep up their diversification and reform efforts supported by fiscal expansionary policies, over the first half of 2014-15. The drop in oil prices in the latter half, which could constrain government spending, could yet impede these activities. While there has been some growth in the number of new project enquiries, this has unfortunately been often accompanied by illogical commercial conditions, particularly in Qatar. The business has however succeeded in securing appropriately risk mitigated orders worth Rs. 1185 crores over the course of the year. Some of these are currently in the early stages of execution and will hopefully, provide an uptick to earnings in the coming year. The total carry-forward order book of International Projects amounts to Rs. 1871 crores, which includes proportionate share of orders booked by JVs.

7. The Company had simultaneously focused on the commercial closure and resolution of legacy projects, but disputes and delayed payments continue to be the order of the day. Meanwhile visa issues, design changes, non-availability of work fronts (impacted by the crawling pace of Main Contractor's construction activity), etc. are challenges that sub-contractors like Voltas constantly wrestle with. The iconic Yas Mall project in Abu Dhabi was successfully inaugurated in December 2014 and the World Trade Center in Abu Dhabi is fast approaching readiness for handover, following testing and commissioning.

Domestic Projects

8. The difficulties of the contracting environment in India and the slow pace of project execution are well known and require no elaboration. Delayed payments and postponed projects continue to strain and challenge the overall performance of this business. Some of the newer projects including Metro have yet to pick up pace, leading to a drop in turnover. Nevertheless, the business efficiency improvement program which had commenced earlier has helped to improve the internal processes and systems, thereby contributing to an improvement in profitability.

9. The Company's Domestic Projects business was able to garner several new projects aggregating Rs. 1053 crores in line with the Company's selection criteria of reasonable threshold margins and sound credit ratings. However, there continued to be delays in finalization of many projects, due to the continuing sentiment of risk-aversion and cautious investments. Meanwhile, the business also established itself in rural electrification specifically in Madhya Pradesh, with projects aggregating Rs. 180 crores for electrification of around 2000 villages.

10. Overall, the segment's carry-forward order book as of 31st March, 2015 stood at Rs. 3893 crores.


11. The Indian textile industry went through some turbulence, in contrast to its healthy growth in 2013-14. China revised its Cotton Policy to cut down on yarn imports from India and rely on its own surplus cotton stock. This led to a steep correction in yarn prices, adversely impacting the domestic spinning industry and dampening demand for textile machinery. Textile manufacturers in the Southern States were also hit by power cuts.

12. Nonetheless, the Company's Textile Machinery business grew at reasonable rates, in tandem with the growth of the Lakshmi Group and other Principals and sustained its leadership in spinning machinery. Additionally, the Company's focus on the parts, accessories and allied machinery segments aided the growth of business. In post-spinning business activities, the Company further established its weaving solutions by leveraging positive referrals from customers.

Mining & Construction Equipment

13. For the Mining industry, the year was marked by low output resulting from bans in iron ore mining, cancellation of coal block allotments and drop in global iron ore prices, resulting in a significant slowdown in the sector. Consequently, the Company sustained its focus on its mining service operations in Mozambique, which continued to grow with the addition of a new 3 year service contract with the existing customer.

14. An important new initiative was a venture into refurbishment of used loaders, by which the Company could more fully utilize its capabilities and provide customers with savings in a debrssed market. Delivery on the first breakthrough order, to a major metals producer was completed successfully.


15. The domestic Room AC industry registered growth of over 20% in sales volume during the year under review, due to better consumer confidence as well as an extended summer. The Company's primary sales of ACs grew by 16% in the same period. Despite intense competition, the Company sustained its No.1 market position in the Unitary Cooling Products business for the second consecutive year during 2014-15 with market share of 20.8% for the full year at Multi-Brand Outlets compared to 19.8% in the brvious year.

16. Voltas' Brand Equity Index reached 4.0, the highest among all AC brands; this was the outcome of a strong advertising campaign, an augmented product mix and extensive distribution reach. The Company's advertising won several awards, including the India Effie Award, as well as the brstigious Asia PAC Effie Award, for which the brand competed against global brands across several categories.

17. The Commercial Refrigeration business also witnessed a healthy increase in volumes, especially in Chest Freezers, yielding 11% growth. This was achieved through cementing better customer relationships, pursuing deeper penetration and targeting a more diversified customer base.

18. Overall, better quality cum range of products, wider distribution, sensible advertising and appropriate pricing resulted in higher revenues for this segment. The overall profitability of the segment also improved due to a favourable product mix, with larger sales contribution of Split ACs, coupled with stringent cost controls.

19. Revenue of this business segment increased by 22% and was Rs. 2510 crores as compared to Rs. 2052 crores last year. Similarly, profit increased by 38% and was at Rs. 349 crores in 2014-15 as compared to Rs. 252 crores last year. Unitary Cooling Products business is the largest contributor, both in terms of revenue and profit accounting for 49% of total revenues of the Company in 2014-15 as compared to 39% last year. ROCE had also increased to 120% as compared to 92% last year.



20. Following years of a muted investment environment and policy paralysis, the formation of an industry friendly government at the Centre raised hopes of a possible revival. However, the situation on the ground is yet to change significantly. Nevertheless, given the pent up demand and need for improvement in infrastructure, it is expected that both private and public spending would increase. Promising opportunities are also likely from the new educational institutes and medical facilities being facilitated by the Government, where the Company can leverage its prior experience. There are also good prospects in rural electrification in certain geographies, for which the Company is well-equipped via its wholly-owned subsidiary, Rohini Industrial Electricals Limited (RIEL).

21. Water and waste water management projects are expected to accelerate, once appropriate policy and funding decisions are made. The 'Clean Ganga' investments could probably yield good business opportunities for the Company, in sewage and effluent treatment plants. The expected growth in cold storage sectors will increase the demand for process refrigeration, for which the Company's Low Temperature equipment is well suited.


22. Despite the slippage of oil prices in late 2014, the GCC construction sector is expected to see reasonable growth in awarding of new projects. In the building segment, United Arab Emirates and Kingdom of Saudi Arabia (KSA) could offer good opportunities in terms of value of projects that are budgeted by the Governments.

23. Mega events of FIFA 2022 and the Expo 2020 will remain enablers for business opportunities in Qatar and Dubai, respectively, coupled with travel and tourism-related projects. Also, these are the two States which are potentially less affected by the oil plunge. However, the ability to compete successfully and procure right quality orders which are suitably risk mitigated is key to future profitability. With the GCC nations increasingly turning their focus to social infrastructure projects, the Company is also examining the feasibility of pursuing projects in adjacent MEP sectors, such as the industrial, water and refrigeration segments.

24. With the objective of increasing productivity, the Company introduced MEP brfabrication as a staple construction methodology. Additionally, the use of BIM has also been introduced for MEP drawings, to brvent on-site clashes and conflicts. These measures while improving efficiency, safety and speeding up delivery, would also offer the Company, an appropriate key advantage in the market place.


Textile Machinery

25. Although the industry has been through a difficult year, it has high expectations that the Central Government will suitably incentivize economic revival helping to raise the operating levels of textile and apparel companies in 2015-16. Once cotton and yarn prices bottom out, industry sentiment is also expected to take a positive turn and accelerate off-take of spinning machinery. Additionally, it is expected that Andhra Pradesh, Telangana and Uttar Pradesh will finalize and announce favourable State-level textile policies that will boost the demand.

26. The post-spinning segment expects to benefit from the Textile Upgradation Fund and creation of special zones dedicated to weaving and knitting activities. In time, India is projected to grow its share of apparel exports to the US and the European Union, which would further energize the business.

Mining & Construction Equipment

27. Significant opportunities are foreseen from the recently announced plans of Coal India, the world's largest coal producer, to double its coal production to over 1 billion tons, with an investment of Rs. 12000 crores. This offers good prospects in Equipment sales as well as Operations & Maintenance contracts.

28. Following the recent auctioning of coal blocks, renewed private sector investment in mining is expected. Mine development organizations are likely to demand high-performance equipment so as to maximise returns on investment - a scenario in which the Company can leverage its track record of high equipment uptime, both in India and overseas.

29. The Company's reputation shall stand in good stead as it explores opportunities arising from investments by Indian mining firms in South Africa, Kenya, Mozambique and other African territories.


30. The Company sees healthy long-term growth potential in the changing social landscape, marked by increasing urbanization, growing middle class and rising income levels. There is a large vacuum to be addressed in air conditioner ownership, with only estimated around 5% penetration -in contrast to 77% for TV, 33% for refrigerators and 13% for washing machines.

31. In spite of such low penetration, growth is dependent upon weather conditions which tend to be erratic and the state of the economy. On the other hand, rising consumer sentiment will probably stimulate demand for second-ownership and replacement units, especially in the Split AC category.

32. Both the high cost of electricity and the growing consumer consciousness are expected to stimulate demand for energy efficient products. Identifying this as a need, the Company's ad-campaign this year focuses on Smart Inverter technology AC's which offer greater savings in power consumption to the consumers. Additionally, the 'Smart App' turns a mobile handset into a remote control and the 'Smart Sense' monitors ambient conditions and suggests optimum settings.

33. Leveraging its market standing and equity in the cooling domain, the Company has launched a new range of 'Fresh-Air Coolers' in selected North India markets. The new range comes with exclusive honeycomb cooling pads, carbonized dust filter and powerful air flow. With this introduction, the Company aims to bridge the space between a fan and an AC, thereby tapping the growing need for a comfort product at an affordable price.

34. Efficiently Servicing end consumers remains a key focus area. In order to improve service delivery, a new 'business intelligence' module has been included in the Company's new CRM, to capture data and perform analytics. Multiple training centres have been opened, conducting a series of training programs for the Company's technicians. Call Centre operations have also been significantly revamped.

35. In Commercial Refrigeration business, the Company expects to leverage its expanded customer base of key accounts in the chocolate cooler and chest freezer segments.



36. The traditional MEP contracting space occupied by the Company appears to be increasingly engaged by main contractors and smaller regional players. The key reason for this trend is the dearth of quality orders in the market which is making various players look at alternate areas for growth. In a more recent trend, many Government agencies are releasing a consolidated order to a single party which makes it difficult for sub-contractors. Additionally, India's growth potential is drawing more and more multinationals, which make deep investments in technology. Such competition from MNCs will need to be met with ongoing investment in product development and manufacturing and puts additional brssure on project margins.

37. The subdued domestic business environment has been a key factor leading to sluggish pace of project execution. The Balance Sheet and over leveraged position of some customers gives cause for concern and is expected to impact their cash flow. There is an increasing tendency to thus delay certifications, payments and settlement of variations and claims which in turn warrants conservative provisioning in line with accounting regulations.

38. In the accelerated phasing-out of certain refrigerants, the transition to new-generation replacements is being hampered and controlled by a few global manufacturers, who have the patented technology for the required substitutes.


39. The prospect of business opportunities from the Dubai Expo 2020 and FIFA 2022 event in Qatar has attracted numerous new players from across geographies into the Middle East market. Civil construction companies in the Middle East are displaying the potential to build their own in-house MEP capabilities, with a view to undertake the electro-mechanical subcontracts routed to them by clients and consultants. This threatens the Company's MEP business, although clients still brfer established specialist companies for the larger and more challenging jobs.

40. Additionally, in the aftermath of the oil price collapse, margin combrssion due to the budget deficits of GCC countries adds further brssure to the existing difficult environment. At the same time, onerous new contractual conditions have heightened the challenges, putting security of commercial entitlement in such orders at risk. In general, all these factors have contributed to intensifying competition, posing challenges and making the market adversarial.

41. Issuance of visas remains a challenge in the Middle East, with KSA posing the greatest hurdles and Qatar running a close second. The Company's capabilities are also hampered by Government requirements for employing larger numbers of locals in Oman and KSA, impacting availability of suitable talent and increasing related costs.


Textile Machinery

42. The industry is experiencing some relief from the brssures of issues which brvailed in 2014, such as slowdown in yarn exports and low availability of power and finance. However, there has not yet been a strong uptick in sentiment, along with growth in new investments. Meanwhile, the Business remains highly sensitive to changes in domestic and international policies as well as the overall economic environment.

Mining & Construction Equipment

43. Global consolidation of the mining industry's OEMs remains a threat to the Company's Mining Equipment business. Many equipment manufacturers restrict the number of dealers rebrsenting them; this usually leads to elimination of multiple dealerships and associated service opportunities when OEMs consolidate. To mitigate the risks arising from such consolidation, the Company is strengthening its position as a supplier-neutral service provider, identifying new mining sector OEMs who seek rebrsentation and adding new product lines to serve the growing road-building and construction sectors.


44. In spite of its recent growth trajectory, the AC industry continues to show signs of fragmentation, caused by an excess of international and domestic brands in the market, enticed by the growth opportunity. Many of these pursue top-line growth at the cost of their bottom lines. A special threat arises from Japanese brands with a wide portfolio of Inverter ACs, a growing trend.

45. The AC category continues to have the highest Average Selling Prices vis-a-vis any other consumer durable, driven up by the cost of complying with BEE's upgraded energy regulations, as well as by adverse foreign exchange trends.

46. Unbrdictability in climate is likely to continue and may be aggravated by the forecasted El Nino weather phenomenon. A contemporary threat arises from online e-tailers and e-commerce sites which engage in brdatory pricing, creating conflict with traditional trade partners and impacting operating prices in the market.

47. In Commercial Refrigeration, the Visi-Cooler OEM segment is facing strong competition from both, international and domestic players armed with extensive product portfolios.


51. With the Fiscal and Current Account Deficit coming under control and inflation seeing some amount of cooling off, it is widely believed that the threat to macro-economic stability has dissipated. Further, the steep fall in crude oil price has also provided some respite to both, the Rupee and inflation. Due to this traction, RBI responded twice with reduction in interest rates in the last quarter of 2014-15. However, for most part of the year under review, the external environment was challenging. The stretched balance sheets of various industry players coupled with long period of tight liquidity and high interest rate regime has made cash a very brcious commodity. However, the Company' retained its sharp focus on cash conservation, evinced by the comfortable position of cash and bank balances and liquid investments of Rs. 1281 crores as on 31st March, 2015. Due to negligible borrowings, the Debt-Equity Ratio has been further reduced.


52. The Company has robust systems for risk assessment and mitigation and has a Risk Policy in place with well-established internal controls and risk management processes, at both Business Unit and Corporate levels. This includes review and monitoring of the top risks at an Entity level by the Risk Management Committee of the Board.

53. The mitigation planning for these risks is embedded in the longer term Strategic Business Plan (SBP) of each of the businesses. The Management has identified the major risks and concerns and developed a risk assessment matrix which is reviewed periodically.

54. The Company also has a well-defined forex policy which ensures timely monitoring and coverage of foreign exchange exposures. The Company is not vulnerable to interest rate risks since it does not have any debts for domestic business operations other than temporary working capital borrowings. With regard to various operational risks, necessary insurance coverage is taken by a central team of internal and external persons.

55. Both the International and Domestic projects businesses have utilized the elongated recovery period to strengthen their respective business improvement programs. This has entailed a re-look at key resources, procedures, practices etc., and has also reinforced the established practice of Techno-commercial audits. Such audits are conducted for major international as well as domestic projects at the tender stage as well as during the course of execution to assess the physical progress and financial performance and validate the end-of-project forecast.


56. The Company has an internal control system commensurate with the nature of its business and the size and complexity of its operations. The Company has taken adequate steps for compliance with the requirements of Internal Financial Controls as per the requirements of the Companies Act, 2013.

57. The Company's Internal Audit team consists of qualified professionals led by the Chief Internal Auditor, who reports to the Board Audit Committee. Further, M/s. Mahajan & Aibara, Chartered Accountants, are the co-sourcing partners for internal audit.

58. Audits are conducted based on an annual risk-based internal audit plan which is approved by the Board Audit Committee at the beginning of the financial year. The annual audit plan and internal audit reports are shared with the Statutory Auditors. Significant audit observations and status of follow-up actions taken are periodically reported to the Audit Committee. The Audit Committee monitors and reviews the significant internal audit observations, compliance with accounting standards, risk management and control systems and profitability / risk ratings of overseas contracts.

59. The scope and coverage of the internal audit plan includes reviewing and reporting on key process risks, adherence to operating guidelines and statutory compliances. The internal audit function provides assurance to the Board and the Audit Committee regarding the design, adequacy and operating effectiveness of the internal control system.

60. The priorities of Internal Audit are to conduct internal audits objectively with transparency and to help the businessproactively detect emerging operating risks. Internal audit, through its suggestions, helps business in its quest for operational excellence and continuous improvement.

61. The Company has, with the assistance of external consultants, reviewed the framework of Internal Financial Controls including documentation / processess to ensure that they are adequate and working effectively. Internal Audit team has tested the effectiveness of these documented controls.


62. With a view to equip the Company to address the business challenges of a dynamic economic environment, the HR function focused on retaining and attracting suitable talent, enhancing the technical / behavioural skills of employees and optimising employee costs.

63. To augment its leadership and build up its talent pipeline, the Company hired 39 Management / Engineering trainees from select campuses, and through Tata Group programs like TAS. Further 65 trainees from various institutes are expected to come aboard in July 2015.

64. Learning and Development has been prioritized as a means of expanding the knowledge base of employees, which is seen as a key driver of growth. There has been increasing focus on greater awareness and evaluation of Learning and Development interventions in terms of their business impact. Some key initiatives were:

• The High Potential (Hi-Po) Development Program for middle and junior levels was given the necessary momentum to develop the managerial skills of the selected employees and render them capable of bridging levels / functions in the organisation. The year-long Voltas Young Leaders (VYL) and Voltas Emerging Leaders (VEL) programs have been successfully completed.

• Eight Certification workshops on 'Behavioural Event Interviewing (BEI)' across India were conducted in order to equip managers with tools and techniques for interviewing and selecting suitable candidates. In future, interviewing panels at various levels will consist of certified BEI interviewers.

• Textile Machinery business has focused on the need for its employees to adapt to industry-wide transformation as well as a new generation of customers. With this objective, a workshop was conducted in association with Mercuri Goldman International, to enhance the competencies of 22 Sales Managers.

• Measures for Project Management Professional (PMP) training and certification of Project Managers were instituted, in recognition of the vital role of project management capabilities across the Company's Projects businesses. Training programs were held in Dubai, Qatar, Mumbai and Kolkata, covering 57 Project Managers for PMP, as well as 63 Project Engineers.

65. Contrary to global trends, Voltas' employee engagement score showed upward movement, recognised as a lead indicator of improved business results. To further advance and enhance the employee experience, an internal online portal was developed for team leaders, where they can absorb learnings, upload their own plans and refer to appropriate reading material.

66. The IR situation showed marked improvement over the year, with Management and Union leaders agreeing to resolve issues across the table. The current discussions cover the Charter of Demands (CoD) and the long-term settlement for revising the salary and benefits of the general staff. The talks are proceeding satisfactory. The Management place on record their recognition of the efforts made by the Union leadership to maintain a cordial and harmonious atmosphere.

67. In its continuing concern for creating and maintaining a safe working environment in Voltas, several initiatives were taken during the year under review. The British Safety Council was engaged and the consultant made recommendations based on which suitable changes are being implemented in the Safety Management System. Quarterly safety audits have also been initiated to identify potential risks. Employees participate in near-miss reporting and sharing of their safety observations. Despite best efforts, the Company regrets to report that two fatalities occurred in 2014-15 in project sites in India.

68. Following its formal policy on 'Respect for Gender', the Company has in place an Internal Complaints Committee (ICC) to redress grievances arising from gender-based disrespect and harassment. No written complaints were filed during the year. The Committee members have been trained for proper handling of complaints; additionally, the Committee organised 5 'general awareness' training events at 4 locations, attended by 83 participants.

69. The total staff strength of Voltas Limited as on 31st March, 2015 was 5287, including 3008 contract staff, primarily for overseas projects.


70. Statements in the Management Discussion and Analysis describing the Company's objectives, projections, estimates, expectations or brdictions may be 'forward-looking statements' within the meaning of applicable securities laws and regulations. Actual results could differ materially from those exbrssed or implied. Important factors that could make a difference to the Company's operations include economic conditions affecting demand / supply and price conditions in the domestic and overseas markets in which the Company operates, changes in the Government regulations, tax laws and other statutes and other incidental factors.

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