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Edited Transcript of VOLTAS.NSE earnings conference call or presentation 7-Nov-19 10:30am GMT

Q2 2020 Voltas Ltd Earnings Call

Mumbai Nov 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Voltas Ltd earnings conference call or presentation Thursday, November 7, 2019 at 10:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Asawari Sathaye

Voltas Limited - Senior Manager - Corporate Communications and IR

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Conference Call Participants

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* Abhilasha Satale

Dalal & Broacha Stock Broking Pvt Ltd., Research Division - Research Analyst

* Aditya Bhartia

Investec Bank plc, Research Division - Analyst

* Amber Singhania

Asian Markets Securities Private Limited, Research Division - Senior Analyst

* Amish Shah

BofA Merrill Lynch, Research Division - Director

* Anupam Gupta

IIFL Research - VP

* Bhoomika Nair

IDFC Securities Limited, Research Division - Security Analyst

* Lokesh Garg

Crédit Suisse AG, Research Division - Research Analyst

* Nitin Arora

Axis Asset Management Company Limited - Equity Research Analyst

* Rahul Gajare

Haitong International Research Limited - Research Analyst

* Renjith Sivaram

ICICI Securities Limited, Research Division - Assistant VP

* Sheena L. Barbosa

T. Rowe Price Group, Inc. - VP

* Shrinidhi Karlekar

HSBC, Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the Voltas Limited Q2 FY '20 Earnings Conference Call hosted by Asian Market Securities Limited. (Operator Instructions) Please note that this conference is being recorded. I now hand the conference over to Mr. Amber Singhania, from Asian Market Securities. Thank you, and over to you, sir.

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Amber Singhania, Asian Markets Securities Private Limited, Research Division - Senior Analyst [2]

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Thank you, Lisa. Good afternoon, everyone. On behalf of Asian Market Securities, I welcome you all to our Q2 FY '20 Earnings Conference Call for Voltas Limited. We have with us today Mr. Anil George, Deputy MD and CFO; [Mr. N. Garudachar], Head Finance Corporate; and Ms. Asawari Sathaye, Head Corporate Communications, Investor Relations also from the company.

Without further delay, I would like to hand the call to Ms. Asawari Sathaye for her remarks, and then we can take the opportunity to answer questions. Over to you, [Priory].

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Asawari Sathaye, Voltas Limited - Senior Manager - Corporate Communications and IR [3]

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Thank you, Amber. Welcome, everybody. Analysis of results quarter and 6 months ended 30th September 2019. The latest finance report suggests that the global economy is in a synchronized slowdown with growth for FY '20 downgraded to 3%, its lowest pace since the global financial crisis. This comes at a time when monetary policies have significantly eased almost simultaneously across advanced and emerging markets, rising trade barriers, the slower effects of the U.S.-China trade war and uncertainties surrounding geopolitics, including the impending Brexit are casting a shadow on the global recovery prospects. While fiscal stimulus in the United States has helped counter the impact of tariffs, change-related uncertainty continues to have negative effects on investment. In China, growth is expected to be low on account of the increase in tariffs. As well as the slowing domestic demand. The impact of the recent attacks on Saudi Arabia's oil facilities, a generally weak global oil market and increasing geopolitical tensions on the near-term growth is difficult to gauge.

In India, specific sector weaknesses in automobile, consumable durables, real estate and banking, unseasonal extended monsoon continue to overshadow growth. Some of the leading indicators, such as lower credit offtake, lower capacity utilization, meeting the fiscal deficit targets suggests waning demand. In tandem, lagging indicators such as a rise in unemployment levels, a general reduction in corporate earnings and GDP growth are worrisome. A slowdown is also indicated by the decelerated growth in core sectors, softer interest rates, declining trend of GST collection, combined with benign inflation. Even on the back of a supported monetary and fiscal policy, consumption and demand seem to have slowed down, further impacting private investment and spending.

The consolidated total income for the quarter ended 30th September 2019 was higher by 2% at INR 1,495 crores as compared to INR 1,467 crores in the corresponding quarter last year. Profit before exceptional items and tax, includes share of profit or loss of JVs and associates. This was higher by 11% at INR 156 crores as compared to INR 140 crores in the corresponding quarter last year. Profit before tax was higher than 7% at INR 150 crores as compared to INR 140 crores in the corresponding quarter last year. The quarter was impacted due to a voluntary retirement scheme announced by the group which has been accounted and disclosed as an exceptional item in the quarter.

Further, the group has evaluated the option to pay lower corporate tax rate under Section 115B8a of income tax act 1961, as introduced by the taxation laws Amendment Ordinance 2019. And accordingly, Voltas Limited, the holding company and its wholly owned subsidiary, Universal Comfort Product Limited has opted to pay corporate tax at reduced rate effective 1st April 2019.

The change in tax rate has resulted in a reversal of deferred tax assets of INR 32.93 crores on account of remeasurement of deferred tax balances as at 31st March 2019, and reversal of current tax and deferred tax charge of INR 22.84 crores and INR 0.75 crores, respectively, accounted for during the quarter ended 30th June 2019 due to reduction in tax rate.

The net impact of such change in tax rate amounting to INR 9.33 crores have been recognized in the consolidated results for the quarter. Accordingly, the profit after tax was at INR 1.07 crores. Earnings per share, face value per share of rupees [are not] annualized, as of September 30, 2019, was INR 3.22 as compared to INR 3.13 last year.

Analysis by segment. We present below our detailed comments on the performance of the various business segments in which we operate. Segment a, Unitary Cooling Products. Voltas continues to be the leader with #1 position in room air conditioner business, with market share of 24.4% YTD at multi-brand outlets. Segment revenue increased by 19% and was INR 526 crores as compared to INR 441 crores in the corresponding quarter last year. Segment results was higher by 64% at INR 46 crores as compared to INR 28 crores in the corresponding quarter last year. Industry grew by approximately 33% YTD while Voltas continued to outperform the market. Inverter ACs contribution has, as expected, continued to grow. The strategic focus is on expanding our reach in the Tier 2 and 3 cities, with a particular focus on Southern markets, where we are gaining ground. Voltas products are now available across more than 19,000 touch points pan-India.

The competitive and unique product offerings, combined with customer-friendly promotion offers, like the -- daily offer or dealer support measures have met with an encouraging response from the trade and end users. We have ramped up our products with the right mix in the energy efficiency and water segment, along with attractive pricing and access to easy financing schemes. Sustainability is a core -- core to the company and keeping the same in mind, we have partnered with Tata Power to promote higher energy-efficient inverter ACs in Delhi and Mumbai, respectively.

Voltas has also been working on engaging more with the online customer and sales were particularly boosted during the independent base flash sale and festivals sales announced by various e-commerce platforms and other ongoing offers. On the air cooler front, the company continues on a strong footing, supported by increasing trade partnerships. Additionally, in commercial refrigerator segment, the company is moving from strength to strength, increasing its customer base and bringing in newer, better and customized products to the market.

Segment B, Electro-Mechanical Projects and Services. Segment revenue and results for the quarter were INR 809 and INR 56 crores as compared to INR 901 crores and INR 76 crores, respectively, in the corresponding quarter last year. Carryforward order book of the segment was higher by 24% at INR 6,567 as compared to INR 4,883 crores in the corresponding quarter last year.

International operations. The volatility in oil prices, coupled with geopolitical tensions in the Middle East, has created a cloud of uncertainty for the region. Most of the Middle East countries are facing liquidity challenges creating elongated periods of certification and collection of receivables. We continue to pursue risk-mitigated opportunities in the region and are prudent in picking up the right projects. During the period, the division has won a prestigious project in Qatar to develop a commercial boulevard. The total order book for the international operations as of September 30, 2019, is around INR 2,787 crores with orders of around INR 1,297 crores, which was booked during the quarter.

We're happy to share that 1 of our projects has been recognized as the GCC project of the year, in addition to 3 other awards, including 1 on safety. In respect of a project where Carillion is the main contractor, we continue to face the challenge of delayed receivables. In general, there is a tendency to delay certification and settlement of receivables.

Domestic projects. Lack of funds and unrealistic price expectations continue to be a major impediment in private sector spend. According to PMI, 26% of projects are stalled in addition to the private sector investment, hitting a 16-year low. The company, therefore, continues its strategic focus on government and government-funded projects. Domestic projects have successfully enhanced its order book to INR 3,780 crores, having booked INR 1,319 crores of orders during the quarter. This includes prestigious metro projects at Mumbai and Kolkata Metro.

Our business of water management solutions continues to increase its order book, with recent wins in Odisha and Bihar. We see even more opportunities for our scope of work in the recent announcement by the government on infrastructure, water and electrification projects. Smart execution and productivity will continue to be the driver for profitability.

Segment C, Engineering Products and Services. Segment revenue and results for the quarter were at INR 80 crores and INR 25 crores as compared to INR 73 crores and INR 29 crores, respectively, in the corresponding quarter last year. The textile industry starting through a difficult period, and in this scenario, our focus continues on aftersales business in both spinning and post-spinning segments. In Mining and Construction Equipment, Mozambique Corporation continues to drive the majority of the revenues. Mining and operations in India remains subdued.

Voltas-Beko. The 50-50 equity JV between Voltas and Arcelik, both -- Beko home appliances private limited, continues to build for the future. Our product change has been garnering a positive and encouraging feedback, both from the trade as well as end users. In fact, being a customer-centric brand, the JV also recently launched India's first 5-star washing machine, along with attractive customer and trade offers. Our channel reach is further improved, given the synergy with the Voltas AC business. The focus on expanding the footprint through more exclusive brand outlets for IDUs across Tier 2 and 3 cities remains, and the brand Voltas and Voltage Beko are now available at around 150 IDUs in the country. The brand has positioned itself as partners of everyday happiness with the consumer benefit of nutrition preservation for refrigerators and cleaning efficiency for washing machines.

The recent colorful print and digital advertising campaign under engaging TVCs that talk about all products being tested by real mothers, has generated the required buzz and was received well by the audience. Additionally, the brand is also investing in creating a digital community via innovative marketing and plans on tapping on the increase in insurance service segment.

In summer, in recognition of weak market sentiment, government has embarked on some cost corrections, including corporate tax reduction, among others. Assuming that the government is able to follow through with other measures, we expect to see a certain kickstart to the investment cycle, combined with growth stimulus to the economy. They should help the project business and restart the CapEx cycle. Additionally, we will continue to remain cautious and selective in our international operations business. Meantime, our AC segment has had a good run till now, and we are certainly hopeful of continuing the momentum in H2.

We are now open for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Aditya Bhartia from Investec.

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Aditya Bhartia, Investec Bank plc, Research Division - Analyst [2]

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My first question is on the strong order inflows that we have seen in the E&P segment. It would be helpful if you could indicate which subsegments have we seen these orders coming from in the domestic market. And what is likely to be the average execution period for the same.

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Unidentified Company Representative, [3]

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The question is pretty valid because we have been able to improve our overall order book by something like about 34%. And particularly, in the domestic projects, it's gone up even higher. We have booked almost INR 1,319 crores this quarter. This is a mix of various projects, both in the infrastructure and also water and metro and some part of it is rural electrification. So we have got a wide spread. Generally, I would say that the time frame that one takes in terms of doing these things would be anywhere between roughly around anywhere between 18 months to about 2, 2.5 years. Hopefully, that there will not be any further delays in terms of various executions.

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Aditya Bhartia, Investec Bank plc, Research Division - Analyst [4]

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Understood. And as a part of our order backlog, what would be the rough split between what the rural electrification and the conventional HVAC credits that we used to have.

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Unidentified Company Representative, [5]

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Hopefully, we're getting more projects in terms of water, particularly. And as we had mentioned earlier also, I remember that RIEL was a difficult proposition earlier. But we have prepared -- thankfully, converted that into a profitable government asset -- a profitable company. And a good amount of the orders, almost about 1,000 crores is from rural electrification. There's a significant portion coming from HVAC and water heating.

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Aditya Bhartia, Investec Bank plc, Research Division - Analyst [6]

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Understood. On the UCP segment, last year, we had issues of high inventory levels in the channel, which was also resulting in higher competitive intensity. How is the scenario currently? And how do you see it, as we approach the next summer season in a few months?

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Unidentified Company Representative, [7]

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You're right that last year, there was high inventory, and that was because the sales were not really taking off very well. But now with the aggressive sales that most of the companies have been able to achieve and be more so, inventory in the channel as some back to normal. It's about of the order of about 2 weeks to 3 weeks.

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Aditya Bhartia, Investec Bank plc, Research Division - Analyst [8]

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And does that also mean that companies have a lot more flexibility in terms of pricing?

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Unidentified Company Representative, [9]

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I don't know whether pricing will be -- there'll be too much of flexibility because what we are seeing in the market is a lot of the pricing actually coming down. In fact, inverters, which were at 1 point in time pretty more expensive than the fixed speed, they have started reducing prices. And as you know, there's a lot of offers in the market. And the consumer has never had it as good. So any pricing changes, we will have to really watch and see how the market is actually behaving. Right at the moment, I cannot say that we are looking at any aggressive price increase. But of course, from area to area on a selective basis, we will do what is required, both to protect our market share and to enhance our margins.

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Operator [10]

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The next question is from the line of Renjith Sivaram from ICICI Securities.

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Renjith Sivaram, ICICI Securities Limited, Research Division - Assistant VP [11]

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Congrats on good set of numbers. So if you can help us with how much has the room AC market grown in Q2? And how are we in terms of our growth?

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Unidentified Company Representative, [12]

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Basically, as we have written in the note also, the industry grew by approximately 33% on a year-to-date basis. And our increase has been far higher. But it's because one of the things that you will notice is that we -- when I talk in terms of industry growth, we are talking in terms of second retails. And you can see our numbers in terms of the primary sales, which for the quarter has been an increase of something like about 19%. And if you take the half year fully, we've got a 42% increase in the AC segment. And similarly, the other subverticals, such as air coolers and CRAs have also seen pretty good aggressive growth numbers.

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Renjith Sivaram, ICICI Securities Limited, Research Division - Assistant VP [13]

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Okay. And for the quarter Q2, how much was this number?

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Unidentified Company Representative, [14]

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[19%], Renjith.

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Renjith Sivaram, ICICI Securities Limited, Research Division - Assistant VP [15]

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Okay. For the industry also. Hello?

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Unidentified Company Representative, [16]

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Yes, what?

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Renjith Sivaram, ICICI Securities Limited, Research Division - Assistant VP [17]

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So we have been talking about this solar EPC and some plants in the last quarter in our presales is there any development in that front or we have put that on hold?

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Unidentified Company Representative, [18]

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There is a lot of activity happening. And 1 of the things is that we have to actually learn this business a little, yes? So we are doing some initial work. And whatever we are doing now will not be of the order of big-ticket projects, it will be smaller-sized projects, so we can actually learn how this whole industry really works. We have the wherewithal to execute. We are also looking at some of the international markets where there is a possibility in the Middle East, where solar is going in a very big way. But as I said, we will not jump into the situation, we will very carefully evaluate our options and also look at the risk parameters before going in full tilt into it.

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Operator [19]

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(Operator Instructions) The question is from the line of Rahul Gajare from Haitong Securities.

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Rahul Gajare, Haitong International Research Limited - Research Analyst [20]

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So my question is, India has seen unprecedented rains this season with floods in several parts. And we've had rains going until November. In this scenario, October, which is apparently your second summer, I'm sure would have got impacted to some extent. Now I want to know in the 19% growth that you have seen in the AC business, in the UCP business, how much of that would actually would be coming from the programs that you are running with -- EESL and Datapower. So if you can just break it up into the air conditioning sales, which were basically B2C and B2B.

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Unidentified Company Representative, [21]

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With the EESL, we have just signed it. So it will take a little time before that really ramps up. We have got a total order, something like about 50,000 units of which, I think we have only started currently, I think, probably about 1,000 units or so have gone into the market. So it's not very much. With Datapower, again, we have just started the initiative. So it will need to be seen how we are actually going forward on it. But we do think that we will find greater traction from both B2C as well as B2B in this segment.

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Rahul Gajare, Haitong International Research Limited - Research Analyst [22]

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Okay. Sir, in the -- how the window ACs are really growing right now? Can you just tell me, we did indicate -- I mean, whether we are doing well. How is window ACs particularly growing, right now? I mean, how much of that -- how much of your revenue really comes from window ACs?

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Unidentified Company Representative, [23]

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Basically, to really look at the total market, as we see it for Voltas, we have, if you look at 100 units being sold of ACs, roughly about 72% is coming from splits and the balance, 28%, is windows, yes. And in the split portion, roughly about 50% thereof is coming from inverters. The trend that we have seen is that window is declining year after year after year, but it's not vanishing, as you can see. At one point in time, everyone said that windows will grow out of the market completely, that's not true. Similarly, it is also not true that the fixed ACs will go out of the market in a short while. So we believe that there is a tactical portion of our strategy that says that you should be able to remain in the markets that are relevant to the consumers. Therefore, supply and have available a product for the window AC consumer, supply and have a product available for the split inverter customer and the fixed split customer as well. So we will continue to be in all 3 segments till we see some kind of very definitive movement. And normally, because we understand the market, we can predict this trending well. And if at some point of time, we believe that windows are going to be completely out, we will accordingly reduce the emphasis on that. But right now, we are getting a fair amount of sales from the windows also. And incidentally, I would say that some of the people who went out of the window market earlier in terms of international competition have also gone back into window because they feel that the change has not taken place as quickly as they had anticipated it to do.

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Operator [24]

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The next question is from the line of Nitin Arora from Axis Mutual Fund.

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Nitin Arora, Axis Asset Management Company Limited - Equity Research Analyst [25]

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Just on the EMP part, you said that you have got some big orders, large order. Is it possible to quantify them? Though you have said you can't quantify the segment, but if you can just quantify some orders here? And there are a few bids in metros which got closed in October. So are there some more large orders you are expecting in Q3 as well? And my second question is more to do with the revenue growth, because we've done a very strong revenue growth in the NEP over the last 2 years. So there was an argument that this year could be a soft in terms of the revenue growth but you've got good orders now. Is it possible that on the order backlog, continued the time they will take next 2 years, which is FY '21 and '22, 15% growth is possible? And with the margins, if you can guide us?

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Unidentified Company Representative, [26]

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Yes. Normally, I don't really give a guidance that way. Because if you really look at it, there was an earlier question saying that how long or how much time do you really take to work on this order book, and I had given an indication of about 2 to 3 years. So one way we are looking at it, can we buy a -- reviewing the quantum of order book outstanding and seeing how that really peters out. I must also say that we are L1 in a considerable -- sizable portion of other projects and we expect to be able to add a similar number of projects in this quarter also in terms of order bookings, particularly in domestic coming both from water and from other places. Yes. Yes. In terms of the metro, the question that you ask. The -- normally, the orders are actually split between various NEP players because they don't want to give all the stations to 1 particular entity. So it will be in certain packages. So what we bid for, while we might in reality bid for more than 1 package, generally on a line level restrict each NEP players to say 1 or 2 packages, depending on how the bidding really is.

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Nitin Arora, Axis Asset Management Company Limited - Equity Research Analyst [27]

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And generally, when you do because you, again coming to a large order from the domestic market. Are these -- when you do a checks and balances with respect to water projects specifically because metro, I understand last year our country gets funded by overseas agencies. And in the water, also the funding agencies are same? Or is it largely backed up by the state government funds?

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Unidentified Company Representative, [28]

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When we started hitting the liquidity crisis in the economy as general, and I've been talking about this for almost about 1.5, 2 years. We said that we were getting away from the private projects and actually concentrating more on government projects. And projects that are funded from the back by agencies like, let's say, the JICA or the World Bank and things like that. So for example, in water, there is a lot of projects that are coming up in terms of last-mile connectivity now, yes. So the idea that the government has now just as in rural electrification putting lines so that a light point is available at every house. Similarly, they are now looking at saying that water should also be similarly piped to every house and should be available. So these are some of the ambitions that we have. At the same time, there are things like Nahayan Gange water shoots offshoots, which are in terms of sanitation, which are all those kind of treatment plants, all that. And I think there is a lot of scope here. But the question that you asked is very important. We are very careful with whom we deal because at the end of the day, as I'm fond of saying, in project business, the money is actually reckoned when we start receiving -- that the profits are actually reckoned when you start receiving the money. Build and it's all remaining on the book, yes. So we are very conscious about that, and that's the way that we will be running our business, risk mitigated.

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Operator [29]

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(Operator Instructions) The next question is from the line of Shrinidhi Karlekar from HSBC.

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Shrinidhi Karlekar, HSBC, Research Division - Analyst [30]

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So I have a question on this incrementally, we are seeing more and more sales happening through the e-commerce channel as well as this multi-pronged which is typically concentrated by a few entities. So I just wanted to understand is the things happening through this channel is less profitable than the profit per unit side already, compared to your traditional distribution segment?

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Unidentified Company Representative, [31]

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One way of looking at this whole thing is that in a business, there are different channels that we have to deal with. Now as people who are being -- doing this business for a long while, we kind of balance out all the channel profitabilities. And why is that important, because you cannot be seen to be favoring the e-commerce channel at the cost of our direct distributors. Therefore, what we do is that we take -- we understand that off-line and online partners are equally important. And at this point of time, almost about 10% to 12% of our total sales goes through e-commerce, largely. And the way that we deal with it is that we have certain products, for example, of 1.2 ton AC or a 1.4 ton AC which is exclusively available in the e-commerce channel and you'll not find it in the normal. So there are ways and means of dealing with it. And we do have a certain understanding with the likes of both Amazon as well as Flipkart on how we will be and catalogs on how -- and [Catapult] of course, on how we will actually deal with it without detriment to our own market. Yes. One other thing that I would say is that our philosophy has always been to look at what the market changes are on the horizon and to adapt ourselves accordingly to it. So we are not in a situation where we are saying that we are going to be fighting against the e-commerce. But on the contrary, we are really saying, e-commerce is here to stay. Let us see how we can actually work with them and make it -- convert the whole proposition into a win-win for both us as well as them.

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Shrinidhi Karlekar, HSBC, Research Division - Analyst [32]

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And sir, how do you see like we have many players already in this market. And as you know, this e-commerce has a very pure multiformat to it. They are also expanding quite rapidly. So earlier, India as the market was very difficult market. It was a difficult market to distribute for a new company, right? And so scale was also difficult to acquire. But do you think because now the distribution is getting concentrated in e-commerce and a few peers in the multiformat, could you think fundamentally competitive intensity will keep going up? Because these players can introduce or like can give access to a big part of the market very easily to a newer player?

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Unidentified Company Representative, [33]

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In the country, as a whole, it's a very large territory. And it has got pockets of 2 tier and 3 tier cities all over the place where the demand comes up from. It is very important to have physical distribution at all these places. And as Voltas, we have almost about 19,000-plus distributed touch points apart from about 150 exclusive brand outlets, which markets both Voltas as well as Voltas-Beko products. Now e-commerce is catching up, but I don't know whether in a consumer durable like ours, where we're talking about an air conditioner, which also requires installation, it is going to take off at the same level that you might find, let us say, a mobile or some other smaller consumer durable products. So I think there is a certain amount of, shall I say, a business difficulty for e-commerce to just grow and expand that way. And this is what we have seen in other developed countries also where particularly where ACs are concerned that a certain portion certainly goes through the e-commerce channel, but it just doesn't all of our physical feel -- look and feel and touch kind of points that we have.

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Operator [34]

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The next question is from the line of Anupam Gupta from IIFL.

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Anupam Gupta, IIFL Research - VP [35]

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So the first question is on the product segment margins. So you mentioned that the competitiveness has not come down and not too many price increases have happened. Given that your costs have moved up because the cost of duty, how do you look at the margin profile going forward? Any change in the guidance for the full year for the product segment?

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Unidentified Company Representative, [36]

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Okay. One of the things is that competition is here to stay. And why is competition here to stay? Because the penetration is still abysmally low as far as the air conditioner product is concerned in the country. So there's lots of opportunity for growth. And when people see that, and they also see a company like Voltas earning around 11% to 12% margin year after year for the last 7 to 8 years, there is a great propensity for new competition to come in. We have no quarrel with that. In fact, we are appreciative of competition because what it does is also that it helps to grow the market. Because every time they advertise, it helps to also secure and a mind-set in the consumers' mind saying that he or she is missing something from their house. So -- and when they walk into the shop to buy, that's where we hope that by our quality, by our products, by our price, we'll be able to convert them into Voltas customers. And that is indeed the secret as to why 1 out of every 4 air conditioners sold in this country bears the Voltas product name today.

Now in terms of the forward margins, while competition might be there, I think that we can reasonably see in and around 11% margin as we go forward, yes. There might be certain quarters, as you have seen in this current quarter, where the volume is not very large, where the margins come down a little bit. But what happens is that the 11% that I'm talking about is an average during the year.

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Anupam Gupta, IIFL Research - VP [37]

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Right. Understand. Secondly, on the Beko part. So if you -- well, you haven't included exact losses. But share of losses from associates has come down significantly versus the last quarter. So is that a function of lower sales during the year -- during this particular quarter? Or what exactly is it due to?

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Unidentified Company Representative, [38]

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Well, if you had lower sales then what would happen is actually, those costs will go up. Because you'll be incurring -- because we are in an investment phase right now. And as we have said, it will take 3 years before we are able to -- 3 to 4 years before we are able to actually start making a profit, yes? At this point of time, I have publicly said that our ambition is to be 10% of market share for the whole type products by the time we are at 24, 25, yes? And that we're still going at it. The share of JVs and associate companies, what you see the figure is a combination of not just Voltas-Beko, but also certain other over JVs, et cetera, which are similarly placed as for VoltBek. Now what I want to assure you is that we are perfectly in terms of profitability, et cetera, we are motoring along fortified. And both the partners are adequately cash rich to be able to support it in terms of required market investment to reach our ultimate goal. While we're on the subject, I would also say that the products that we are now today selling is not a full complement because we are missing something for the direct cool refrigerators which are now being -- the factory at Kanan is supposed to be doing that. And by the end of this calendar year, we should be starting production. And once the production starts, I think the whole number again will change, both in terms of volume, sales and profitability of the limited -- the losses that we show on the profit and loss.

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Operator [39]

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The next question is from the line of [Aditya Bhart] of the Macquarie Group.

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Unidentified Analyst, [40]

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Sir, I have 2 questions. The first question is on the Unitary Cooling Product Segment. I can see that the EBIT margin in the UCP segment has gone up Y-o-Y. So is it entirely because of the operating leverage benefits because of the segmental growth? Or have you seen any changes in terms of the revenue mix, a better mix of inverter products or something like that? That's the first question. The second question is on the Electro-Mechanical Projects business. The capital employed in this segment has gone up consistently for the last 6 quarters. So can you just highlight why that is happening. Is it only because you're growing in terms of revenue? Or is there any stress on working capital or any other reason?

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Unidentified Company Representative, [41]

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Let me first take the EBIT question. Yes, yes, you're right that it is a function of the volumes. It's a function of various growth. But the EBIT margin depends upon various other things that happen, including the advertising spend that is incurred during the quarter, the kind of inventory level that was there. As you know, that we went into this quarter with low inventory, so -- and the orders has also picked up. Many of these factors are there. So on an average basis, again, my submission would be that please don't look at quarter-to-quarter kind of margins for these kinds of businesses because they are never really indicative. On an annual basis, I think you would be able to look at something like 11% that I indicated earlier. Now coming to your second question in terms of EMP, I think it's that the capital employed has indeed gone up, and this is a consequence of the projects that we have taken up, and it's in the pipeline. And both the under revenue and whatever is there is also now treated as contract assets, so it will be part of the capital employed. So some bit of slowdown has happened in terms of the money coming in, particularly in the domestic because of the elections and various other activities and the general liquidity. But this is something, as I mentioned, that we are focusing on, particularly in terms of cash collections, and I'm sure that over a period of time, it will equal out. In fact, on the international, again, as I have commented on the North, a number of -- there is a general propensity to actually delay the payments as much as possible. But then again, I think you would have noticed that we are large enough to be able to sustain some of these ups and downs. And over a period of time, you will make sure that the total inventory and the capital employed is well in line with what our internal objectives are.

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Unidentified Analyst, [42]

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Okay. Sir, just 1 small follow-up on the EBIT margin for the UCP business. Can you quantify how much percentage of your AC sales are from inverter products? You mentioned 50% for the whole market, right? I think 50% of splits for the market, right? What that number would be for you?

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Asawari Sathaye, Voltas Limited - Senior Manager - Corporate Communications and IR [43]

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I think it's very much similar for us. We are very much in line with how the market is also leading the inverter space. In fact, for us, also, it's close to about 50% of our sales in split ACs that's coming from the inverter segment. And as we have mentioned earlier, we see the trend picking up. But at the same time, the focus will continue to be an holistic one: windows, split 6 and the inverters.

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Operator [44]

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The next question is from the line of Bhoomika Nair from IDFC Securities.

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Bhoomika Nair, IDFC Securities Limited, Research Division - Security Analyst [45]

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Sir, I just wanted to get some color on EMP. We've seen a lot of orders in the metro as also in the international market. So would this have -- how does -- given that these projects do tend to see variations in terms of the execution, would our margin guidance of 7% to 7.5% change in any way?

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Unidentified Company Representative, [46]

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I think it would still retain there. And again, I mean, as I've always said, that in the project business in every quarter depending upon the settlement that we make and the various -- the accounts, et cetera, there is a certain up and down that happens. So in this quarter, for example, if you really look at the entire thing, it's about, I think, 6.9% is the kind of -- so it's very close to 7%, the EBIT margin that we have seen. So I would expect that it would be around the region in the next 2 to 3 years, it should go around this. And in the project business, Bhoomika, as a person who's been following our business for so many years, you would be aware, there will always be a little bit of ups and downs. But at the end of the day, we will make sure that over a period that we are able to run the business as prudently and as risk-mitigated and as selectively as possible.

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Bhoomika Nair, IDFC Securities Limited, Research Division - Security Analyst [47]

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Sure. So the other thing was if I could get the second quarter industry secondary sales growth number. Or while it is obviously low season, but just to get some cut on how the industry has performed in Q2.

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Unidentified Company Representative, [48]

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The YTD was 33% for the -- for Q2. So it was really (inaudible) for Q2, it was in the range of about 19% or so. We are not really -- because we haven't got the GSK Nielsen reports for the September quarter completely analyzed at this particular point of time. But they're just released, it's real late night or something like that. But it would be in the region, yes.

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Operator [49]

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(Operator Instructions) We'll move to the next question that is from the line for Abhilasha Satale from Dalal & Broacha.

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Abhilasha Satale, Dalal & Broacha Stock Broking Pvt Ltd., Research Division - Research Analyst [50]

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Yes. So in this UCT segment, I want to know that we have been gaining our market share consistently to consist increase in the last 3 quarters. Have -- we have not been able to take, or we have not initiated any price increase in part of gaining market share consistently. So what is it that will trigger any price increase there and some margin improvement? What are the parameters you are looking for taking any price increase.?

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Unidentified Company Representative, [51]

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When you think in terms of price increase, I must actually admit that everyone in the industry missed a trick early -- in the beginning of this calendar year, in January, because everyone had a lot of inventory. And looking back, we could have all taken a good amount of price increase and still the quantity would have sold. But none of the competitor -- competition, including us, were bold enough to take that step because why? Because this particular business is terribly weather-reliant. And therefore, you cannot read the market ahead. But you can always look back and say that, yes, I perhaps should have done that. So no one took price increases. But what happened is that all that inventory at those low prices went into the market. Now when you're looking at it, there's a lot of competition that's coming up. Inverters came in, and people have been extremely aggressive in terms of pricing. You can see the number of deals that are there. And because the consumer sentiment is so very low, there has been a huge amount of offers that are there. And when you make offers, these all cut into the margins. The one other factor is that the intermediate agencies were doing 0% EMI and consumer financing. They have all grown very substantially over a period of time, now approximately...?

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Asawari Sathaye, Voltas Limited - Senior Manager - Corporate Communications and IR [52]

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25%.

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Unidentified Company Representative, [53]

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25% of our sales is actually going through these 0% financing, and they also have a cost attached to for the company. Now this is the change that we have seen in the industry. And at this particular point of time, we think that it will be difficult to go all out and make a complete price change and say that here I am going to increase my price by 5%. It might be difficult. That being said, there will be selective markets, there we selected models in which we will take the appropriate price increase depending upon what competition we are particularly facing in that particular area.

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Operator [54]

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The next question is from the line of Lokesh Garg from Crédit Suisse.

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Lokesh Garg, Crédit Suisse AG, Research Division - Research Analyst [55]

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Basically trying to clarify some questions earlier on the call. Basically, you seem to suggest that, basically, there is a significant amount of L1 that you have in similar businesses and segments, as we have seen in 1Q. Almost suggesting that we could have roughly, let's say, somewhat in the same vicinity in order of magnitude, order booking in 3Q ongoing as well. Is that right?

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Unidentified Company Representative, [56]

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Yes. I'd say that based on the L1. But let me also just put out a small word of caution. In many of these projects, what happens is the L1 is declared and the L1 is not within the region of their price estimates. And they normally call us for negotiation, et cetera, before they actually finalize it, yes. But yes, we have a good amount of L1s in the other projects.

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Lokesh Garg, Crédit Suisse AG, Research Division - Research Analyst [57]

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Sure. And just to sort of quantify things a little better, your share of the total order backlog of INR 38 billion in the domestic projects business, about INR 10 billion is in rural electrification. So the remaining INR 27 billion. Should we assume it to be roughly equally split between let's say water and HVAC?

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Unidentified Company Representative, [58]

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Yes.

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Unidentified Company Representative, [59]

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Yes, equally between urban and -- include metros, airports, hospitals, education institutions, there will be a substantial chunk in HVAC and balance is in water.

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Lokesh Garg, Crédit Suisse AG, Research Division - Research Analyst [60]

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Yes. So all these establishments buildings as we can call them, if you categorize them all in HVAC, then HVAC is still half of the remaining, right?

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Unidentified Company Representative, [61]

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On as we have electrification will be about 1,000, water will about 400, [organic] will be about another 7,800, and the balance will be HVAC.

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Operator [62]

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(Operator Instructions) The next question is from the line of Sheena Barbosa from TRP.

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Sheena L. Barbosa, T. Rowe Price Group, Inc. - VP [63]

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I wonder if you mentioned some update on the Voltas-Beko JV on what sort of products have been launched so far? How has been the pick up? And in terms of the distribution, also, how is that working out?

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Unidentified Company Representative, [64]

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So firstly, as we have been mentioning before, we don't have the full complement of desirable products for the Voltas-Beko right now. And when I'm saying that it's what we are missing out right now is the direct cool refrigerator, which we hope will be coming in from December onwards. We will be starting to produce from our own factories. So that will fill in a gap on the portfolio. As far as the products are concerned, the large number of products are the washing machines, the refrigerators, which are frost-free, the dishwashers and microwave ovens. These are the products which we are selling at Voltas-Beko. We have -- we are using the synergies that we have with the Voltas distribution network. We have been able to increase our distribution footprint pretty rapidly. And there, we also have 150 EVOs, which earlier on as Voltas by itself without the full complement of consumer durable products, we were not able to the extent we have. So now we have started, and there are EVOs across [100 or 150] products

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Operator [65]

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(Operator Instructions) The next question is from line of [S. Agarwala] Of Canara Robeco Mutual Fund.

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Unidentified Analyst, [66]

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Just 1 question on the project division of the international order book of 28 billion. Roughly, which would become major geographies? And if you can just quantify the proportion which they would be contributing in the order book?

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Unidentified Company Representative, [67]

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It's split -- the international order book is split between that this in the -- city; Qatar, where we have picked up a large order, which is the commercial order, which we have spoken about; UAE; Oman and others, Barrier et cetera, all of those. So largely, I think, if you take UAE and Oman and Qatar, they are the large ones for us.

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Unidentified Analyst, [68]

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So more than 60%, 70% would be from these 3?

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Unidentified Company Representative, [69]

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Yes.

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Operator [70]

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That next question is from the line of Renjith Sivaram from ICICI Securities.

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Renjith Sivaram, ICICI Securities Limited, Research Division - Assistant VP [71]

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Yes, sir. I just want to know, on the current orders which we have booked, how has been the pricing aggression? Because the overall market -- there was a lack of orders, especially in the EMP segment. So did you see more aggression from these players? Or was it kind of a rational kind of a competition, especially in this rural electrification, water kind of projects?

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Unidentified Company Representative, [72]

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I think we have seen Voltas has both kind of experiences. Sometimes, there are always new players who are wanting to enter the market, and you'll find this kind of an irrational aggression, as you call it. But where there is an established -- for example, let's take a metro job, or let's take an airport job. Where the 3 Qs are pretty important. And when -- what we mean by 3 Qs are 3 qualifications, basis of certain kinds of work that has been done here and there and successfully completed. So that creates the basis for your ability to bid for those projects. So when you do that, then we are reasonably assured that it would be the type of companies that will go in our companies with large financial resources with good commercial systems and destination sales which bid for these projects. And in those cases, you'll find that very often, the difference between L1 and L2 and L3 will all be very, very miniscule. Not too much to really differentiate. Very rarely do we come across, unless it is the first case that I spoke about, where people are desperate to get a project, do you find a big gap between L1 and L2.

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Operator [73]

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The next question is from the line of [Ankar B.] from Bank of America.

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Amish Shah, BofA Merrill Lynch, Research Division - Director [74]

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This is Amish from Bank of America. Very quickly, can you just give us some perspective on the kind of water orders that you've won and the ones that you see in the pipeline? Meaning, what kind of orders are these. Are these to connect the homes, the last mile, as you said? Or purification? What kind of orders?

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Unidentified Company Representative, [75]

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So both. So quite a lot of them is of the last mile. Some part of it is actually in terms of STP, sewage treatment plants, and water purification. We are also now trying to look at -- we haven't actually won any project asset on that. But I think going ahead in the future, desalination seems to be a large opportunity that is really going to come up, especially the fact that we have got only thousands of kilometers of the tree axis. And that part of water is a real problem, drinking water is a real problem in most of the metros and cities that are in and around the coastal belt.

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Operator [76]

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The next question is from the line of Rahul Gajare from Haitong Securities.

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Rahul Gajare, Haitong International Research Limited - Research Analyst [77]

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Sir, just on the project business, maybe a couple of quarters like kind of what you were indicating that the way of thinking about it was getting tougher, in terms of the requirement of the main contractor or the ultimate customer. How has that changed? And given -- and what has happened, given the fact that you picked up a large order from Qatar. How is the ground reality right now in terms of execution? Because I think the political embargo remains where it is.

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Unidentified Company Representative, [78]

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A political embargo-wise, yes, there has been, let me say, a lessening of tensions. Where in Qatar it's what we have seen over the last 3 years. We have seen quite a bit of easing. And now, in -- if you talk specifically about Qatar, they are pretty easy about many of these restrictions. They are no longer saying that the material must only be sourced from there. They are allowing, for example, sourcing from India. The other part of it is that when under stress, Qatar as a country has learned to survive in very different ways. While the cost competitiveness and the aggressiveness is still there, I think one of the things that's happening is that they are much more, shall I say, clear upon the execution of the projects and are looking at people who are in a position to financially support building project that's actually completed. In many cases, especially in Qatar, some of the projects could not be taken forward because the partners were from one of those countries like UAE or Saudi, et cetera, where there might have been issues in terms of their political accessibility. So we have actually got a little bit of an edge there. But we bided our time there, till we were able to look at the situation and understand that we didn't want to go through circuitous of supplying and managing the wherewithal there and getting supplies there. Now I think things are looking better. In terms of the projects that we have taken commercial Bolivar. This -- we have, again, risk assess it appropriately and it's not a very complicated kind of project. In fact, it is a large area with lots of medium-sized buildings. And I'm talking about medium-sized building I'm talking about with floors of about 6 or 7 floors kind of residential, commercial office, et cetera, and it's all spread out. And we believe that we can estimate that extremely well, and we can also execute it fairly fast without really being impeded by other constraints.

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Operator [79]

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Ladies and gentlemen, that is the last question. I now hand the conference over to Mr. Amber Singhania for his closing comments.

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Amber Singhania, Asian Markets Securities Private Limited, Research Division - Senior Analyst [80]

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Thank you, Lisa. On behalf of the Asian Market Securities, I thank everyone for joining this call. And as questions, thanks to the management of Voltas Limited are providing us the opportunity to hold the call. Now I would like to hand the call back to the management for their closing remarks. Over to you, Mr. [Garg].

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Unidentified Company Representative, [81]

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Yes. Firstly, a big thanks to all of you. I'm aware that there's been more than 100, 115 people on the call, which is good and shows the interest that you have in the company. I also recognize that some of the questions that might have been on the list have not really been asked and that we might not have been able to do full justice. But we have an IR team here with people who are completely available, and we'll be happy to answer your e-mail or your phone calls. While on the subject, I also want to just mention that the [Socha,] my colleague and friend who is the Head of Finance for Corporate. He is retiring. And his position will be taken up by [Manish Vishah] so I want to take this opportunity to really thank Socha, serve also for all the hard work and all his assistance. And many of you know him very well. I'm sure that I will certainly miss him, and I'm sure that many of you will also. But I'm sure that Manish will walk into those shoes, and we will continue to provide stakeholders support in the same way that we have been able to do before. So on that note, thank you once again, and let me sign off.

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Operator [82]

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Ladies and gentlemen, on behalf of Asian Market Securities, that concludes today's conference. Thank you for joining us, and you may now disconnect your lines. Thank you.