Street happy with Voltas’ move into white goods

If executed well, expansion could lead to re-rating of the stock

Voltas gave investors more than a reason to cheer. On Tuesday, not only did it post stellar results for the March quarter (Q4) but also announced the formation of a joint venture (JV) with Turkey-based Ardutch to launch a host of consumer durables products. While Voltas has maintained a lead in the domestic air-conditioners (AC) market despite stiff competition, investors have always felt it needed to diversify into other products. The JV, analysts believe, is a step in that direction and channels the company's cash kitty in productive avenues. They say the expansion opens up new growth opportunities. Credit Suisse upgraded the stock to ‘outperform’ after its results, citing stronger sales and margins. All this pushed up the stock to a new 52-week high of ~451.25 in Wednesday's trade.

However, there are reasons for investors to also be cautious. While the move is positive, it will bear fruit gradually. For instance, FY18 will go in setting up the JV business and putting the supply chain and after-sales service in place. While there would be some revenues in FY19 from this JV, significant contribution will come only from FY20. As the company invests in this business, there could be some margin pressure as well. This, along with the management strategy on branding (whether Voltas alone or as Voltas Beko) will be among key investor queries in their call with the management on Thursday.

Also, as Pawan Parakh, analyst at HDFC Securities, says: “Voltas entered the air coolers market a few years earlier but could not scale it up meaningfully. Re-rating in Voltas versus peers such as Havells, Crompton Greaves and others will be contingent on the company getting its execution right in the JV business.” A decade ago, Voltas had to exit the home refrigeration business. Although it now has most of the ingredients to make the move successful, the Street would keep watch on progress. If successful, this business can aid a re-rating in Voltas’ valuation multiples.

Meanwhile, the stock trades at 30 times the FY18 estimated consolidated earnings, which is at a discount to peers Havells, Blue Star and Crompton Greaves Consumer 36 to 45 times. Its relatively lower valuation versus peers is a positive, considering Voltas is likely to grow its net profit at a healthy 15 per cent annually over FY17 to FY19, and is expected to increase its market share by 200 basis points in the domestic AC segment in this period. While the higher rate on ACs under the coming goods and services tax (GST) is a concern and could lead to some near-term pressure for Voltas and its peers, a fall in share price could be a good time to enter the stock.