Voltas to benefit from early onset of summer

AC business, improving prospects of projects to drive growth

The early onset of summer, launch of inverter window airconditioners (ACs) and potential benefits accruing from Budget proposals have put Voltas in the spotlight. The market seems to have had an inkling, given the Voltas stock was up over 6 per cent in the last few days.

According to analysts, the early onset of summer might help AC manufacturers in hiking prices, which will support margins and drive their top line. Analysts at IIFL said given the aggressive pricing policy adopted by LG, the industry had not increased prices despite the rise in commodity costs and change in energy ratings. “A severe summer can boost demand and lead to increase in prices — about 4-5 per cent — from March onwards,” said IIFL.

This scenario will help the revenues and profitability of all players, including Voltas, which surprised the Street with 32 per cent growth in AC sales in the December quarter (Q3) while maintaining margins. Motilal Oswal Securities analysts said despite intense competition in the room AC segment, Voltas was able to expand market share without sacrificing margins. Operating profit margins stood at 8.6 per cent in Q3, compared to 8.3 per cent in Q2 and 7.5 per cent in the year-ago quarter. Also, the March and June quarters are seasonally strong with better margins, thus price hikes will support margins to offset cost pressures.

The Budget proposals on boosting housing, smart cities and infrastructure can drive AC demand and Voltas’s projects business further. Additionally, given the power efficiency-related rating changes applicable on ACs from the current quarter, inverter ACs can also drive growth. Against this backdrop, Voltas has announced the launch of a window AC with DC inverter technology. The Street might keep an eye out for the product’s success.

Voltas will also be launching other consumer durables, such as refrigerators and washing machines, by the second half of 2018 as part of the Voltas Becko brand, through its joint venture with Arcelik. This will drive its top line further.

The company’s unitary cooling products segment, accounting for 40 per cent of its top line, is doing well and its electro-mechanical projects and services (EMP) segment is also stable — EMP revenues grew 7 per cent in Q3. Weak oil prices and geopolitical issues had affected orders from West Asia, yet Voltas was able to offset the trend with orders from the domestic market, largely driven by government spending. Domestic orders constitute 64 per cent of Voltas’s total order book of ~48.5 billion. The company is aiming to earn margins of 7-7.5 per cent from the EMP business.

Given the long-term growth visibility in room ACs, prospects from the Arcelik JV and recovery in EMP margins, many analysts are positive on the stock. Macro variables have moved towards negative territory over the last two months. This includes rising crude oil prices, yields in developed markets moving north, fiscal slippage, and prospects of a change in the MSP mechanism.

We maintain a bias for reversal in the interest rate stance sooner than later. Bond yields have been pricing this in and the policy outcome for now will resist a hardening of yields. We expect gilt yields to come under pressure as the government auctions resume in April.

The consumer price index (CPI)-based inflation rose to 5.07 per cent in January. Will there be more inflationary pressures?

As the growth momentum reverses benefiting from re-monetisation, it will be accompanied by a rise in inflation. Higher CPI prints in the recent past can also be attributed to seasonality as well as statistical factors. Statistical factors have a measured shelf life and wane over a period of four quarters. So, a rise in inflation, especially in the first quarter (Q1) of FY19, will be predominantly driven by the base effect.

Two dominant factors that will drive near-term inflation dynamics are crude oil prices and MSPs for kharif crops, which will be defined in Q1.

Foreign portfolio investors (FPIs) have been net buyers in the debt markets this year. Do you see this continuing?

The high participation by FPIs in the Indian debt markets was driven by high carry and a stable exchange rate. For an offshore investor, the rupee’s appreciation has contributed more towards total returns against rates/carry.

A stable currency, higher (real) rates, and a sound macroeconomic environment form an ideal combination for FPI inflows. Over the last few years we have demonstrated the best of these combinations. As things stand, FPIs have been utilising more than 90 per cent of their debt limits. If we are able to demonstrate the ideal combination, then opening up of further limits will aid a strong trend of FPI inflows in debt.

India’s external balance sheet has improved considerably since 2013. However, the recent deterioration of the current account deficit is a cause for concern as the focus will shift to currency risk.

It is being considered making it compulsory for corporates to tap the bond market for a part of their capital requirement. Will this help deepen the bond market?

We will have to wait for more details. The moot issue is that of price discovery — both in the primary and secondary markets. As fixed-income products move from definedbenefit to market-defined products, price discovery becomes that much more important. The existing fixed-income market is controlled in the longer end by institutional players like insurance companies and provident funds. The shorter end is with the mutual funds and there is no one in the middle, other than some proprietary positions by banks.

The fixed-income market has limited price discovery, restricted to certain securities and issuers. Since valuation guidelines are not uniform, the same security held by a bank, mutual fund, insurance company or a pension/provident fund could be valued at different prices. Efforts should be made to have uniform pricing across securities; this will promote transparency and eventually lead to better liquidity.

What is your advice for debt investors?

Accrual, capital gains, and trading are the three drivers for bond fund returns. With the reversal in the rate scenario on the anvil, bond funds will have increased exposure to low-duration high-accrual assets. With the repo rate at 6 per cent and the money market rates close to 7.5 per cent, markets are pricing in at least one rate hike at current levels. Funds bearing higher allocation to money market rates and short-tenor bonds will be considerably less exposed to volatility.

Duration yields continue to look enticing with the benchmark 10-year yield trading close to 7.5 per cent. Unless markets get a wholesale buyer for duration, we expect volatility in duration assets to persist. Hence, the duration segment will remain underweight until the demand-supply equation for longduration bonds improves.