Voltas may be Hot Again Af­ter a Sea­son of Gains

Sea­son­ally strong Q4 to boost growth; exit of LG from con­ven­tional seg­ment could help in­crease mar­ket share

The Economic Times - - Smart -

ET In­tel­li­gence Group: The stock of Voltas, In­dia’s largest maker of air-con­di­tion­ers, has un­der­per­formed the S&P BSE Con­sumer Durables in­dex by 9% in the past three months due to slack in de­mand fol­low­ing the gov­ern­ment’s de­mon­eti­sa­tion drive. How­ever, it may re­port a turn­around con­sid­er­ing a sea­son­ally strong fourth quar­ter, firm prices across prod­uct cat­e­gories and a pos­si­bil­ity of im­prov­ing mar­ket share af­ter the exit of LG from the con­ven­tional AC seg­ment.

The vol­ume growth of uni­tary cool­ing seg­ment (UCP) is ex­pected to pick up as re­tail­ers have grad­u­ally started build­ing in­ven­to­ries to meet sea­sonal de­mand from South and North. This will be sup­ported by cash avail­abil­ity.

In the De­cem­ber quar­ter, the in­dus­try sales of ACs in the multi-branded out­let dropped 11% due to de­mon­eti­sa­tion. As a re­sult, the com­pany’s rev­enue de­clined by 5% YoY to ₹ 411 crore, while the op­er­at­ing mar­gin fell by 110 bps. How­ever, it was able to main­tain its mar­ket share at 21.4%.

On the pos­i­tive side, the vol­ume

loss in Q3 may re­sult in pent up de­mand in the months to come.

The de­ci­sion of LG, a close peer, to fo­cus on in­verter ACs may also help. In the past, it had re­ported higher vol­ume and bet­ter mar­gin af­ter some of the multi-na­tional com­pa­nies stopped sell­ing win­dow ACs.

Voltas has men­tioned that it would not en­gage in ir­ra­tional price war to fend off com­pe­ti­tion. In­stead, it plans to fo­cus on qual­ity, bet­ter distri­bu­tion, and ef­fi­cient ser­vice to main­tain the mar­ket lead­er­ship.

In the elec­tro-me­chan­i­cal seg­ment, the com­pany ex­pects a slow re­cov­ery in West Asia. Ma­jor­ity of the in­cre­men­tal or­ders are ex­pected to fetch 4-5% EBIT mar­gin from FY18.

At Mon­day’s clos­ing of ₹ 348.7, the stock traded at 24 times FY18E earn­ings, which ap­pears rich. How­ever, with just a quar­ter left for an­a­lysts to roll over their es­ti­mates to FY19, it of­fers val­u­a­tion com­fort given bet­ter growth prospects.

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