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
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.