Voltas shares buoyant on demand recovery hope
It has managed to gain share in cooling products despite strong competitive pressures
Stocks of the country’s largest air conditioner maker Voltas have risen for 10 consecutive trading sessions since August 26, gaining 27 per cent during this period and hitting its all-time high on Thursday. It ended the day at 1212.9 apiece, a 0.6 per cent rise.
Before this, the stock had underperformed its peers in the consumer durables space, which had led brokerage to upgrade it because of the resultant valuation discount to peers and expectations of a recovery in volumes.
The room air conditioner sector volumes saw a fall of 30 per cent in financial year 2020-21 (FY21) with a demand recovery expected in the current financial year led by the festive season. Himanshu Nayyar of YES Securities expects demand for white goods to normalise in the September quarter (Q2) as economic activity gathers steam after a subdued Q1. He expects demand to be strong if not better than the festive season last year. Brokerages expect the cooling products segment to deliver on the back of pent-up demand (after two weak years) and under penetration.
Despite higher competitive intensity in the air conditioner space Voltas has been able to maintain its leadership position with its FY21 share in the room and inverter air conditioner space being in the 21-25 per cent range. Voltas expects FY22 to be better than FY21, but volumes this year are unlikely to hit FY20 levels. Its ability to hold on to market share gains will be key going ahead as competitive pressures from Hitachi and Lloyd are increasing with weaker players ceding share.
What could aid margins is backward integration as part of the production-linked incentives scheme in the air conditioner space, led by increased local sourcing.
The other trigger for the stock would be the scaling up of its presence in the refrigerator (FY20 market size of ~26,000 crore) and washing machine (~12,000 crore) space, where its market share is around 3 per cent. Both segments are expected to more than double by FY25 from FY20 levels. Lokesh Garg and Gaurav Birmiwal of Credit Suisse believe the company is getting traction in the consumer durables category and could gain further market share in washing machines and refrigerators once distribution scales up in these large categories. While resumption in construction activities is positive, any uptick in capital expenditure is expected to reflect in the electromechanical projects and services segment, which accounted for 39 per cent of revenues.
With the recovery in demand the firm’s prospects are expected to improve led by the cooling products segment (55 per cent of sales). However, valuations after the recent rally have moved into the expensive zone. The stock is trading at 47 times its FY23 estimated earnings and is at a premium to the peer index as well as its five-year average valuation of 32 times. Investors can consider the stock on dips.