(BSE Code: 500575) (CMP: Rs.551.55) (FV: Re.1) By Amit Kumar Gupta
Established in 1954, Mumbai-based Voltas Ltd operates as an air-conditioning and engineering company primarily in India, the Middle East and Singapore. It operates through three segments: Electro-Mechanical Projects (EMP) and Services; Engineering Products and Services; and Unitary Cooling Products (UCP). It undertakes heating, ventilation, airconditioning and refrigeration projects; electro-mechanical works comprising electrical systems for buildings, plumbing, firefighting, extra low voltage and specialized systems, building security and other utilities; electrical power projects; and environmental and water pollution control, pumping stations and water supply, water and waste water treatment projects. It manufactures air conditioners, industrial air conditioning and refrigeration equipment, water coolers, commercial refrigerators, coolers and freezers, cranes and construction equipment. Voltas being a strong brand in the room air conditioner (RAC) segment has maintained its market leadership position in India despite the rising competition and various macro level abruptions such as demonetisation and GST implementation. Its UCP segment, which contributes ~50% to sales, recorded ~12% CAGR over FY12-18. A strong brand coupled with over 6,500 dealers has helped it gain market share in ACs from 14% in FY10 to ~21% in FY18. With relatively stable margins and high operating cash flow, the UCP segment has provided strong support to its profitability by maintaining lower working capital requirement in the segment. We believe the low penetration of RAC coupled with rising aspirations of middle-class families will open up huge opportunities in future for players like Voltas in the cooling product segment.
To tap the growing consumer market and leverage its existing dealer network, Voltas recently launched a range of products in washing machine, refrigerator, dish washer and microwave oven categories with the help of Turkey-based Arçelik AS under the brand ‘Voltas Beko’. The JV will initially source the products from China, Thailand and Turkey and later manufacture the products at Voltas’ upcoming plant at Sanand in Gujarat, which is expected to begin production from mid-2019.
Voltas’ UCP segment was an underperformer in Q2FY19 with revenue growth of just 8% YoY due to bad weather, unseasonal rains and weak Onam sales in Kerala due to floods. Voltas’ EBITDA grew 26.7% YoY to Rs.1085 million.
However, the EBITDA margin declined by 63 bps YoY to 7.6% due to a ~600 bps YoY decline in the UCP segment’s operating margin due to lower volumes and pricing pressure. Voltas has an order book position of ~Rs.48.8 billion as at Q2FY19, which gives a good revenue visibility for the next two years. To reduce working capital requirements and improve profitability, Voltas has adopted a strategy to remain selective in the choice of new project undertakings with a ticket size in the range of Rs.3000-4000 million. The management is focused on improving its EBITDA margin by bidding for higher margin projects. Currently, Voltas has around
100 exclusive brand outlets and ~16,000 touch points to sell its products. The JV, Voltas
Beko, plans to add 10,000 additional outlets for its range in washing machines and refrigerators. Along with that,
Voltas also plans to add 500 exclusive brand outlets over the next two years to take it to over 1,000 outlets in the next
3-4 years. The management aims for a ‘360-degree’ approach with sales generated via modern trade outlets, multi-brand outlets, exclusive outlets and e-commerce.
Although the past few years were challenging for the UCP segment, Voltas has retained its top position with ~21% market share in the RAC segment given its strong reach in tier-II and tier-III cities.
Low penetration levels, easy availability of finance options, replacement demand, growing consumer electronics’ retail stores, online shopping along with growing number of middle-class households in
India will fuel the demand for
Voltas’ products in the years to come.
Technical Outlook: The stock looks good on the daily chart for medium-term investment.
It has formed a spike pattern on the daily chart and a close above Rs.590 with good volumes will push the stock to higher levels. The stock trades below important moving averages like the 200 DMA level on the daily chart.
Start accumulating at this level of Rs.551.55 and on dips to Rs.505 for medium-to-long term investment and a possible price target of Rs.630+ in the next 6 months.