Voltas Ltd

Money Times - - Stock Watch -

(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.

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