Accumulate Voltas; target of Rs 624: Prabhudas Lilladher

Prabhudas Lilladher's research report on Voltas

We recently met the management of Voltas and the key take aways from the meeting are 1) Due to unseasonal rains and erratic weather, April was very weak for the Room AC (RAC) industry, while May has been better and June too saw some improvement 2) In March-May, Voltas had a relatively better performance than the industry (very low single-digit growth) 3) Commodity/currency are the key headwinds. To offset the same, the company has taken price hike of ~3% in select SKUs; however, to maintaining margins of 13%+ will be contingent of a pick up in volume during the year and the relative competitive intensity 4) Management highlighted that it has not lost market share and in fact has gained 30-40bps in FY18 5) Share of inverter in RAC sales has gone up to 30% in Q4FY18. Introduction of more SKUs and better promotions have led to fast ramp-up of Inverter AC sales 6) Voltas-Beko JV is on track to be launched in H2CY18 (around festive season) 7) Seeing huge opportunities in Rural Electrification, Urban Infra and Water in domestic MEP segment 8) In International market, Voltas currently operates only in UAE and Oman, given the political uncertainty in other countries 9) Looking at maintaining EBIT margin of 7-7.5% in MEP over the next 2-3 years.

Outlook
The stock is trading at 25.6x FY20E earnings. We remain positive on Voltas over medium/long term, given improving margin profile of fresh orders, strong consumer business franchise, healthy balance sheet and cash flow and structural growth in RAC segment, given the low penetration. We have cut our earnings for FY19/20 by ~5% to factor lower AC sales due to erratic weather and some margin pressure due to low volumes, commodity and currency headwinds. We maintain 'Accumulate' with revised TP of Rs624 (previous Rs652).

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