Voltas shares under pressure after Motilal Oswal cuts earnings estimates

Voltas shares declined 1.5 percent in morning on Friday after Motilal Oswal cut its earnings estimates for current as well as next financial year.

"We cut earnings by 3 percent for FY19 and FY20 to factor in lower sales in the unitary cooling products (UCP) segment. We build in flattish growth from the UCP segment in FY19 versus earlier estimate of 5 percent growth," the research house said.

Hence, it has maintained neutral rating, with a revised SOTP-based price target of Rs 600 as it rolled forward target price to FY21 (UCP business at 35x FY21E EPS; EMP and engineered products business at 15x FY21E EPS).

For the target price, the research house valued unitary cooling products at Rs 460 per share, engineered products services at Rs 37 and electro mechanical products at Rs 103.

Voltas' first half of FY19 room air-conditioner (AC) sales saw muted growth of 6 percent as a result of unseasonal rains and hailstorms across North and South India.

Although, Q3FY19 sales witnessed a pick-up in the western region due to a rise in temperature, rest of India saw tepid sales given a seasonally weak quarter (Q3FY18 was a very strong quarter for the UCP segment on inventory clearance done by Voltas as new energy norms came into existence from January 2018).

Given that Voltas has two months inventory yet to be cleared from the system, the company anticipates FY19 to be flattish for the UCP segment, said Motilal Oswal after meeting the management.

It further said Voltas has been unable to take price hikes given (a) demand weakness in the room AC segment, and (b) higher inventory prevailing in the system.

Thus, margins are facing downward pressure on account of high competitive intensity, INR depreciation, and import duty hike in the segment, it added.

Voltas currently imports indoor units and compressors whereas outdoor units are assembled at its Pantnagar facility for requirements in the northern region. For rest of India, it is outsourced to domestic OEMs. By FY20, company plans to manufacture its own molds for indoor units to de-risk its business model from Chinese imports.

The research house said the company expects inverter AC share to stabilise around current levels (40-45 percent of the total Room AC sales) given that incremental growth is seen coming from tier-II/III cities where quality of electricity supply is still inferior as compared to tier-I cities.

For Voltas, top 35 cities constitute 75 percent of the total volume.

Motilal Oswal believes the structural growth story in room ACs remains intact for the next few years (despite near-term hiccups of a weak summer), driven by low penetration levels, rising income levels and increased distribution in tier-II/III cities. The company has around 15,000 touch points across the country.

In the project segment, ordering is primarily driven by rural electrification and urban infrastructure projects by the government. Key end markets are seeing an uptick, including metro rail, modernization of airports, hospitals and educational institutions.

Private capex remains weak and is yet to see any significant on-the-ground revival, Motilal Oswal said.

In May 2017, Voltas (a Tata enterprise) had established a joint venture company with Ardutch BV, a subsidiary of Arçelik AS, part of the KOC group – Turkey, in India.

Currently, VoltBeko products are imported except for the twin-tub top-loading washing machine, which is sourced from domestic OEMs.

The company said VoltBeko factory should be ready by December 2019 for manufacturing refrigerators, washing machines, microwave ovens and dishwashers. The initial capital commitment by the JV partners is Rs 650 crore, but as the manufacturing and distribution operations expand, the partners would infuse more equity capital in the JV, it added.

Motilal Oswal said Voltas expects the JV to attain break-even in the next 2-3 years and targets to reach Rs 10,000 crore revenue by 2025. "It aims to rank amongst the top-3 players in the market."