We had a quick conference call with management this morning. The following are some of management’s comments and our views on the same: According to management, inventory in the system had depleted at end-1Q owing to strong offtake. As a consequence, the industry is now building up the same in preparation for the second summer & festival season. Though continued rains in 2Q have been a source of concern, management was hopeful about the festival season.
Management is preparing to enter other consumer durables categories in the near future. However, details about this would be provided at the appropriate time. So far the entry into the air coolers category has been in line with expectations with Voltas selling 50K air coolers in 1Q vs 68K units in FY16. Voltas has surplus net cash which is 25% of the net worth of the company and can be deployed to build an enviable consumer durable franchise leveraging on the Voltas brand, in our view.
Though we have now entered the two seasonally weaker quarters, we remain constructive when it comes to y-o-y comparisons given 2Q (Unitary Cooling Products (UCP) sales declined 9% y-o-y and Ebit margins contracted 109bps y-o-y) and 3Q (UCP Ebit margins declined 168bps y-o-y) in FY16 were on the weaker side due to price competition. Further, GST and 7th Pay Commission should be positive for business.
Our target price for Voltas of `405 is based on a March18E P/E of 25x.