We recently spoke with listed and unlisted manufacturers, distributors and dealers of room air conditioners to understand the sales trends in Q2FY17 and the outlook for the festive season in Q3FY17. Room air conditioner sales were strong on a YoY basis across north and south India during Q2FY17. However, West India saw degrowth post weak sales in Q1FY17.
East India saw a q-o-q slowdown in Q2FY17 (strong summer season had led to stock-outs inQ 1FY17), though sales grew y-o-y. The weak base of last year also aided YoY growth in Q2FY17. We estimate 20% y-o-y growth for Voltas’ UCP division in Q2FY17 after 29% y-o-y growth in Q1FY17. October-December 2016 is being seen as the second summer for room air conditioner manufacturers. The festive season is off to a very strong start. In West India, however, sales have not picked up meaningfully, which is unusual — typically consumers buy new appliances during Dussehra. This is especially true for markets in Mumbai, Thane and Pune.
There are multiple triggers for the stock, which include, positive impact of 7th Pay Commission hikes, structural uptrend in the air conditioner market, and potential improvement in the MEP business, with pickup in domestic construction activity. Yet, we maintain our neutral rating, given the stock’s premium valuations (29x FY17E and 25x FY18E EPS). Our TP is `360 – we value the UCP segment at `313 (25x FY18E EPS) and the engineered products segment at `36 (15x FY18E EPS).