We believe strong H1CY17E demand is needed for the next uptick in Voltas. The season has started off well with soaring temperatures. Our dealer checks suggest that demand has picked up particularly in the last fortnight. 2017 temperatures in Jan-Feb are higher or similar to 2016 levels, when AC industry sales rose 20%+ y-o-y. LG’s inverter AC launch is still priced higher than split ACs, though 20-25% lower than earlier inverter AC prices. Temperatures higher than historical averages in metros – expected to continue into March also: The industry entered peak season H1CY17 with healthy inventory levels post demonetisation.
Our channel checks suggest that strong demand growth coupled with low inventory is leading to reduced pricing competition within this segment. North/West temperatures are especially higher than the 10-year average. Regional sales trend are also reflecting this.
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Inverters ACs currently are estimated to be less than 15% of the overall market, though growing faster. Our checks suggest that given split ACs are still at a discount, it is not cannabilising this market.
Voltas has a fairly small proportion of sales from split ACs hence, we do not expect a material margin impact from the drop in inverter AC prices.
We maintain buy with a PT of Rs 410 — 25x PE FY18E, premium to the 10-year average of 22x. Downside risk: collapse in domestic AC demand.