1. Jefferies maintains ‘Buy’ on Voltas with TP of Rs 480

Jefferies maintains ‘Buy’ on Voltas with TP of Rs 480

Our channel checks suggest air-conditioner (AC) industry has seen 10-15% y-o-y growth during Q4FY17, with Q1FY18 poised for stronger 20% y-o-y growth.

By: | Published: May 9, 2017 6:27 AM
Split ACs remain a volume driver with the share of window ACs dropping. (Reuters)

Our channel checks suggest air-conditioner (AC) industry has seen 10-15% y-o-y growth during Q4FY17, with Q1FY18 poised for stronger 20% y-o-y growth. LG’s aggressive inverter AC launch in January 2017, saw competitors also dropping inverter AC pricing then. However, prices have inched up from the lows since April 2017 given the strong demand. We remain positive on Voltas as it is a goodplay on investment and consumption themes in India.

Split ACs remain a volume driver with the share of window ACs dropping. Voltas is 5-10% cheaper than its key competition across most dealerships, which gives confidence in it maintaining market leadership without price reductions. Our dealer checks also suggest that Voltas/Samsung are gaining market share from LG’s regular split AC market exit.

Cut in inverter pricing has not translated into regular split AC prices coming off, and they are still 20-25% more expensive in dealerships. We don’t expect material margin impact for Voltas from lower inverter AC pricing as it has small proportion of sales from this segment. High temperatures should see AC demand remaining robust into June/July, risk being unseasonal rains.

Blue Star management recently commented that advertising spend is likely to be up 10% y-o-y. Our channel checks also suggest that industry spends would be less than 15% higher y-o-y. This should add to operating leverage.
Typically commodity price rise/ reduction is passed on in pricing over 3-6 months and demand is a bigger driver of EBIT margins over a 12-month period.

Recent rise in aluminium and copper prices (up 22-25% y-o-y in Q4FY17, ~ 20% of AC cost) might cap leverage linked margin surprise potential as prices have been steady. Our `1.4 billion Q4FY17 profit estimates for Voltas factors 12% cooling segment margins v/s 16% y-o-y (FY17E annual margins 13%).

Other segments being constant, flat margins y-o-y will lead to 20% surprise on Q4 profit estimates and 6% on FY17E estimates. Listed consumer durable businesses in India, given high ROCEs, trade in a PE band of 36-45x FY18E.
Our target 28x PE FY18E multiple implies 16x PE for the engineering businesses, if one values AC segment at 36x PE. Maintain ‘buy’ with `480 TP, at 28x PE FY18E, premium to 10-year average of 22x. Downside risk: Collapse in domestic AC demand.

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