Prabhudas remains positive on Voltas over medium-to-long term, given improving margin profile of fresh orders, strong consumer business franchisee and healthy balance sheet. The brokerage house recently met up with the management of Voltas. In room AC segment, last two months were the tale of two halves, while April saw very strong market growth, lower than expected pick up in northern market led to slightly subdued sales in May; however pricing continued to be stable. Project business continues to see challenges in timely execution both in domestic and international markets. Voltas continues to focus on profitability and being selective in picking orders. Long term opportunity in Room AC continues to be strong given the rising income levels, easy availability of finance and low penetration and improving power availability. Prabhudas believe Voltas continues to be the best proxy to play growth in Room AC segment.
Here are top 3 reasons why Prabhudas Lilladher is bullish on Voltas:
UCP Segment‐Northern markets trending lower than expected: In room AC business, while market saw a very healthy growth in April, May was slight lower than expected due to northern market not picking up to expected levels. Pricing in the market has been stable in the last few months led by strong demand in March‐April in the industry. Voltas believe its key strengths in room AC segment are 1) strong brand 2) product quality 3) availability and 4) thoughtful campaign/advertising. It highlighted that currently 75% of AC sales happen in top 25‐30 cities, improving power availability should drive industry demand over next few years. It expects AC market to grow at 10‐15% CAGR over next few years. Voltas recently entered air cooler business and aspires to become among the top 2 players in the segment in next 2‐3 years. It has recently added 200 dedicated touch points for air coolers.
MEP business ‐ Delays in execution: The Company highlighted that timely completion of project continues to be a challenge both in domestic and international markets in turn impacting project profitability. In domestic markets while opportunity in areas like Metros, water rural electrification etc continues to be promising but near term tender pipeline continues to be subdude. In International markets environment on the ground is yet to improve. The industry remains exposed to the elements of tight liquidity conditions led by oil prices, hindering the ability/willingness to pay. The dearth of experienced MEP contractors (esp. Qatar) with adequate financial standing has resulted in an increase in enquiry levels for Voltas. The company continues to be particularly conscious about threshold margins and inherent risks associated with new order booking. Voltas remains confident of reaching decent profitability in medium term (4‐5% EBIT).
Outlook and Valuation: The stock is trading at 23.1x FY18E earnings. Prabhudas remains positive on Voltas over medium/long, given improving margin profile of fresh orders, strong consumer business franchisee, healthy balance sheet and cash flow. Prabhudas expects stock to deliver earnings CAGR of 18% over FY16‐18E.