Gradual withdrawal from an aggressive inverter-AC pricing by LG, unified BEE ratings from CY2018 abolishing the key marketing narrative for inverter-ACs and “one-market” promise of GST promoting industry growth are surely positives. But these are not enough to counter the reduced estimates for Arcelik JV on more realistic market share and margin assumptions. Further downside risks exist to UCP’s market share, gross margins and EMP contracts from geopolitical events in Qatar. We downgrade to SELL with a revised target price of Rs 415.
Competitive dynamics of the room AC industry are set to undergo significant changes in the next six months led by increased focus of competition on inverter ACs, change in BEE rating tables from January 1, 2018, and the implementation of GST. Recent interaction with a mid-sized AC player suggested that LG had successfully exited the fixed-speed AC market. It was also able to protect market share by making its customers buy inverter models. The discounts offered were treated as a seasonal scheme and aggressive pricing has been withdrawn since. This should alleviate price pressures on peers like Voltas. Upcoming changes to BEE ratings will abolish the differential star ratings to inverter and non-inverter categories. This will alter the marketing narrative for inverter models — a positive for Voltas that has maintained its strategic foothold in the non-inverter space. The 28% GST tax rate for room ACs would have a net 2-3% impact (versus current) but it will make it easier for players to venture outside their regional strongholds.
Voltas announced a JV with Arcelik that will introduce products under the Voltas-Beko brand in India. The company has not decided on its entry strategy but aims to enter the market before Diwali this year. The foray into the consumer business appears to be a large opportunity at first due 2.5X the AC market size and 10-year revenue CAGR of 15% versus 14% for ACs.
However, our analysis suggests high penetration in certain categories such as refrigerators in urban households and concentrated market with top five players commanding an over 80% share in all three target categories.