Jefferies maintains ‘Buy’ rating on Voltas with Rs 480 target price

By: | Published: March 31, 2017 3:13 AM

Air-conditioner sales have picked up sharply in the last fortnight on the back of soaring temperatures since January 2017.

Despite rising competitive intensity Voltas has maintained its market leadership position with margins in 12.5-14% band.

Air-conditioner sales have picked up sharply in the last fortnight on the back of soaring temperatures since January 2017. Our dealer checks suggest that LG’s aggressive inverter AC pricing has not meaningfully dented the regular split AC market. We have revised our FY17E-19E EPS higher by 1-5% to factor better AC pricing environment in margins.

Maintain Buy with `480 TP (v/s `410), at 28x PE FY18E on revised earnings v/s 25x earlier. Despite rising competitive intensity Voltas has maintained its market leadership position with margins in 12.5-14% band. This also includes one bad season when AC market rose at less than 5% in FY16 as temperatures were benign. Our dealer checks suggest that sales have picked up even in the southern markets like Bangalore, which were not traditionally AC markets.

Pricing has been stable with limited discounts. Demonetisation impact seems to be behind with cash sales also returning, though credit card/financing proportion has risen. We have moved to stable margins at 13% from FY17E-19E v/s 50-100 bps dip earlier for the AC segment.

We believe air-coolers, where Voltas is advertising is also a potential surprise area, as margins here are 25%+ currently of the industry leader Symphony. Our industry checks on commercial air-conditioning market suggest some revival in the environment.

This ties-in with execution pick-up discussions with E&C companies. With legacy orders reducing MEP margins are already showing recovery signs – 9MFY17 margins are up 124 bps y-o-y to 2.4%.

Given this, we believe multiples will see some re-rating before the actual earnings materialise. Listed consumer durable businesses in India, given high ROCEs, trade in a PE band of 35-47x FY18E.

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Our target 28x PE FY18E multiple implies 18x PE for the engineering businesses, if one values AC segment at 35x PE. As the AC business will dominate earnings mix v/s 10-years ago, it should trade at a premium to its 10-year avg of 22x.

We believe Voltas remains a good play on consumption and investment theme in India. Downside risk: collapse in domestic AC demand.

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