We met dealers for a sense on air-conditioner (AC) industry trends. Dealers ran down old inventory at heavy discounts in June 2017, prior to GST implementation. Post 1st July 2017, normalcy has returned. Dealer ordering from companies has picked up for new stock. Price change is in the 0-1% band to reflect GST impact across product ranges. Q2FY18E Y-o-Y growth should normalise for companies, post the Q1 hit from June destocking.
AC demand was strong In April-May 2017, driven by high temperatures across India. Dealer behaviour was impacted in June as they chose to run-down old inventory at discounts v/s making fresh purchases from companies.
Post 1st July 2017, dealers have once again started ordering activity. Voltas, LG, Hitachi ACs which were stocked out before June 30, 2017 are being seen on the shelves once again. Q2FY18 is the lean AC season, but has begun with double-digit growth y-o-y in ordering activity.
While effective tax rate has seen a rise of 1-1.5%, octroi savings and also the value chain has led to prices moving in a range of 0-1%. Additionally, our understanding is that margins should remain intact at the company/ dealer levels.
LG could potentially have used this opportunity to raise prices by 3-5% given the aggressive discounts it offered on the inverter AC range it launched in January 2017. However, we are yet to see any change to this effect. We have factored 8% y-o-y revenue growth in Voltas’ Unitary Cooling products’ segment in 1QFY18 and some margin decline, reflecting dealer behaviour in June. We look forward to Electro-Mechanical Projects’ segment seeing a margin improvement to 4% from 1.9% y-o-y as proportion of legacy projects within the order book has reduced to less than 5% in FY18E v/s upwards of 10% in FY17.
We remain positive on Voltas and maintain ‘Buy’ with a TP of Rs 600, valuing stock at 28x PE FY19E, premium to 10-yr average of 22x. Downside risk: Collapse in domestic AC demand.