We believe Voltas, the market leader in room ACs in India with a well-run cash-generating business, is the best play on the structural growth opportunity from low AC penetration levels. Voltas is expanding into other associated consumer durable categories. The move to the 4-5% Ebit margin band in the EMP business and beyond is not far away – perhaps within just one more year. We increase our target price to Rs 483 as we roll forward our target P/E to Mar19e. Investors could be over-reacting to LG’s inverter AC price cuts.
We believe Voltas/other AC players may gain market share because of LG’s decision to vacate fixed-speed split ACs. Further, even if Voltas selectively takes price cuts in inverter ACs, these may not impact the overall business given inverter ACs only account for 6% of Voltas’ sales. Daikin might be just a bugbear, currently while Voltas is going after the popular category, which is the fastest growing, Daikin is targeting the premium AC category. Daikin is the undisputed leader in commercial VRV systems in India, but it has not been very successful in room ACs. Daikin currently does not have significant market share beyond metro areas.
EESL – Will it have a big impact?
As per Voltas, success in ACs would be very challenging for EESL. This is owing to much larger dimensions of ACs and significantly more complex installation and after-sales service requirements for ACs.