Analyst Corner: Maintain ‘buy’ on Voltas with target price at Rs 687

By: |
August 5, 2020 8:34 AM

Company has embarked on cost reduction with fixed costs in other expenses at 3.9% of sales in FY20 vs 5.1% in FY17 and 4.7% y-o-y.

Analyst Corner, Voltas, Voltas target price,  Voltas sales, Voltas market share, voltas revenueSmart Thinking, Winning Attitude, Innovative, Flexible, Teamwork (SWIFT) is highlighted in the AR as Voltas’ cultural pillar.

Management’s tone in the AR is enthusiastic across segments. Debtor days are flat year-on-year (y-o-y) and the inventory days’ rise reflects the March-end lockdown impact on the cooling segment. Company has embarked on cost reduction with fixed costs in other expenses at 3.9% of sales in FY20 vs 5.1% in FY17 and 4.7% y-o-y. Ad spend and travel is 1.6% of revenues. This and 112 bps additional provision for bad debts y-o-y in FY20 gives a cushion to margins in a difficult FY21E.

Gaining share across most segments. Smart Thinking, Winning Attitude, Innovative, Flexible, Teamwork (SWIFT) is highlighted in the AR as Voltas’ cultural pillar. Its inverter air-conditioner (AC) market share is 22% in FY20 vs 17% y-o-y and just 8% in FY18 in-line with customer focus on saving electricity costs. It has 40% share in e-commerce sales and overall AC market share of 24% (up 50 bps y-o-y). They are 2% share in the washing machine and refrigerator category within 18 months of starting operations. Spinning machinery market share in engineering products has risen to 55% from 52% y-o-y. 57% y-o-y order book growth is above market average and a healthy mix of water, metro, airport, solar and general projects.

Fixed costs 12.6% of FY20 sales — Rs 9.7 billion including employee expenses. Voltas has been moving its employees from permanent to contract workforce for a while. FY20 employee strength is up 7% y-o-y but on books staff is down 4%. AR mentioned that given the subdued demand, material prices have come down and savings are expected to accrue on future project sourcing in engineering. NWC flat y-o-y as a percentage of sales. Cash and available liquid financial investments is 39% of B/S, with management focused on monetising sales and executing projects only where cash flow is healthy. Customer advances is up 103 bps y-o-y and partly offset the rise in inventory days.

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