Key takeaway: Voltas announced the Voltbek JV back in 2016-17 with a Rs 5-billion investment outlay. We viewed it as a material value creator only over four-five years, and now believe we are close to the turning point. Our ests factor Voltbek reaching PBT break-even by FY25E; we raise our FY22E-24E EPS by 2-5% to reflect reduced losses. Recent underperformance given weak 1Q AC sales is an opportunity to buy the stock, which should recover as festive season sales pick-up October onwards.
Voltas Lounge just launched – promotion activity accelerates: Voltbek currently has 1000+ billing points and over 6000 touchpoints, a respective 2.5% and 3% market share in washing machine, and refrigerators and 30% share in dishwashers from naught in three years. Management has gradually leveraged its brand equity as a market leader in air-conditioners (ACs) to promote Voltbek. Combined effort is intensifying with Voltas launching its exclusive online website “Voltas Lounge” to showcase Voltas and Voltbek products together. Independence Day special offers across both Voltas and Voltbek products were introduced which included cashback, easy finance schemes and extended warranty offers. Higher shelf space share with the product spread should help market share gains ahead as well.
153% revenue CAGR in FY19-21; 47% in our FY21-25E estimates: Refrigerators, washing machines, microwave ovens and dishwashers are the four major product lines for Voltbek. Addressable market size is approximately Rs 340-350 billion, with refrigerators and washing machines accounting for the bulk at 80%. Top three players (LG, Samsung and Whirlpool) have close to 80% share in refrigerators and 60-65% in washing machines, with the balance split between five and eight players.
We have factored Voltbek’s FY25E market share gradually moving to 5.5-6% among cross branding, promotional schemes, and rising dealerships. Management is aiming for 10% market share by FY25E.
Voltbek is primarily an assembling unit and is gradually moving up the manufacturing value chain. Hence, we maintain relatively low gross margin estimates of 11-13% vs normal industry margins of over 18-20%.
Dealer checks pointing to AC sales picking up: States have been easing lockdown restrictions as COVID-19 cases are receding. Onam sales have been strong, with dealers looking forward to Diwali driven festive sales October onwards. Pricing has been relatively stable, with limited promotional offers. Our 2QFY22E cooling segment sales estimate is up 20% YoY, which compares with 19% rise YoY in 1QFY22.
Valuations/risks: If Voltas can outperform peers in its segment and gain share, the stock should see premium valuations sustain. We believe Voltas is a good recovery play on both consumption and investment themes in India, with a strong B/S to back it. Our revised PT of Rs 1,200 values the company at 45x PE FY23E (38% premium to 5-year average of 32.5x) and reflects the EPS revision. Downside risks: domestic AC demand collapses or national level lockdown comes through.