Our discussion with investors suggests they have three key concerns on Voltas, which are 1) market growth slowdown, 2) ability to retain current high market share of c21% 3) sustainability of margin expansion. Our analysis suggests that all 3 concerns are overdone. India’s penetration level of mere 3% (urban India at 24%) is very low compared to its Asian counterparts. Increase in discretionary spending on the back of macro revival will place the industry at an inflexion point. Voltas’ distribution reach and strong brand recall should in our view help achieve higher than market growth rate, which is more critical than just maintaining market leadership.
We raise EPS by c3% over FY15-18e. We have revised our margin forecasts up by 20bps over FY15-18 to factor efficiency gains, c5-6% price hike in the UCP segment as well as marginal benefits from entry into the high margin air coolers business. Our revised EPS forecasts are 3-5% above consensus over FY15-18.
Voltas is our preferred sector mid-cap play and valuation has the potential to re-rate. We reiterate buy with a higher target price of Rs 380. Our target price implies its leadership in the UCP segment is valued at Rs 295, its MEP business at Rs 36, its engineering services business at R48.