Downgrade Voltas, switch to Havells as AC sales cool off: Nomura

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Updated: July 3, 2015 12:59:22 AM

Voltas consistently surprised us positively on better room AC performance in FY15 as a result of its market share gain as well as significant operating...

Voltas consistently surprised us positively on better room AC performance in FY15 as a result of its market share gain as well as significant operating margin improvement. Gains in the UCP segment made up for Voltas’ underperformance in the electro-mechanical projects (EMP) segment. However, our recent dealer checks suggest that room AC sales are slowing and are being accompanied by discounts and free installations by competitors, leading to risk of market share/margin loss for Voltas. The recent industry growth guidance cut by Blue Star (one of Voltas’ key competitors) from 15% to 10% y-y further reinforces our dealer checks for slowing room AC sales this summer. We cut our FY16-17f earnings 12-16% to factor in weaker growth in room AC sales as well as further delays in the EMP segment’s recovery. Voltas has outperformed the market significantly over the past two months and is up ~30% during the period; with potentially weaker results going forward, we downgrade the stock to Reduce from buy previously. We recommend investors switch to Havells, with a buy rating.

Trading at 22x FY17f P/E, Voltas is amongst the most expensive stocks in our coverage universe. On the back of 12-16% cut in our FY16-17f EPS, we cut our target price to R265. With 19% downside potential we downgrade Voltasto Reduce. We recommend investors switch to Havells India (buy, 8% potential upside to our target price of Rs 304).

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