Demand outlook: 1) Due to a strong heatwave across many parts of India, demand for room AC products was robust in the second half of March-22 and April-22. Demand eased in May-22 m-o-m because of a) high base in April-22, 2) category seasonality as well as 3) some underlying slowdown. We remain confident that the room AC industry will report 25% volume growth in FY23e and overall demand scenario for the room AC category will be much more resilient than other durables.
Market share: In a recent analysts meeting, management highlighted that early indicators suggest firm gained ~200bps market share m-o-m in April-22. This gain is on an upwardly revised market share of 19.6% in March-22 from 18.5% earlier. In our recent note, we highlighted the strong prospects of market share gains for Voltas sequentially. Voltas is aiming to claw back the entire market share loss it saw in Q4FY22 by June-22.
Profitability: Competitive environment continues to be tough. There haven’t been meaningful price increases by players despite very weak profitability in Q4FY22. Voltas continues to balance market share and profitability. It is still hopeful it will report double digit margin in its room AC segment in FY23e. That said, margin in the upcoming quarter is likely to be lower due to higher investments in A&P expenses.
Voltas-Beko JV: Management reiterated the JV continues to aim for 10% market share (~4% currently) and EBITDA break-even by FY25e.
HSBC view: Investors’ two key concerns on Voltas currently are: a) market share headwinds b) and possibly lower profitability in forecast years for its valuation driver room AC segment. We think these concerns will start looking less structural and much less pronounced as quarterly results come through with the firm gaining market share sequentially as well as margin in the room AC segment returning to double digit levels. Profitability of Voltas’ peers has been impacted much more than Voltas.
Maintain Buy, cut TP to Rs 1,160 (from Rs 1,200): Our revenue estimates are unchanged, though we assume ~50-70bps lower profitability in the room AC segment over FY23e-25e (~12.0% in FY24 and FY25). This coupled with slower industry growth assumptions for Voltas Beko JV has led to ~3% cut to our TP.