We attended Voltas analyst meet in which the management sounded confident of growth aided by low base despite flood disruption in Kerala impacting Onam festive season. Company will try to take tactical price hikes during the main festive season in certain categories and markets. The actual impact of customs duty hike on indoor units will be evident during the supply procurement for next summer.
Voltbek (Voltbek Home Appliances, a JV between Voltas and Turkey-based Arelik) losses are likely to continue as the JV is reworking on the initial strategy given the recent customs duty increase and major share of the domestic market comprised of direct cooling refrigerators and semi-automatic washing machines. Given expensive valuations, margin pressures and Voltbek losses, we maintain our Sell rating on the stock with a TP of Rs 497.
Muted uptick in Kerala festive demand due to floods: However, given the low base and higher flood-related devastation during Q2FY19, there will be overall growth under unitary cooling products (UCP) segment in Q2FY20.
Expect pick-up from main festive demand: Despite the overall muted sentiment, Voltas is not witnessing growth-related stress in the room AC or refrigerator segments. Company will try to take some selective price hikes during the main festive season in Q3FY20.
Maintain SELL: The China imported room AC model of Voltas is under stress vs higher localisation by MNC competition. Review of the Voltbek JV’s strategy and higher import duty on refrigerators will delay the recovery of profitability of the same. Given these headwinds and relatively higher valuations, we maintain Sell on the stock. We assign weighted Ebit contribution average of 33x for UCP segment, 13x for EMP projects and 20x for engineering products. We value the consolidated business at Rs 475 and Voltbek at Rs 22 arriving at TP of Rs 497.