India Meteorological Department (IMD) recently issued the first heat wave alert of 2023. Normally, March is when temperatures rise but in February itself the trends are showing. Dealers are highlighting that lower commodity prices have not been passed on in pricing. This points to improved volume and margin outlook for Voltas (28% 1-yr underperformance to Nifty) ahead. The brokerage firm Jefferies trusts FY24e should see both AC and Engg sections of Voltas being in a sugary spot.
IMD discussing higher temperatures particularly in the West
In the last 10 days, many districts in Gujarat and Maharashtra including Mumbai recorded daytime temperatures 5-7 degrees higher than normal. Last couple of days, even Delhi, Himachal and Uttarakhand recorded higher temperatures than usual for February. Approx. 40% of Voltas’ sales are from the North and 20-25% from the West, and it is well positioned to benefit from the 2023 demand uptick. Voltas saw material market share loss in 4QFY22, partly driven by a faster summer onset in the South, where it has a lower presence.
3QFY23 Voltas’ call discussed possible price hike in April 2023
Air-conditioner (AC) inventory at the dealer level is comfortable, despite weak Q3 demand where the industry saw barely 2% y-o-y growth. Hikes taken in 1HFY23 have not been rolled back, even with the softening of commodity prices. Given this, 4QFY23E-1QFY24E should see 250 bps+ margin expansion q-o-q if normal summer temperatures prevail. Market share being stable at 22.5% vs 22.8% q-o-q in Q3 is a comfort.
Also read: Artificial intelligence to bring new era of patient care in India: GlobalData
Summer – the positive near-term catalyst; 2x order flow rise in engg. in Q3 is a sweetener
Voltas is still 33% below its 2022 peak driven by market share and margin decline seen in 4QFY22. AC margins should close at 9% in FY23E vs 11-12% band of earlier years. Voltas has recovered market share from 19% exit run-rate of March 2022 to 23-24%, albeit at lower margins. The peak share price reflected both market share and margin benefits. Since market share has recovered, we believe the stock should retrace close to half the journey left to its peak, with the balance requiring confidence building up in annual margins improving to 10%+ again sustainably. We maintain our FY24E-25E EPS and our PT of `1,050, based on 35x PE Sept 24E, a 15% discount to the 7-year average of 41x. Downside risk (i) Sustained margin pressure in the cooling segment.