At the virtual investor meet last week, the management at Voltas highlighted that given above-normal temperatures in the country ahead of the summer season, primary room air conditioner (RAC) sales to channel partners have been good from Feb-23. While the company’s secondary market share in Jan-23 remained stable at 19%, management expects improvement to earlier levels during the season. Competitive intensity has not changed much and Voltas has not taken any price cuts to date. Rather, it stated that price hikes are under consideration in April, depending on secondary demand.
While other companies in the industry might only have a profit margin (EBIT) in the single digits (e.g. 1-9%), Voltas expects to have a profit margin of around 9% in the near future. This improvement will likely be due to industry consolidation and government incentives under the PLI scheme.
Voltas plans to be more aggressive in its VoltBek business by launching more product variants (SKU launches) and expanding its distribution channels by around 1.5 times in FY24. In its projects business (e.g. construction projects), Voltas has stopped providing bank guarantees without any conditions and has added caveats to its bank guarantees to protect itself from potential risks or losses.
Growth forecast for the unitary cooling products (UCP) segment of Voltas are 12% for Q4 of the FY2023 (Q4FY23F) and 15% for the entire FY2024 (FY24F). In other words, we expect the UCP segment of Voltas to experience revenue growth of 12% and 15% respectively during those periods.
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We note that IMD has issued warnings of heat waves from March to May, with temperatures 3-5 degree Celsius above normal. This can lead to upside risk to our estimates for seasonal products like ACs/Fans. Over the longer term, we expect AC industry growth visibility to remain high due to low penetration levels and latent demand (high average temperatures). Competitive intensity remains unsustainable and operating leverage/price hikes will likely be margin tailwinds for FY24F. We maintain our Buy rating on Voltas, based on our target P/E of 40x/13x/15x for UCP/Project/Service applied to FY25F EPS and value VoltBek at `69 per share to arrive at our TP of Rs ,083.