Stock Tip: Buy Voltas at a CMP of Rs330

Prabhudas Lilladher | July 16, 2014, midnight

We recently met up with the management of Voltas. In room AC segment, last two months were the tale of two halves, while April saw very strong market growth, lower than expected pick up in northern market led to slightly subdued sales in May; however pricing continued to be stable. Project business continues to see challenges in timely execution both in domestic and international markets. Voltas continues to focus on profitability and being selective in picking orders. Long term opportunity in Room AC continues to be strong given the rising income levels, easy availability of finance and low penetration and improving power availability. We believe Voltas continues to be the best proxy to play growth in Room AC segment. We remain positive on Voltas over medium/long, given improving margin profile of fresh orders, strong consumer business franchisee and healthy balance sheet.



UCP Segment‐Northern markets trending lower than expected: In room AC business, while market saw a very healthy growth in April, May was slight lower than expected due to northern market not picking up to expected levels. Pricing in the market has been stable in the last few months led by strong demand in March‐April in the industry. Voltas believe its key strengths in room AC segment are 1) strong brand 2) product quality 3) availability and 4) thoughtful  campaign/advertising. It highlighted that currently 75% of AC sales happen in top 25‐30 cities, improving power availability should drive industry demand over next few years. It expects AC market to grow at 10‐15% CAGR over next few years. Voltas recently entered air cooler business and aspires to become among the top 2 players in the segment in next 2‐3 years. It has recently added 200 dedicated touch points for air coolers.


Outlook and Valuation:The stock is trading at 23.1x FY18E earnings. We remain positive on Voltas over medium/long, given improving margin profile of fresh orders, strong consumer business franchisee, healthy balance sheet and cash flow. We expect stock to deliver earnings CAGR of 18% over FY16‐18E. Maintain ‘Accumulate.

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