Motilal Oswal
Voltas (Buy)
CMP: ₹256.25
Target: ₹350
A short summer impacted Voltas’ air conditioner volumes in 1QFY16, but this is only transitory. We expect medium-term growth to sustain at 10-15 per cent a year.
Our interactions with dealers indicate increased competitive intensity and discounts to push volumes. However, lower commodity prices would offset margin pressures due to discounts.
The street appears concerned over Voltas’ cooling products business, post a weak 1QFY16. We draw a parallel from FY12/FY13 (industry volumes declined 14 per cent/5 per cent), when a shortened summer season had led to a drop in industry sales and increased discounts to clear inventory. For FY16, we build in a base case of 5 per cent industry growth; Voltas usually outpaces industry growth, driven by market share gains. Moreover, air cooler sales should start contributing meaningfully from FY17.
We cut our earnings estimates by 4 per cent for FY16 and by 3 per cent for FY17. In our view, there are multiple triggers for the stock, which include 1) positive impact of 7th Pay Commission hikes; 2) improving margins in the projects business; and 3) structural uptrend in the air conditioner market.
Published on September 29, 2015
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