With most of the country encountering heatwaves, shares of AC maker Voltas are set to rise! Brokerage house JM Financial has a buy call on the stock. It recommends investors to ‘buy’ around ₹826-836 for a target of ₹880-893 for a time horizon of one month.
"As per IMD forecast, above normal minimum temperatures are very likely to sustain over most parts of the country, except south peninsular India where normal to below normal minimum temperatures are likely. The enhanced probability of occurrence of heat waves during the March to May season is likely over many regions of Central and adjoining Northwest India. This auger well for Air-conditioning segment," noted the brokerage.
What works for Voltas?
According to the brokerage, Voltas continues to maintain its market leadership position with a 22.5 percent YTD market share till Dec’22 (vs 22.8 percent in Aug’22). Management highlighted that they aspire to regain market share to 25 percent levels going forward, but will be prudent in striking a balance between market share and margins.
Improvement in margins would also come by improving share in inverter ACs and penetration in South India (new facility). Share of inverter ACs increased to 82 percent of split ACs vs 65 percent earlier, added the brokerage.
It further informed that dealers indicated that demand for Voltas continued to remain high, especially in lower tier cities given higher brand awareness, but with increased product offerings by other brands, dealers anticipate a pickup in demand from other brands as well.
"Voltas continued its growth journey and capacity expansion is progressing as per schedule. The company is introducing consumer-centric products with improved features, and recently signed a technical agreement with Vestfrost of Denmark for medical refrigeration and products will be launched in the coming year. In air coolers, after a muted growth, the segment has grown in Q3 and 9M period, on the back of the introduction of SKUs that were differentiated through investment in moulds and dealer distribution schemes, which also helped in overall profitability improvement. Currently, it has a 9.2 percent market share in air coolers," stated the brokerage.
Going ahead, ease in raw material prices will provide some relief to margins and JM expects Voltas’ market share to stabilise in the 21-22 percent range since it sees competitive intensity easing out during the summer season.
It also believes that margins have bottomed out and a cyclical recovery in EMP and better than expected summer season 2023 will drive positive surprise in profitability. The stock looks attractive at the current juncture, added the brokerage.
Outlook
According to the brokerage, primary feedback indicates demand in all major cities like Delhi, Chennai, Hyderabad and Kolkata witnessed moderation currently, whereas Mumbai, Bengaluru and certain pockets in Ahmedabad are witnessing a pickup in demand given the early onset of the summer season. Dealers are expecting a healthy summer season ahead, as dealers in North India anticipate growth of 18-20 percent, whereas dealers in South and West India are expecting growth of 14-16 percent, it highlighted.
This growth would be led by a) a sharp increase in temperatures in the majority of the northern cities, b) availability of an affordable range of ACs, c) price increases of 6-8 percent across brands and SKU’s post implementation of new Bureau of Energy Efficiency (BEE) norms and d) healthy pickup from commercial spaces as operations are reaching pre-Covid levels, it explained.
Stock price trend
Shares of Voltas have fallen nearly 32 percent in the last 1 year but have risen around 9 percent in 2023 YTD, giving positive returns in 3 of the 4 months. It has added 6 percent just in April followed by an 8 percent fall in March. However, it advanced 11 percent in Feb and was flat, up 0.3 percent in Jan.
Earnings
Meanwhile, in the December quarter, Voltas reported a net loss of ₹110.5 crore versus a net profit of ₹96 crore in the year-ago period. The profit was impacted due to the provision of ₹137 crore (exceptional item) made on an overseas project, said the firm. Its total revenue from operations jumped 12 percent to ₹2,005.6 crore during the quarter under review as against ₹1,794 crore in the same period last year.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
