Analysts positive on Voltas despite slowdown, see growth in projects, ACs

While the company's projects segment is expected to perform better, a strong Q1 and moves to clear inventory are positives for room air-conditioner business

Despite the downward bias and volatility in broader markets, Voltas has gained more than 12 per cent from its end-July lows.

Analysts say, the company remains well placed for growth with the worst behind, and this is one reason driving up sentiment for Voltas. 

For one, the company’s Electro Mechanical Projects and Services (EMPS) business, which has continued reporting regular improvement in profitability, has a strong order book. Recently, it bagged orders for tunnel ventilation system for Mumbai Metro worth about Rs 233 crore. The division’s order book stood at Rs 4,750 crore (up 3 per cent year-on-year) at the end of June quarter, which saw fresh order inflow of Rs 450 crore. Moving forward, analysts expect the government's focus on water conservation and purification (Namami Gange), rural electrification, building and urban infrastructure to continue driving EMPS’ prospects. 

While this bodes well, the worst is behind for Voltas’ Unitary Cooling Products (UCP) division too. The unfavourable weather conditions during FY19 had led to significant jump in inventory of air conditioners (ACs) at dealer-level, thereby impacting growth and profitability as rising inventories restricted Voltas from taking any price hikes despite rising input prices. However, even as the current fiscal has seen a slowdown in economic growth, Voltas recorded a strong show in June quarter led by good summer season demand. The UCP segment’s sales grew 47 per cent year-on-year (industry growth around 36 per cent), leading to market share gains in room ACs. Inverter ACs, which are more efficient and priced higher, saw their revenue share rise to over 50 per cent of overall AC sales, which is also good for profitability. Analysts say, as distributors ran out of inventory and generated good cash flows during the summer season, it augurs well for UCP division’s revenue visibility as channel refilling itself can drive sales. Motilal Oswal thus has modelled in UCP revenue growth of 26 per cent and 15 per cent during FY20 and FY21, respectively. Some analysts even feel that actual growth can surprise positively given the favourable base of FY19. 

Voltas’ newly launched home appliances range in joint venture with Arcelik should also drive topline growth moving forward. Although it is currently making losses due to higher promotional and other costs, as growth picks up and its Tirupati plant starts production profitability too should improve.

Although there could be some near-term hiccups given the economic slowdown, analysts are positive on Voltas looking at the growth in projects and AC segments. Emkay Global, for instance, estimate Voltas’ net profit to grow 19 per cent annually over FY19-21.