Voltas stock: Sentiment weak on concerns over volumes, margins

Shares of Voltas, which slipped to their nine-month low on Monday, have lost more than 20 per cent since their 2018 highs seen in April. While the recent concern emanated from reports of Tata Sons (the promoter) selling stake in Voltas to fund investments in the aerospace and defence businesses, the larger issue has been on the business front. On the news of stake sale, Voltas has clarified to exchanges that it was unaware of any such development and no such proposal had been discussed by its board. 

However, analysts at Jefferies observe that if the stake sale does happen, it will be a surprise as it is a meaningful reduction (Tatas own 30.3 per cent currently), considering that similar proceeds can be generated with negligible stake sales in companies such as TCS. For now, most analysts do not see any possibility of stake sale.

Beyond this, the Street is watchful on the company's June-quarter performance as unseasonal rain and inconsistent weather have affected sales of air-conditioners (ACs) in April. 

Though analysts say May has been better and June has seen some improvement, there are other pressure points. These are in the form of higher commodity prices, currency volatility and intense competition - all of which can weigh on profitability. Part of these cost pressures can been offset by price hikes in some products to the tune of 3 per cent. Analysts at Prabhudas Lilladher said in March-May that Voltas had a relatively better performance than its industry peers (very low single-digit growth), but maintaining margins of over 13 per cent will be contingent to a pickup in volumes during the year. Thus, one needs to keep tabs on recovery in volumes as June-quarter performance will indicate the impact of input prices on margins as well as competitive intensity.

While there are concerns on the near-term prospects, Voltas' long-term growth outlook seems intact, led by rising AC demand (owing to increasing urbanisation and an underpenetrated AC market) and its ability to expand market share. According to Prabhudas Lilladher, its market share has risen for six consecutive years to 22.1 per cent. The launch of other consumer durable range by the second half 2018-19 and better forecasts of its other business segment (rising metro projects, rural electrification, etc) also augur well for the company. So, patient investors can use the current situation of low prices to accumulate the stock.