Demand recovery in durables, growth expectations drive rally in Voltas

The company has been able to gain share in cooling products despite strong competitive pressures

The stock of the country’s largest air conditioner company Voltas, has ended in the positive territory for the last ten consecutive trading sessions (since August 26) gaining 27 per cent during this period. Prior to the recent surge, the stock, which hit its all time high on Thursday, has been underperforming its peers in the consumer durable space. The underperformance had led to brokerage upgrades due to valuation discount to peers as well as expectations of a recovery in air conditioner volumes.

The room air conditioner sector volumes saw a fall of 30 per cent in FY21 with a demand recovery expected in the current financial year led by the festive season. Himanshu Nayyar of YES Securities expects demand for white goods to normalise in the September quarter as economic activity (easing restrictions, vaccinations) gathers steam after a subdued Q1. He expects demand to be strong if not better than the festival season last year. Brokerages expect the cooling products segment to deliver on the back of pent up demand (after two weak years) on the back of pent-up demand and under penetration.

Despite higher competitive intensity in the air conditioner space Voltas has been able to maintain its leadership position with its FY21 share in the room and inverter air conditioner share being in the 21-25 per cent range. While Voltas expects FY22 to be better than FY21, volumes this year are unlikely to hit FY20 levels. Its ability to hold on to market share gains will be key going ahead as competitive pressures Hitachi and Lloyd are increasing with weaker players ceding share.

What could aid margins is backward integration as part of the production linked incentives scheme in the air conditioner space led by increased local sourcing.  

The other trigger for the stock would be the scaling up of its presence in the refrigerator (FY20 market size of Rs 26,000 crore) and washing machine space (Rs 12,000 crore) where its market share is around the 3 per cent mark. Both segments are expected to more than double by FY25 from levels in FY20. Lokesh Garg and Gaurav Birmiwal of Credit Suisse believe the company is getting traction in the consumer durables category and could gain further market share in washing machines and refrigerators once distribution scales up in these large categories.

While resumption in construction activities is positive, any uptick in capex is expected to reflect in the electromechanical projects and services segment which accounted for 39 per cent of revenues.

While prospects led by the cooling products segment (55 per cent of sales) are expected to improve with the recovery in demand, valuations after the recent rally have moved in the expensive zone. The stock is trading at 47 times its FY23 earnings estimates and at a premium to peer index as well as its five year average valuation of 32 times. Investors can consider the stock on dips.