Voltas: Investors should tone down expectations in FY18

Impact of GST may last for 1-2 quarters; profitability may also see pressure due to competition

Not known for extreme volatility, the stock of Voltas took the Street by surprise when it posted a single-day gain of 10 per cent when it entered into a partnership with Arcelik. However, after touching a 52-week high of Rs 515 in early June, the stock hasn’t sustained the momentum. It has corrected by about 11 per cent since then. 

A large part of this correction may be attributed to the uncertainties in FY18 earnings courtesy introduction of the goods and services tax (GST), which is seen as a price escalator for the consumer durables segment. Tax rates are up from 23 per cent to 28 per cent after implementation of the GST. 

As the consumer durables segment tends to be price sensitive, the Street is expecting a near-term pull back in discretionary spending. Such a consumer trend was visible even during demonetisation. Sandeep Tulsiyan of JM Financial points out that sales in the first half of FY18 may see downward pressure due to destocking by dealers, followed by a lean sales period, which may restrict restocking. The high growth base of the previous year, where the unitary cooling products (UCP) segment grew by 23 per cent, could also weigh on the June 2017 quarter’s volumes. Additionally, the June quarter is most likely to be impacted on the operating profit margins front, given the widespread discounting trend (20–50 per cent) in the consumer durables segment seen ahead of the implementation of GST, in order to clear inventory backlog.

While these factors are already playing out on the stock price of Voltas, analysts have already reduced their FY18 expectations from the company, though not in a significant manner yet (see table). That said, analysts don’t expect a brisk recovery in volumes before the festive season in the December quarter. Also, while the exit of LG from the window air conditioner (AC) segment is positive for Voltas given its leadership in the space, consumer preference is moving towards wall-mounted, particularly inverter ACs, where Voltas doesn’t command similar leadership. How competition pans out as well as Voltas’ response in this segment are also key monitorables going ahead.

The Street will also closely watch how the capital expenditure (Rs 10 crore) towards the joint venture (JV) with Arcelik pans out. Analysts have already increased Voltas’ valuations by Rs 60–67, pricing in for this JV. Therefore, a delay in rolling out products, according to the JV, (washing machine, refrigerator, dish washer and microwave oven) will reflect on Voltas. Analysts at Kotak Institutional Equities have already toned down their expectations from the JV. Lack of stated market share strategy and non-compete agreement with Arcelik for 4-5 years are some of the concerns pointed out by the analysts at Kotak.

Therefore, with these likely concerns around, it may be prudent for investors to moderate their expectations on Voltas. “I expect further correction in Voltas and investors could take fresh exposure to it once we have a clear idea of how the GST would impact its earnings,” said an analyst at a domestic brokerage.