Voltas share price geared for cooler times

Strong AC segment prospects, rising margins in projects business to aid earnings

The share price of Voltas has almost doubled in the past year due to strong performance of its air-conditioner (AC) business, where it is industry leader. While the trend in the AC business is seen as continuing, improvement in profitability of its projects business should translate to faster growth in earnings.

The AC segment has been a key growth engine for Voltas in the past few years. Consequently, the unitary cooling products (UCP, includes ACs) segment has done well, clocking 21 per cent revenue growth in FY17. Voltas' strong foothold in tier-II, III and IV cities (besides urban India), analysts say, has been a key differentiator. UCP revenue grew 15 per cent in the first half of FY18, despite challenges on account of goods and services tax (GST)-related stock adjustments. Recent channel checks by analysts suggest the trend continues and the segment should achieve 10-15 per cent growth in the December quarter, too. 

Although some concerns on higher discounts by dealers to clear inventory do exist, analysts at Jefferies say the trends should normalise after January, as products with new energy ratings are introduced. The brokerage expects Voltas' room-AC business to continue clocking strong margins of 13-14 per cent for FY18 and that market share gains and stronger volume growth could help expand profitability further. 

After the September quarter (Q2), Voltas said it had increased the output of products with the right mix in the energy-efficiency segment (received well by customers) and allied marketing initiatives, and these were helping improve market share. Maintaining its leadership in room ACs, Voltas had improved its market share to 23 per cent (in multi-brand outlets) during Q2. More initiatives are under way.

Beyond ACs, Voltas is targeting other white goods such as refrigerators and washing machines following its joint venture with Arcelik. Analysts at Edelweiss retain their optimism on Voltas, as the target market (ACs plus white goods) works out to Rs 70,500 crore by FY20, compared to Rs 15,000 crore currently (only ACs). This should trigger significant ramp-up in white goods revenue, generating significant shareholder return after FY19, they add.

Equally important is that the outlook for the electro-mechanical projects' (EMP) segment is improving. After seeing lumpiness, it has stabilized, with margins recovering to five-six per cent. A revival in the domestic business (rural electrification, water and government projects) and India's capital expenditure cycle should reflect positively on Voltas' order book. As old and less profitable orders are behind and higher-margin orders start getting executed, this segment's profitability should improve, say analysts. All these should lead to further re-rating of the stock.