Voltas stock to gain from improving demand led by rising temperatures

While pricing action is expected, margins may remain under pressure for Voltas.

The stock of consumer durable major Voltas has risen about 10 per cent in the last 8 sessions on expectations of improved demand and higher volume growth. Most brokerages are  expecting demand to be strong in the summer season after two consecutive years of muted performance due to lockdowns and unseasonal weather.  

Says Arafat Saiyed, senior research analyst at Reliance Securities, said, “After lockdown and disruption in the last two peak seasons (March-June period), Voltas is set to deliver strong 25 per cent y-o-y revenue growth in the March quarter (4QFY22).” The growth is expected to be led by realisation gains of 20 per cent while volume growth will account for the rest.

The company is expected to continue maintaining its market leadership having raised its share in the room air conditioners from 16.7 per cent to 25.2 per cent in FY21. Even in the 9 months ended December FY22, its volumes were down 4 per cent outperforming the sector where volume dip was higher at 5 per cent. Volumes in the first two months of the quarter were under pressure due to prolonged winter, uncertainty due to the omicron variant and geopolitical tensions, highlights Nirmal Bang Research.

While demand is expected to be robust, the company which had hiked prices by 3-5 per cent in the December quarter will be under pressure to increase prices to offset raw material pressures. Though the company has not hiked prices in the March quarter yet, it is expected to do so across its product line. Elevated input costs dented the cooling segment margins in Q3FY22 by 300 basis points to 9.3 per cent.

Says Saiyed of Reliance Securities, “The increase in commodity prices and supply chain disruption is likely to take a toll on margin in 4QF22 as well. The time lag in passing on the increase in raw material costs, given the resistance from trade and price disruptions continues to impact its margin of products business.”

Over the medium term, the company’s efforts to indigenise are positive. It recently entered into a joint venture (JV) with Hong Kong-based Highly International, a world leader in refrigeration motors and compressors. Macquarie Research believes that the JV for domestic compressor manufacturing is a step towards backward integration and is a medium term positive. The company is paying high duties currently due to import of compressors from China and the JV will help save on duties and other related costs.

Despite the margin worries, most brokerages are positive on the earnings growth trajectory of the room AC market leader. Macquarie Research expects the Voltas stock and earnings to benefit from improving demand led by rising temperatures in spite of the margin pressures. Nirmal Bang Research believes that the company’s net profit will grow by 28.6 per cent annually over FY21-24. It expects healthy cash flows, lean working capital cycle and strong long-term growth prospects for the air conditioner/white goods sector to support Voltas’ valuations.