Downside may be capped for Voltas

Analysts, though, prefer to assess impact of note ban before altering their stance on the stock

The Voltas’ stock has pretty much mirrored the performance of the BSE Consumer Discretionary Goods & Services index, which has fallen 11% since demonetisation. Some believe this is a sign of resilience, however, the manner in which the stock fell from its closing-high of Rs 402 registered in October suggests a lot of pain was perhaps digested much ahead of demonetisation.

The September quarter results were short of the Street’s expectation and the management’s forecast was also weak. But, after the

recent 21% correction, a majority of analysts believe there may not be more downgrades for Voltas hereon. 

“The December quarter (Q3) tends to be a bit weak. Even if on a year-on-year basis, volume growth appears muted, I would attribute it more to extended festive season last financial year,” says Pawan Parakh of HDFC Securities. He believes the impact of demonetisation is largely priced-in and, hence, the downside risk for the stock may not be elevated.

But, not all analysts are confident and believe it may be prudent to wait and watch how the impact of demonetisation is absorbed. Reports suggest sales for consumer durables in tier-3 and tier-4 cities have nearly halved after demonetisation, while in the metros, the loss of volumes is 25–30%. 

In such a scenario, it could be too soon to rule out a noteworthy decline in the December quarter’s volumes for the unitary cooling product vertical (air conditioners, commercial refrigeration, water coolers, etc), which account for 49% of consolidated revenue. Any deferment of purchases could also affect results in the March quarter. “We also need to see how much Voltas can withstand in terms of its pricing strategy and market share,” an analyst from a domestic brokerage says. 

Further, the Street will keep a close tab on how well Voltas performs in south India (the company’s stronghold), as dealer restocking usually sets in by mid-January, lending support to the performance in the March quarter. 

Goldman Sachs recently reiterated its ‘neutral’ rating on Voltas, as it believes uncertainties after demonetisation could continue and, hence, there aren’t any near-term catalysts for the stock. Not to forget its electro-mechanical projects business (45% of consolidated revenues) exposed to export markets has also been under pressure. Analysts had already started lowering their rating on the stock after Q2 results. Their one-year target prices, according to Bloomberg, offer just an upside of seven%. 

On the whole, till clarity emerges on the prospects of the two key business segments, the stock is likely to remain range-bound.