AC manufacturer Voltas stock hots up on hopes of a cooler outlook

Manufacturers have also started to stock channels in anticipation of summer demand which may kick in from Q4FY24

Due to unseasonal rains, the second quarter of financial year 2023-24 (Q2FY24) was disappointing for the room-air conditioner (RAC) segment and Q3FY23 was also slow. While general consumption demand was low in Q3FY24, the low base and the pent-up demand from the first half of financial year 2023-24 (H1FY24) seem to have driven an off-season demand for RACs. Among the majors, Voltas could see a turnaround in sentiment along with profit growth and margin expansion. As a result, several analysts have switched their recommendations to “buy/add” from the earlier “reduce/sell”.  

Manufacturers have also started to stock channels in anticipation of a summer demand, which may kick in from Q4FY24. Channel checks indicate Voltas has been aggressive and may have gained market share. Competitive intensity remains high.

Low penetration and latent demand are positive factors for the air conditioning (AC) industry. Commodity prices of metals have also fallen, thus boosting margins. Volume growth estimates have been raised by 200-300 basis points to the 12-15 per cent band (year-on-year or Y-o-Y). This could mean a big profit expansion for Voltas due to the low base effect and gains in market share.

Primary AC volumes could be up 20 per cent Y-o-Y in Q3FY24 which is normally an off-season quarter. A pick up in commercial refrigeration may also lead to 20 per cent Y-o-Y revenue growth in unitary cooling products (UCPs), with earnings before interest, and taxes (Ebit) margin held at 7-8 per cent. Volume in the projects segment could be up 50 per cent Y-o-Y (on a low base), but there will be Ebit losses here due to losses in the overseas segment.

Premium brands have tried to penetrate the mass-market with some success by using a combination of tactical price reductions and easy EMI-buys. Voltas could see profit after tax (PAT) double Y-o-Y in Q3FY24 due to base effects and PAT may also rise very substantially quarter-on-quarter (Q-o-Q) due to the washout caused in Q2FY24 by heavy rains. Earnings before interest, taxes, depreciation, and amortisation (Ebitda) margins should also expand on reduction of raw material costs and operating leverage. However, there is an increasing manufacturing capacity with a possible short-term demand-supply mismatch. Management guidance for demand expansion (or the lack of it) will be key to monitor. Overseas performance for companies such as Voltas will also be crucial, since this segment has seen growth but is not yet profitable.

Analysts are seeing revenue growth of 12-20 per cent Y-o-Y for Voltas in Q3FY24 with healthy growth in Ebitda and at least a 100 per cent jump in PAT on a Y-o-Y basis. Even on a sequential basis, Ebitda margins had contracted by 260 basis points in Q2FY24 and a Q-o-Q Ebitda margin recovery of over 100 basis points or even 150 basis points is expected by most analysts. The Q2FY24 PAT was also hit by Rs 84 crore provision taken due to delays in realisations from overseas projects. Updates and clarity on this provision and possible recoveries could be another point to monitor. The drop in PAT in Q2FY4 led to earnings per share (EPS) downgrades and an anticipated recovery in Q3FY24 could lead to upgrades from those reduced levels. The stock has gained around 5 per cent in the last month.