Voltas Share Price Target: AC rate hikes coming? Know the risks and what will drive company

Voltas Share Price Target: Haitong Securities hosted a concall with the management of Voltas to get an update on the company and industry’s recovery across all of its business segments. Haitong values the stock based on a SoTP basis, where three businesses of Voltas – Project, AC and Engineering Services are valued on a PE basis with a total value of Rs 802 per share while Voltas Beko is valued on a DCF basis with Voltas’ share at Rs 78 per share for a 50% stake in the JV. Thus, arriving at the cumulative Target Price for the company based on a SoTP of Rs 880.

While each business is seeing an improvement, below are the key highlights:

AC business gradually recovering; domestic manufacturing in focus:

The AC business has witnessed good growth momentum since Q2 FY21 and with expectation of a harsher summer; the industry and Voltas are looking to recoup some of its lost sales by FY21 end. The inventory level remains high, however with expectations of supply disruptions and price increases, channel partners are stocking up. Voltas expects inventory levels to normalise by Q4 FY21. Given the logistical issues to import key components and the inherent higher inflation rates, the company is likely to look at price hikes by Q4 FY21. The company continues to maintain its margin guidance of 11% to 12%.  

To look at whether the company wants to produce AC components in house or outsourced it evaluates:

(1) the company’s internal capital allocation policy;

(2) the return that can be generated on the capacity;

(3) technical skill;

(4) the available capacity for backward integration the company has.

Three things will drive the demand for AC:

(1) weather;

(2) product innovation;

3) after sales service and supply chain

Project business currently seeing liquidity stress; margin to improve gradually:

Q2 FY21 was better than Q1 FY21, as accessibility to site and labour availability had improved resulting in better execution, although liquidity stress continued. This stress is expected to normalize only by Q1FY22. The liquidity stress is likely to impact the margins as the company is making conservative provisions. The company’s decision to restructure its project business was driven by the government’s push towards infrastructure projects for which the company wanted a higher amount of management bandwidth. The company hopes to restructure its international business as well although the process may take longer given its need to have an international partner in the geographies it operates.

Voltas Beko seeing strong growth momentum; likely to see price hikes to beat higher input costs:

Arcelik (ARCLK TI) is buying Hitachi’s (JCHAC IN) consumer durable business 60% stake excluding India and Japan to gain access to its Australia business. Clarity on the same will be available in the coming few days. Voltas Beko products, like washing machines, refrigerators and premium products like dishwashers have seen strong growth, outpacing the last 2 years’ sales volumes. Similar to AC, the consumer durable industry is also expected to pass on higher input costs to the end user.

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Main Risks to Rating and Target Price:

(a)    Seasonal weakness in AC business & aggressive competition

(b)   weak private investment along with a delay in execution in Project business

(c)    limited shelf space and revenue pick up in Voltas-Beko.