Voltas share price: Jefferies maintain Buy with a price target of Rs 1250, know key risks

Temperatures have just started warming up in February, particularly in North India. Dealer checks suggest a healthy trend in consumer durables demand, with optimism that air-conditioner (AC) sales will pick-up with the summer onset. Q3 channel stocking helped dealers as prices rose 5-6% since Jan. 2021. Jefferies believes a consistent higher temperature in the next 2-3 weeks is important for the next leg up in voltas/Blue Star from current levels. Voltas share price closed at Rs 1018 in last session, down Rs 30 or 2.9%.

Customers trending to 5-star ACs vs 3-star – positive for margins:

Dealers indicated there is no aggressive pricing currently between different brands. Samsung is gradually re-entering the market post its reduced focus a few years ago but will take some time for customer association. Daikin is top of the mind for customers but premium pricing is the main deterrent. Rising electricity prices and higher usage with work from home has seen customers willing to spend Rs 4000-6000 extra for a 5- star rated AC vs 3-star.

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Inverter ACs continue to gain share with non-inverter AC sales reducing substantially in Tier-I cities and declining in Tier II-III cities. LG has launched products with additional features and slightly higher pricing, auguring well for Voltas, which is seeing stock-outs in some locations. Blue Star, Havells-Lloyds and Hitachi are holding their ground on pricing/customer interest.

Recent survey suggests more product awareness among customers:

Voltas conducted a nationwide survey of consumers' behavioural changes due to the pandemic. 73% of respondents use the 'eco-saver' mode while working from home, with 56% using it every day. 71% of respondents knew about the 'anti-fungal' feature of ACs, highlighting improved awareness about indoor air quality. All weather usage of ACs is also trending upwards with 86% of consumers understanding the 'super dry' mode and 63% using it during Monsoons.

20% and 35% YoY rise in Q4 cooling segment revenue estimated for Voltas and Blue Star:

The March 2020 lockdown limited Voltas' cooling segment revenue growth to 20% YoY and led to a 15% YoY decline for Blue Star. Jefferies Q4 FY21E revenue growth estimate is led by strong summer demand expectation against a weak base. Jefferies anticipate QoQ margin improvement for both companies based on operating leverage, price hike and customer shift to high value product

Voltas Valuations/Risks:

Maintain Buy with a price target of Rs 1250, at 45x PE FY23E (38% premium to 5-yr average of 32.5x).

Voltas Downside risk:

Domestic AC demand collapses