Buy Voltas, target Rs 705: JM Financial

JM Financial has a buy call on Voltas with a target price of Rs 705.

The current market price of Voltas is Rs 499.

Time period given by the brokerage is one year when Voltas' price can reach the defined target.


View of the brokerage on the company:
Volume decline spills over to 2Q: While the summer season ended weak (overall volume decline of 10-15 per cent), Jul-Sep was similar as 20 of 25 dealers indicated a 15-20 per cent volume decline. Demand from South India was the weakest, followed by the West and East; the North has also declined but was slightly better off as average temperatures rose in Sept. The decline can be attributed to multiple factors such as high channel inventory (spillover from 1Q), a delay in the festive season (Dussehra in 3Q vs. 2Q last year), Kerala floods (Onam sales impacted), higher prices and benign weather, which postponed buying decisions. We believe higher realisations on the change in BEE ratings (7-8 per cent effective price increase) and a higher share of inverters would result in a ‘5-10 per cent’ sales decline for the room AC industry in value terms.

Voltas maintains pole position, Daikin gaining share: Voltas maintained its leadership in most markets, while slightly increasing its share in select markets in North and East India on better warranty terms, aggressive pricing and improved after-market services. Daikin has done particularly well across North India and continues to dominate Gujarat, Rajasthan, etc; dealers now refer to it as a No. 2 player in many regions. Interactions suggest smaller players such as IFB, Panasonic, and Onida lost market share, while LG and Samsung also fared poorly. Hitachi has been flat in its dominant region (East India) but lost market share in other regions. BLSTR has seen lower volumes with South India seeing a hefty decline in volumes as Karnataka, Kerala and Hyderabad experienced heavy rains vs. Bangalore, which was rather warm.

Other details: Onslaught of a wide inverter AC range from all players has impacted LG’s dominance in this category. Most companies hiked prices from the 1st week of Oct’18 owing to adverse USD/Rs movement, while another price hike is on the anvil owing to a customs duty hike as the industry stocks up during Jan-Mar’19 for the next summer.

Maintain Buy: Near-term demand and cost pressures could weigh on profits, but we remain bullish over the long term as inherent drivers such as rising penetration and affordability remain intact. Maintain Buy; SOTP-based target price of Rs 705.