Moneycontrol
Dec 06, 2017 12:49 PM IST | Source: Moneycontrol.com

Voltas falls 3% after Motilal Oswal retains netural call, sees 5% downside

Voltas has more than 24 percent share in window ACs; Daikin, Blue Star, Hitachi are other players present in this segment.

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Motilal Oswal has maintained its neutral rating on Voltas with a target price of Rs 580 per share, implying a 5 percent downside after meeting its management.

"We would watch out for the company's pricing/positioning on inverters, with the ratings changes from January 2018 – a successful transition by Voltas would make us turn positive on the stock; and launch of washing machines and refrigerators in second half of CY18," the research house said.

Moreover, the projects business has also stabilised with margins recovering to 5-6 percent and a revival in the domestic business, it added.

Despite intense competitive pressure in the room AC segment, Voltas has been able to gain a market share without sacrificing margins in Q2FY18. Companies that lost market share were Samsung and Hitachi, the research house said.

According to Motilal Oswal, AC portfolio overhaul is likely post energy rating norm changes.

To comply with the new energy-efficiency rating (EER) norms (which will be effective January 2018 onward), the research house said manufacturers will have to reassess their existing portfolios and formulate a renewed strategy to ensure a right product mix (inverter, fixed aircon); and right pricing (to pass on the impact of higher raw material costs and rating changes).

Under the new EER norms, inverter ACs will be rated as five stars, while fixed-speed compressor ACs will be rated four stars and below. Each manufacturer will thus have to decide on its strategy on how best to meet the EER norms.

Window ACs (around 20 percent of the industry) cannot have a 4-or 5-star rating under the new EER norms. As a result, this segment will have only 2-or 3-star ratings, which would reduce its share in the overall AC market, the research house said.

Voltas has more than 24 percent share in window ACs; Daikin, Blue Star, Hitachi are other players present in this segment.

Motilal Oswal said Voltas is now pushing both inverter and fixed-speed AC – 18 SKUs in inverters as of Q2FY18, which will be increased further.

Share of inverters as a percentage of sales has increased from 6 percent previously to 15 percent in Q2FY18. However, the margin in inverters is lower than that in fixed-speed ACs, as sharp price cuts by a key competitor in invertors has forced other manufacturers to follow suit, the research house said.

It further said margins are under pressure as old inventory is now sold out and the company will have to raise prices to factor in higher raw material costs. Also, the interest subvention schemes are hurting margins with a higher number of consumers preferring to buy under the EMI plans, it added.

On electro mechanicals project segment front, the research house said the domestic business is seeing traction in rural electrification, water and government projects.

Metro projects are witnessing delays in Delhi and Chennai, but rural electrification projects (Rs 1,000 crore in order book) are doing well, as the 2019 deadline to electrify all villages is nearing, it added. Voltas bagged orders in Jharkhand in Q2FY18.

It said water segment is doing well. Under the Namami Gange program, the company has bagged an order in Agra and is seeing a good pipeline ahead as well.

Blended margins in the projects segment will remain at 5-6 percent, Motilal Oswal feels.

On the international business, Voltas has not picked up any new orders in Qatar. It is also seeing delays in getting material to the site due to the embargo over the last 8-9 months.

The company expects new opportunities from the FIFA World Cup 2022.

At 12:02 hours IST, the stock price was quoting at Rs 605.00, down Rs 17.20, or 2.76 percent on thte BSE.
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