Accumulate Voltas; target of Rs 319: P Lilladher

Prabhudas Lilladher's report on VoltasSecondary sales for AC market in Q1FY16 were down ~1% due to erratic weather (especially in Northern markets) and lower customer offtake against very strong Q1FY15 (due to extended summer and post election euphoria). The industry was preparing for a ~10-15% growth and hence, trade is sitting on a higher inventory, which is likely to get cleared in the upcoming festive season. Also, Q2 being a lean season, management believes any significant pricing action is unlikely by industry players. However, promotions are likely to pick up in Q3 (which is normal practice during festive season). We believe there could be some pressure on margins in the near term, given the inventory in trade by other players.  Voltas sustained its No.1 market position and further improved market share to 21.8% (21% in Q4FY15). The Indian room AC industry is poised to grow, given the changing dynamics like urbanization, growing middle class, rising income levels, easy availability of finance and low penetration of AC. In the upcoming season, Voltas is looking to scale up the newly launched Air Coolers in more markets across geographies.MEP segment registered profits for the fifth consecutive quarter against losses until FY14. Order book for the MEP segment was up 6% YoY to Rs40bn. In the Domestic arena, there have been improvements in activity levels in segments like Roads, Defence, Railways, etc. However, recovery is yet to be seen in our addressable segments of HVAC & E&M. In International markets, Voltas commented that market environment led challenges still remain due to continued procedural delays, payment deferrals and visa sanctions; drop in oil prices has added to the uncertainties. However, management believes that Qatar and Dubai, which are less impacted by oil price decline, will continue to see spending (due to Expo 2020 and World Cup 2022). Voltas continues to focus on profitable orders and is cautious in taking orders with lower margins.Outlook and Valuation: "The stock is trading at 22x FY17E earnings. We remain positive on Voltas over medium/long, given the improving margin profile of fresh orders, strong consumer business franchisee, healthy balance sheet and cash flow. Maintain accumulate with a target price of Rs 319", says Prabhudas Lilladher research report.For all recommendations, click hereDisclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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