Buy Voltas; target price of Rs 305: ICICIdirect

ICICIdirect.com's report on Voltas Technical Outlook

The stock remains in a secular up trend forming rising peaks and troughs on all time frames. Currently the stocks is poised at a key support being the confluence of medium term rising trendline in place since April 2014 and the 21 week EMA which has historically acted as good support over the last one year. We believe the stock offers a good entry opportunity for medium term traders with a good reward/risk set up to ride the next up move towards Rs 305 being the price equality of last up move (Rs 225 to 283=58) projected from this weeks low of Rs 248

The 14 week RSI is poised at its bull market support reading of 50. Historically the oscillator approaching its bull market support reading of 50 has produced a steady bounce back on the price front over the last one year which highlights the underlying strength in the trend

Fundamental Outlook

Voltas is primarily an assembler and not a manufacturer of ACs as it outsources various accessories of ACs (like compressors) and assembles at its Pantnagar plant (Uttarakhand). The segment contributes ~39% to the consolidated topline and recorded sales CAGR of ~16% in the last five years. A strong brand coupled with over 6500 dealers in India (sales 90% of segment sales through dealers) have helped Voltas to improve its market share (in the AC) from 14% in FY10 to 19.8% in FY14. Given the relatively stable margin and high operating cash flow, the UCP segment has provided strong support to the company’s profitability by maintaining lower working capital requirement in the segment. The EBIT of the UCP segment recorded a strong CAGR of 16% in FY11-14 while its contribution to the total EBIT improved significantly from 32% in FY11 to 75% during FY14. This resulted in a strong RoCE of the UCP segment in the range of ~40-43% over the last four years

We believe the stock is trading at attractive multiples considering the strong performance of the UCP business and recovery in the EMPS segment. We expect consolidated sales, earnings CAGR of ~12%, ~24%, respectively. We used SOTP method for valuation and valued the UCP segment on a PE basis by ascribing PE multiple of 27x FY17 earnings. We ascribe a PE multiple of 5x FY17E earning to the EMPS business (considering the sharp volatility in earnings) and 9x FY17E earnings to the EPS segment. We have maintained our target price of Rs 348/share (based on 25x FY17 earnings) and BUY rating

Strategy: Buy Voltas in the range of Rs 250-257 for a target of Rs 305.00 with a stop loss below Rs 230.00 on a closing basis

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