Is Voltas a good buy at its current 4-year high?

However, there are dramatic changes that have happened. In fact the result has surprised us completely. They are about 25 percent above estimates this time around particularly in the PAT. So, I believe there are lots of triggers waiting and things could only kind of improve from here and that dramatically in all the segments not just one or two segments. The air conditioning segment which is technically called the unitary cooling products (UCP) market, that is where contribution should see a significant change.

So, I am quite positive on that and our estimates make us believe that we could probably be looking at Rs 290 kind of a level as a fair value.

Anuj: 24 percent up already this month and 100 percent up this year. Were the earnings that good and would the earnings trajectory look as good to warrant this kind of stock move?Irani: It will be very fair in this very segment, maybe about a year ago at Rs 90 recommending the stock and maybe mentioning just two or three weeks ago at Rs 200 the time to book profits. After saying Rs 200 I recommended Rs 230 but I am not going to take a call on that. I am going to comment on the numbers and the stock price. Rs 239-238 I don't think one should be buying Voltas in a hurry.Numbers brilliant but do you really extrapolate the numbers of a company like Voltas answer is a clear cut no. can anybody tell me what will be the numbers three quarters later? It is very difficult to say because this is an engineering company and that particular division is not doing well. There is a termination of a contract Sidra. They can possibly affect future earnings again.Market share is picking up, product quality is good, product mix is good, margins are going on the upside so all said and done that business doing very well. However, EMP I think I would like to be a little bit cautious right now.Regarding your comment about the stock price having gone up, honestly I won't look at the fact that the Rs 100 has become Rs 230 and therefore one should possibly be avoiding. I am just saying that I am not very confident about the numbers going ahead. They were super right now but the stock like you also rightly mentioned has gone up also very sharply. So, at Rs 238 this is definitely one of the better plays in the sector. If you want an exposure on the longer term it is not a bad bet.However, considering that the stock has run up so sharply I don't think I am going to be in a hurry to recommend this stock right now. The stock could be available 10-15 percent lower also maybe two quarters later if the numbers for a particular quarter disappoint.

Anuj: Do you think it is getting a bit of a promoter premium, the management premium, that is something that the market has struggled maybe last year, could that be a possibility?Irani: Premium definitely yes, and it possibly should be enjoying the premium in terms of valuation, not disputing it but our numbers suggest that it should be around Rs 13 going ahead for 2015-16 earnings. Rs 13 earnings giving at a discounting which is already 19 to 20 times 2015-16 earnings is a little bit stretched for the time being. There is not too much of money, at least not that what I can think of at least for the next two or three quarters.For the longer term if somebody wants to buy they can go ahead and buy. So if somebody has a Voltas there is a long-term play I am not saying you should go and sell it off. The question is should I be buying Voltas which is at a three or four year high. The answer is I am definitely not in a hurry to recommend. What is happening to Voltas post the numbers is; I use the word information arbitrage is happening. Every man is saying Voltas is great buy and the word is spreading. Numbers are good, stock has gone up and people want to buy something in this particular sector and people are buying it, but I will not be surprised if the stock is available 10-15 percent lower than the present level maybe a couple of quarters later while it remains a great long-term bet.

Sonia: Coming on the point that Mehraboon Irani made about the fact that you can't really map what the earnings from hereon could look like, just talk about some other white goods players. Today in fact in the morning we were speaking with Whirlpool and they said to us that don’t extrapolate this quarter’s good performance for the rest of the year because it is only replacement demand that has picked up, there are no first time buyers coming into the market. So in that sense for the unitary cooling segment for Voltas are you getting enough visibility which will justify the move in the stock?Diwan: Absolutely, valid point. When you look at straight-line extrapolation, in fact the numbers would look much more encouraging. What we have done is very clearly seen a shift and we have tried factoring that and till FY14 51 percent of the contribution for this company came from EMP and that was a business that was really not doing well but the company had put in lot of stake into that particular resource.Now having turned EBITDA positive that is not going to have a pull down effect on the entire P&L. While the UCB business could contribute in a decent way if not spectacular way and I will tell you what makes me believe it could happen. The next few quarters for this company would be slightly better. You had a longer summer and a delayed monsoon and that dramatically changes the window in which they can clock sales.The second thing is last two years have been very low profile for most air conditioners manufacturers. Most brands have been actually very subdued whereas Voltas continued its very aggressive and effective ad campaign with the ‘Murthy’ character which has really made it a household name of sorts. So that effect is going to be actually continuing for some more time and they have started moving into a slightly higher price range also. The price points have changed; they are talking about the power saving and split air conditioners also whereas Voltas was otherwise a typical window AC supplier.So my belief is the effect is still there. Of course as Mehraboon Irani said the buying on the sheet is slightly more momentum oriented given the kind or run up that the stock has seen but if you look at the growth trajectory we have done an SOTP analysis and the UCB business could contribute much more than what it has traditionally done and that is where its superior network in Tier II towns where others haven’t been present very actively, especially the MNC brands. That is going to be the key trigger. So my belief is yes, the visible change in earnings would come from there and the tractions would probably be slightly longer than what traditionally you see in any financial year.

Anuj: What would be its closest competitor according to you because it is clearly the best in class but has run up. Anything that you think you can buy in the same industry that still has valuation support?Irani: If you ask me honestly if you consider to be white goods industry you can compare it to the Whirlpool. And if you ask me white goods as a business it is no business; at least not for a longer term. But if you consider it to be an engineering company which unfortunately Voltas has been struggling but as of now I agree with Mr. Prakash Diwan that the turnaround is being seen but can it be told with certainty it is turn around and if you take it as an engineering company you can put it in the grade of even a Thermax or even possibly Crompton Greaves, you can put it in that grade.So it is very difficult to put Voltas. The great thing in favour of Voltas is the balance sheet; a very clean balance sheet, certain lovely investments it has. So all said and done if you look at things from that valuation you will see Rs 235 is not a bad price. I am just saying that having gone up so sharply and in a business in which you can’t predict the number or cant extrapolate the numbers if you are looking at it as a white goods company I don’t think the stock is a clean, clear cut one way buy.Sonia: So at what price would you advice a buy if it comes off?Irani: There could be another five percent upside but if and when the market corrects the stock could be available even at maybe below Rs 200 also. So at around Rs 190-210 this stock could be looked at afresh.