Management Speak: Voltas (Outperformer) - Unfavorable weather to impact Q1FY19

We present key takeaways from our meeting with Voltas’ management.

• Adverse weather mars Room Air-Conditioner (RAC) sales in Apr/May 2018: RAC industry sales volumes declined in Apr/May 2018 due to unseasonal rains (notably in North and parts of South India). Voltas’ lower-than-industry decline led by promotional offers (higher warranties, free installation, EMI schemes, etc) and strong growth in inverters resulted in market share gains for the company. Demand improved in end-May, particularly in North, and company is hoping for a recovery in June. Accordingly, we expect the low base (GST-related disruption in Jun-17) to offset the volume decline in Apr/May 2018. 
• Market share gains in inverters: The launch of 30-35 new SKUs in inverters last year and narrowing gap between fixed speed and inverter prices led to market share gains in inverters, with Voltas now the 2nd largest player (No. 4 earlier). The share of inverters has risen to 30-35% for Voltas (40% for industry) versus sub-10% at the end of FY17.
• Price hike of 3% in May 2018: In order to offset the impact of rupee depreciation, higher commodity prices, interest subvention schemes, etc, Voltas took a 3% price hike on certain SKUs and regions in May 2018.
• EMP – Domestic to drive inflows: Government orders remain the mainstay of domestic intake, especially in rural electrification (~33% of order book). Besides, management sees large opportunities in urban infra, metros, water, smart cities, etc. In international, intake is primarily being driven by UAE and Oman, while the company remains cautious of new wins in Qatar. Management expects margins to sustain at 7-7.5%, led by focus on profitable projects and timely execution.

Valuations and view

Scale benefits, deeper reach, higher focus on inverters and cost efficiencies will help sustain market leadership in Unitary Cooling Products (UCP; ~22% market share). On the other hand, focus on process improvements and better commercial terms is reaping benefits, as EMP margins have improved to ~7% (from ~3% in FY17). While near-term concerns on UCP’s growth and margins persist, on the back of weak demand (season miss) and higher raw material (RM) prices, we believe long-term structural growth remains intact. A 20% correction in the stock over last 3 months has made Voltas’ valuations attractive at 23x FY20E earnings, considering 14% earnings CAGR over FY18-20E, free cash generation and a strong balance sheet. Reiterate Outperformer.