MOSL: VOLTAS (Neutral)- AC portfolio overhaul likely post energy rating norm changes

​VOLTAS: AC portfolio overhaul likely post energy rating norm changes; Voltas-Beko product line to be launched in 2HCY18

(VOLT IN, Mkt Cap USD3.1b, CMP INR610, TP INR580, 5% Downside, Neutral)

We recently met management of Voltas (VOLT). Key takeaways:

Room Aircon: New energy ratings to result in complete portfolio overhaul

• ​- To comply with the new energy-efficiency rating (EER) norms (which will be effective January 2018 onward), manufacturers will have to reassess their existing portfolios and formulate a renewed strategy to ensure a) a right product mix (inverter, fixed aircon) and b) right pricing (to pass on the impact of higher RM 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 (~20% 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. VOLT has a +24% share in window ACs; Daikin, Blue Star, Hitachi are other players present in this segment.
  
• - VOLT is now pushing both inverter and fixed-speed AC – 18 SKUs in inverters as of 2QFY18, which will be increased further. Share of inverters as a percentage of sales has increased from 6% previously to 15% in 2QFY18. However, the margin in inverters is lower than in that in fixed-speed ACs, as sharp price cuts by a key competitor in invertors has forced other manufacturers to follow suit.Furthermore, margins are under pressure as old inventory is now sold out and the company will have to raise prices to factor in higher RM costs. Also, the interest subvention schemes are hurting margins with a higher number of consumers preferring to buy under the EMI plans.