MOSL: VOLTAS (Sell)-Room AC segment to feel the heat of GST in 1QFY18-Market shift toward inverter ACs to be gradual

​VOLTAS: Room AC segment to feel the heat of GST in 1QFY18; Market shift toward inverter ACs to be gradual

(VOLT IN, Mkt Cap USD2.4b, CMP INR474, TP INR400, 23% Downside, Sell)

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

GST to impact room AC growth led by dealer destocking/inventory liquidation

• Growth in the room air conditioning (AC) segment is expected to be flat YoY in 1QFY18 as dealers avoid fresh buying and resort to destocking/inventory clearance due to the likely implementation of GST in July 2017.
• The key concern for dealers has been claiming excise duty refund post the implementation of GST. There has been a clear preference for cash flows among dealers.
• The month of July is expected to see muted demand due to the onset of monsoon, and a revival is likely during the festive season later this year.

Pricing to remain stable in room ACs; expect margins to sustain at 11-12%

• VOLT expects pricing for room ACs to remain stable, with the rise in commodity prices likely to be offset by INR appreciation.
• Post sharp price cuts to promote sales of inverter ACs, LG has reverted back to normal pricing.
• The company expects margins to stabilize at 11-12% over the long term, as against 14.5% in FY17. Rationalization of margins would be driven by a) high competitive intensity in the industry and b) focus on maintaining market share with an 11-12% margin profile.
• VOLT would prefer to lose market share rather than compromising on margins (11-12%).
• VOLT expects market shift toward inverter ACs to be gradual.