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MOSL: VOLTAS (Neutral)-Room AC industry to post double-digit growth in FY20-UCP margins to sustain at 11-12%

Voltas: Room AC industry to post double-digit growth in FY20; UCP margins to sustain at 11-12%, earmarked INR5b capex for new facility

(VOLT IN, Mkt Cap USD2.9b, CMP INR618, TP INR590, 5% Downside, Neutral)

 

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

• Expect Room AC industry to grow at 10% for FY20: Voltas expects the Room AC industry to register double-digit growth in FY20 on back of a pick-up in demand in certain pockets of the country. VOLT expects volumes to increase in March- April (post the festive season of Holi). While the southern region has seen a surge in demand (Kerala witnessed demand pick-up), the northern region is yet to see any meaningful demand growth. Inventory levels have started to recede and primary channel filling has increased.
• UCP to see INR5b capex to meet southern/western market demand: VOLT has earmarked capex of INR5b for a new facility in Tirupati, Andhra Pradesh, which will manufacture molding for Room ACs, air coolers and commercial refrigeration. The new facility will come up in phases with the INR5b capex spread over the next five years; annual capex will be in the range of INR1b. VOLT expects the factory to start in 2H 2020.
• UCP margins to settle around 11-12% on sustainable basis: VOLT expects UCP margins to settle around 11-12% on sustainable basis, despite its inability to take price hikes given the subdued demand, INR depreciation and increase in competition, raw material cost, and import duty on compressors and completely built units (CBUs). EBIT margins for 9MFY19 for the UCP segment stood at 9.1%. For Volt to achieve its EBIT margin guidance of 11-12% in FY19, the company will need its EBIT margins in 4QFY19 to be around 15-16%. 4Q margins for VOLT over the last five years stood at an average of 16.9%.