MOSL: VOLTAS (Neutral)-Unseasonal rainfall hurt 1QFY19 room AC sales-Inverter ACs account for 30% of room AC sales

VOLTAS: Unseasonal rainfall hurt 1QFY19 room AC sales; Inverter ACs account for 30% of room AC sales

(VOLT IN, Mkt Cap USD2.7b, CMP INR525, TP INR570, 9% Upside, Neutral)

We met VOLT’s management. Our key takeaways:

 Unseasonal rainfall and resultant weak summer hurt 1QFY19 sales

• Room air-conditioner (AC) sales in April/May 2018 were subdued as a result of rains and hailstorms across North and South India. Industry volumes declined in April; VOLT saw lower-than-industry decline, driven by market share gains and better-than-industry promotional offers. The company remains hopeful of a pick-up in demand in the second half of June in North India and this would offset the weakness seen in the prior two months. Moreover, 1QFY19 has a weak base – primary sales had declined sharply in May-June 2017 on GST-related destocking by dealers.
• The structural growth story in room ACs remains intact for the next few years (despite near-term hiccups of a weak summer), driven by low penetration levels, rising income levels and increasing distribution in tier-2/3 cities. VOLT has ~15,000 touch points across the country.
• Margins are facing downward pressure on rising raw material prices, high competitive intensity, rupee depreciation, and increasing share of interest subvention sales. VOLT has hiked prices by ~3% across select SKUs in June 2018 to offset the impact of higher input prices.