Published on 4/07/2019 10:07:15 AM | Source: Prabhudas Lilladher Ltd

Hold Voltas Ltd For The Target Rs.584 - Prabhudas Lilladher


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UCP on a strong footing, Beko JV a drag

Voltas Analyst meet indicated positive growth momentum in UCP in 1Q but reinforced our cautious stance given long gestation of Voltas-Beko JV. RAC industry has started FY20 on a positive note given strong demand due to harsh summer and low base of 1QFY19. The management has maintained annual margin guidance of 11% in UCP. Voltas-Beko JV performance is in line with internal benchmarks, it is expected to remain in an investment phase over the next 3-4 years given expenses on distribution, branding and stiff competition in white goods market. We estimate the JV to report loss of ~Rs1.5bn/Rs1.2bn in FY20/21. MEP business is focusing on domestic projects in Rural Electrification and Urban Infra as return of NDA Govt is likely to retain continuity in policies. We estimate 15.9% EPS CAGR over FY19-21 and value the stock at 28xFY21 earnings. Maintain Hold.


Voltas-Beko JV has a long road ahead:

The Votlas-Beko (Voltbek) JV set up at an initial equity capital infusion of $100mn envisages leveraging on Voltas’s brand presence and sales & distribution network. Arcelik will contribute in technology, R&D, global sourcing capabilities and wide product range. Launched only in H2FY19 with a range of refrigerators, washing machines, microwaves & dish washers Voltbek reported a loss of ~Rs1bn in FY19. Currently, Voltbek has covered 50-55% of Voltas’s distribution network. Voltbek products are available through almost all large modern retail stores (Croma, Vijay Sales, Vivek, Great Eastern Retail) & in tier II/III towns through ~100 franchisee based EBO’s. The JV is banking on starting production (Dec 2019) of direct cool refrigerators and twin tub semiautomatic washing machine to fully exploit the distribution reach of Voltas in next season. Although Voltas has targeted Rs100bn sales by 2025, we remain cautious on Voltas’s 2 nd entry in the white goods space given mass market focus and tough competition from well entrenched players like Whirlpool, Samsung, LG, Godrej and Haier.


Strong RAC outlook due to hot summer season & lower base:

RAC has seen a strong growth in 1QFY20 on a low base of FY19 (3% decline led by erratic summer, high commodity prices, INR depreciation and 10% increase in customs duty). High channel inventory and competitive scenario has prevented brands from taking any price hikes except tactical adjustments and promotions. June month demand has been sedate in south & west India, north & some parts of east India continue to report encouraging trends. Voltas has taken selective price hikes on certain SKUs/regions. The new AC & related products unit at Tirupati (cost of Rs5bn) is on track (commissioning by end FY20) and will enable better & quicker reach to western & southern markets. EMPS segment to focus on rural electrification & urban infrastructure: With the return of NDA government, Voltas is optimistic on resumption of government spending on rural electrification and urban infrastructure. Voltas expects huge opportunities in 1) Rural Electrification 2) Metro projects 3) Airport infrastructure and 4) Water management (non- portable and sewage treatment). The domestic order book of Rs30bn (total order book – Rs50bn) is split between Rural electrification (40%), Urban infrastructure (40%) and traditional HVAC (20%). The international projects business is undergoing a difficult phase and is not a focus area. Voltas continues to selectively bid for orders.


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