Published on 10/10/2018 11:16:23 AM | Source: Motilal Oswal Securities Ltd

Neutral Voltas Ltd For Target Rs.540.00 - Motilal Oswal

Posted in Broking Firm Views - Long Term Report| #Voltas Ltd. #Capital Goods Sector #Broking Firm Views Report #Motilal Oswal

Takeaways from review of Voltas Beko products

Impressive line-up of refrigerators and washing machines

We took a look at the recently launched washing machines and refrigerators of ‘Voltas Beko’—a TATA product, which are expected to see a pan-India rollout by Diwali this year. We were quite impressed by the product quality, range and features on offer v/s competition. In line with earlier commentary from management, pricing is largely in line with Korean peers (although most products are imported and despite the recent sharp INR depreciation). Going forward, two critical factors would determine the success of the ‘Voltas Beko’ brand and its target to capture 10% share—namely (1) dealer margins being offered, and (2) the ad/promotion campaigns rolled out to capture consumer mindshare (INR1b is planned for advertising annually over the next four years, as per media reports).


Our take on the product line-up is highlighted below:

Refrigerators (250-470litres, double-door frost-free):

The refrigerators are imported from Thailand with the initial rollout of frost-free models; the company plans to launch smaller-sized direct-cooling models later. Unique features of the refrigerators that stood out for us are:

*  Frost-free inverter compressors with 12 years warranty versus the 10-year industry norm

*  Digital display to separately control temperatures in the freezer and cabinet; note: this feature is usually available in high-end/premium LG and Samsung models of 400litres and above

*  Dual cooling and separate air flow between fridge and freezer along with 2x cooling. The company has branded this as ‘Neofrost dual’ cooling

*  Blue light protection, which the company claims keeps vegetables/food fresh for 30 days

*  Ion guard in the food compartment to neutralize food odors. Beverage holders have also been provided to store large-sized bottles.

*  Tube light inside the compartments for better lighting v/s regular bulbs inside the fridge

*  ‘Store fresh’ tray at the bottom to keep food fresh for 30 days and to avoid mixing of odors.


Washing Machines (Semi-auto, top and front-load, 7-12kgs):

The company launched washing machines in different categories of 7-12kgs across range and sizes. Some of the unique features that stood out for us are:

*  12-year motor warranty v/s 10-year industry norm

*  All front-load, fully-automatic machines come with inverter motors for power savings and better efficiency

*  Monsoon wash, which has 15min/30min extra wash cycle and vents on top of the washing machine for better drying during monsoons

*  ‘A+++’ rating for fully-automatic washing machines—these are the top-of-theline fully-automatic washers and are most energy efficient as per EU standards

*  In our view, size of the washing tub is bigger than competition across comparative sizes

*  Washer-cum-dryer models also being launched in top-end models.


JV to leverage existing distribution network of Voltas:

Currently, Voltas has around 100 exclusive brand outlets and around 70% of its dealers (~16,000 touch points for Voltas) deal in other product categories and this network would be utilized by the JV. As per media reports, the JV aims to add 10,000 additional outlets, with Voltas also adding 500 more exclusive brand outlets over the next two years, taking it to over 1,000 in the next 3-4 years. The company would have a 360 degree approach with sales being generated via modern trade outlets, multi-brand outlets, exclusive outlets and e-commerce.


Products mostly imported till plant starts in Sanand, Gujarat in FY20. The products will initially be imported from Arcelik’s plants in Thailand and Turkey. However, from next year the company will start manufacturing some of these products in its up-coming plant in Sanand, Gujarat, spread over 60 acres. Production is slated to begin from mid-CY19 onwards and the factory would have a capacity of 1m refrigerators and washing machines along with 0.5m microwaves. It aims to invest INR10b in its manufacturing, distribution and marketing spends over the next five years with both companies investing equally in the JV. Our channel checks indicate that the washing machines are being made by Vimal Plast, while the remaining products are being imported from the Arcelik factory in Thailand.


Valuation and view

We maintain our Neutral rating and target price of INR540, which values the core UCP segment at 32x FY20E EPS and 15x for the remaining business. We currently do not ascribe any value to the Voltas-Arcelik JV as we expect losses in the first few years until: (a) manufacturing starts at its factory in Sanand, Gujarat, in FY20; (b) volumes scale up driven by market share gains to make the venture successful; and (c) high advertising and promotion spends are planned to establish the brand in the durables segment (ex-AC). In our view, if the JV is able to achieve its targeted sales of INR100b by FY25 with EBITDA margins of 10%, we get a DCF-based value of ~INR80/share for Voltas.


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