Undented long-term growth trajectory in AC business
Volt-Bek continues to scale up distribution and reach
Key highlights from the interaction:
* Lost summer revenue; hopeful for second summer sales: Post the lockdown, demand has largely been witnessed from cities in the northern region and some parts of the southern (Andhra Pradesh) region. Channel partners in the western regions and metro cities continue to have higher-than-average inventory. Current inventory with channel partners is around 55–60 days on a pan-India basis. Additionally, Voltas would have ~90 days of inventory (45–50 days of finished goods + raw materials). Increasing electrification is an enabler for people to purchase fans and gradually scale up to air coolers/conditioners. Voltas expects the AC market to grow at a >10% CAGR over the next five years. In the near term, with the major part of AC season sales lost, the second summer of September–October’20 is the key monitorable period.
* Import duty hike risks: There is the risk of higher import duty in AC components due to the government’s ‘Make in India’ initiative. As per existing WTO guidelines, duty on compressors and components could rise to 35–40% (currently 20%). However, the industry has appealed to the government to have duties on finished goods rather than components as component manufacturing is yet to scale up in India. Earlier, the government’s raising import duty on TV panels led to brands importing the complete product from countries with free trade agreements (FTAs) with India. However, this trend reversed when custom duty was cut to zero once again.
* Reducing dependence on imports: Currently, window ACs (WACs) and outer door units (ODUs) of split ACs are entirely locally produced in India. The company relies on China only for the supply of inner door units (IDUs) owing to the multiple range of stock-keeping units (SKUs) offered by Voltas. However, dependence on IDU imports from China was as high as 93–94% three to four years back. This has now come down to ~70%. With Voltas actively investing in its own IDU molds every year, this dependence could further reduce to 50% over the next three to four years.
* Projects business remains muted: With labor migration witnessed due to the COVID-19 crisis, ~40% of labor is now available across 60–70% of open project sites. Management expects new orders to be lower as the government and other agencies would first focus on the execution of projects in hand. Voltas may create certain provisions in the event that payments are delayed. However, this could eventually be reversed as well once payments resume.
* Strengthening reach in Volt-Bek: Competition in refrigerators and washing machines is less than in ACs, with four players occupying a large portion of the market. Even without direct cool (DC) refrigerators, the company has garnered ~2% market share in frost-free (FF) refrigerators and washing machines. Dishwashers may see higher pent-up demand, leading to a year’s worth of sales in two to three months. Volt-Bek products are priced lower than LG and Samsung products and are at par with Whirlpool and Panasonic. DC refrigerators have seen a good response from channel partners, with Voltas being unable to fulfill demand due to production constraints at the Sanand plant. The company has ~98 SKUs in the Refrigerator category, 38 of which belong to the DC category. The Sanand facility has the capacity to manufacture 2.5m DC refrigerator units, in addition to the flexibility to manufacture FF refrigerators and washing machines. Volt-Bek currently has a presence across ~6k touchpoints, with the company ready to leverage the distribution strength of the Voltas brand. Overall, the AC category has around 31k distribution touchpoints, while those for Appliances are higher at 40–45k. Brand spending would continue as planned and be higher than that for Voltas.
Valuation and view
* We expect system-level inventory to normalize by Nov–Dec’20; hence, FY22E should turn out to be a normal year. We have built-in lower revenue and profitability for the EMP business given the weak macro environment for the Projects business.
* Our FY20–22E revenue / EBITDA / adj. PAT CAGR stands at 7%/8%/8%. The stock has corrected 25% from peak levels due to higher system-level inventory. However, this is an industry-wide issue, and on a relative basis, we expect Voltas to continue to outperform peers in the RAC segment. Voltas remains the best play on the underpenetrated AC market in India. Maintain Buy, with TP of INR600.
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