Published on 21/09/2020 10:14:33 AM | Source: ICICI Securities Ltd

Hold Voltas Ltd For Target Rs.590 - ICICI Securities

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Gearing up for the next leg of growth

Having established an unassailable lead in domestic room AC market, Voltas is gearing up to capture the next leg of growth through its JV Voltbek. The company strategically plans 10% market share by 2025 under washing machine, refrigerator and dishwashers eyeing Rs764bn worth of India home appliances market. We believe the success in this new venture will be a key determinant to future rerating of the stock. The recent “Atmanirbhar” focus by the government may gradually push the input cost in traditional room AC segment and hence, impact margins. Given the recent run up in valuations on the back of better-thanexpected Q4FY20 earnings, we believe current valuations are rich. Hence, we downgrade the stock to HOLD from ADD with a revised target price of Rs590 (previously: Rs526).


* Eyeing Rs764bn worth of domestic home appliances market: The JV is initially focusing on refrigerators, washing machine, dishwashers, microwave and oven. The company targets 10% market share in these respective segments and currently has 2% share in refrigerators and washing machine. Having commenced manufacturing in direct cool refrigerators, it plans to localise frost-free refrigerator by December 2020.


* Leadership in domestic room AC segment continues: Voltas was able to garner 100 bps YoY improvement in domestic room AC segment with current market share of 24.2%. The company also became a leader in inverter segment for a brief period of January 2020. The distribution reach with 19,000 touch points is the key USP of Voltas along with strong branding and advertisement.


* Voltbek JV loss continues: Given the initial costs of marketing, advertising and promotion, the JV reported a loss of Rs1.5bn vs Rs987mn in FY19. The revenue grew 192% YoY to Rs2.9bn. With the introduction of localised products and commencement of Sanand factory, the performance is expected to witness strong growth going forward. However, the current scenario of Covid-19 related environment is likely to impact demand for FY21E.


* Downgrade to HOLD: The stock has witnessed a sharp run up in valuations post the better-than-expected performance in Q4FY20. Demand may be subdued due to lockdown and Covid-19 related social distancing norms. Hence, we believe current valuations are rich and downgrade the stock to Hold. Voltas has a strong balance sheet (~Rs8.3bn of cash and current investments) and healthy cashflows. We value consolidated business at Rs568 (30.4x FY22E earnings) and Voltbek at Rs22 (2x of investments) arriving at an SoTP-based target price of Rs590 (earlier: Rs526).


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