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We upgrade AVL to BUY from Add, while increasing the TP by ~22% to Rs550 (from Rs450), following a ~14%/3% increase in our TP multiple/estimates and rollover to Jun-27E earnings. The upgrade follows our cautionary downgrade in May-25, when we saw potential margin risks over inflated inventory levels (air conditioners) amid unseasonal rains. However, AVL has surprised us with a better margin (flat YoY; 30bps beat) and inventory management (down by Rs1.5bn; Rs30mn per store at Q1-end), thereby leading to a reversal of the TP multiple back to 40x (from 35x) and ~3% earnings increase on lower debt. Despite the SSG decline (4% in Q1), AVL was able to maintain its EBITDA margin (9.5%), led by conscious cost-savings and a reduction in discretionary spends. In light of heavy declines across durable names, AVL’s revenue growth is decent at 6%; the company is targeting better growth in the rest of FY26 (vs ~24% last year). Expansion in UP is on track, with AVL seeing a ~200 store opportunity there (vs 36 currently). AVL added four stores in Q1 and maintained its target of adding 25-30 stores in FY26.

Inventory/margin management better than expected despite unseasonal rains

Ahead of the CY25 summer, AVL had proactively stocked to prevent compressor shortage and benefit from early season/OEM discounts; however, unseasonal rains in Q1 impacted its ramp-up plans. AVL took timely action with targeted promotions and engaged with OEMs for support in liquidating inventory. Encouragingly, it has seen a healthy inventory reduction of Rs1.5bn to Rs5.5bn. Helped by significant inventory reduction, AVL’s debt also declined sharply to Rs1.15bn at Q1-end, from Rs2.8bn. Inventory of Rs5.5bn (vs Rs3.7bn YoY) implies Rs30mn per store (in line with its guidance), and the increase needs to be seen in light of 29 store additions, 6-7 CWIP stores, and price inflation. AVL maintained that its AC inventory is at an optimum level (based on requirement at stores) and is not a cause for concern. With regard to the new BEE norms, AVL stated that these norms do not stop it from selling its purchased inventory.

Expects high double-digit growth for the rest of FY26

AVL reported a 6% increase in revenue (a 2% beat to estimate), despite 15-30% topline decline for most durable OEMs in Q1. With unusually high rainfall and colder temperatures, the SSG dipped 4%. However, AVL remains optimistic about recovery in the rest of FY26, aided by a bumper monsoon, announcement of 125 free units in Bihar, and tax reliefs, which should boost consumption. Among categories, the AC category saw a 2% decline (vs 6% overall growth in Q1) while the rest of the categories saw relatively better trends. AVL added 4 stores in Q1 and 3 in Jul-25, taking the count to 182 as of date; it expects to add 25-30 stores in FY26.

Earnings call KTAs

Demand trends

• Rains were unusually higher at 200-225mm across the company’s area of operations vs the usual ~150mm; temperatures were also colder by 2°C across regions.
• Leading OEMs have seen 15-30% decline in sales due to sharp buildup of inventory in channels. However, AVL saw 6% growth.
• AVL remains optimistic on demand recovery due to good rains (10% higher sowing), the kick-off of 125 free units in Bihar, and tax reliefs, which should ensure healthy disposable income in consumers’ hands and boost consumption.
• While Q1’s low growth will impact growth (vs historical trends of ~30% growth), AVL is targeting to achieve 20-25% growth in FY26 (vs 6% growth in Q1). AVL expects growth to return over Q2 to Q4 and remains confident of delivering better vs last year.

Retail footprint

• AVL’s major expansion focus is on Uttar Pradesh and it is currently not thinking about entering other regions; AVL will take a call on entry into Chhattisgarh by FY26-end.
• AVL opened less stores in Q1 due to a lean season (unseasonal rains); expansion should pick up in the rest of FY26.
• The initial traction is heartening in UP – already surpassed Jharkhand in terms of revenue share (11% for UP vs 8% for Jharkhand). ? After its initial entry into Eastern UP, AVL has expanded to Central UP and now plans to expand further to Western UP.
• AVL is majorly focusing on Tier-2 cities for expansion.

Margins

• Savings were seen in non-critical operating expenses like marketing, warehouse, freight, and security expenses, while maintaining the front-end service experience helped margins.
• AVL gauged weak demand early on as the season was not progressing well. Bonuses are sales-linked, which were automatically adjusted. However, AVL expects costs to normalize, once its growth trajectory returns.
• AVL has not resorted to discounting; it does not believe that discounting would be required ahead either, as it is not desperate to liquidate stock.

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