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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.

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