CLSA upgrades Voltas to ‘outperform’ from ‘sell’, expects margins to rise as commodity prices cool

Air conditioners’ medium-term thesis is intact and demand in India could rise by high-single digits over the next couple of decades, the research firm has said

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Voltas was trading flat in the morning session on December 5 even though global brokerage firm CLSA upgraded the stock to “outperform” from sell, with a target price of Rs 935 a share, an upside of 9 percent from the current market price.

The global research firm said that after the sharp under-performance this year, negatives were largely priced in. The underperformance was largely due to high competitive intensity in air-conditioners (ACs), leading to market share and margin loss and hence estimate downgrades, it said.

CLSA said that the medium-term penetration-led demand growth for ACs would be in the high single digits. Industry margins should also recover from multi-year lows on softening commodity prices.

At 11.37 am, Voltas was quoting at Rs 855.60, up Rs 0.50, or 0.06 percent, on the BSE. It touched an intraday high of Rs 864.95 and an intraday low of Rs 848.80.

A tough year

The underperformance of Voltas—down 30 percent this year against the Nifty gaining 8 percent—was due to high competitive intensity in the sector, leading to both market share loss and margin decline.

Voltas’ market share has fallen from the peak of 26 percent in FY22 to 22.8 percent in Q2 FY23 and there has been a 300bps YoY decline in margin.

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“Margin guidance of high single-digit is also significantly lower than past ten years’ average of 12 percent. This has led to an FY23 consensus EBITDA estimate cut of 30 percent. Air conditioners’ medium-term thesis is intact. We believe room air conditioner demand in India could rise by a high single digits over the next couple of decades driven by higher penetration and intensity,” it added.

Exports could provide added impetus. Margins had bottomed out and were expected to rise from the current multi-year lows on lower commodity costs, the brokerage said.

However, we don’t expect margins to return to past averages in the near term, given the high competitive intensity. A key risk to both market share and margins is the strong capacity addition pipeline in the sector. While some of these will replace imports and lead to exports, domestic supply could rise as well, it said.

Post the sharp correction YTD, Voltas is now trading at 37X FY24CL P/E, largely in line with the past seven-year median. CLSA has raised FY25 EBITDA by 5 percent as it tweaked revenue and margin assumptions.

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