Voltas Target Price Raised By HSBC Citing Better Earnings Expectations
The brokerage raised the target price to Rs 1,350 apiece as it also sees a sharp improvement in margin for the air conditioner manufacturers from prevailing cyclically low levels.
HSBC Global Research has raised the target price of Voltas Ltd., citing a rise in the company's earnings for the next couple of years, pushing the share price of the stock to a nearly two-year high on Thursday.
The brokerage has retained a 'buy' rating on the stock, with the target price raised to Rs 1,350 apiece from Rs 1,250 apiece earlier, implying an upside of 10.84% from its closing price on Thursday.
"We maintain our buy rating on the stock as we believe Voltas is one of the best proxies for the underpenetrated room AC category in India." HSBC said in a note. "We have raised unitary cooling products segment margin assumptions by 40–50 basis points over FY24–26," it said. This has resulted in a 5% increase in earnings per share during the same period, according to the brokerage.
"We now expect a FY26 UCP segment margin of 11.5%, which we think is significantly above consensus expectations."
The brokerage's raised Ebitda estimates are 15–17% above the current consensus expectation.
Robust Demand Of UCP Despite Headwinds
In the previous year, the company's valuation driver, the Unitary Cooling Products, or UCP, segment, posted an impressive 16% revenue growth, according to HSBC.
Last year's growth came in despite market share headwinds, erratic weather conditions in April and May, especially in large markets such as North and West India, and soft discretionary consumption growth trends in India, the brokerage said.
"We believe the outlook for 2024 is looking stronger than that in 2023, as Voltas market share is stabilising and a warmer summer season is forecasted by the India Meteorological Department in 2024."
Margin Improvement In The Offing
"We think a sharp margin improvement is in the offing for air conditioner manufacturers from prevailing cyclically low levels," the brokerage said.
Better margins are expected to be driven by a 5–10% year-on-year fall in the prices of key inputs for air conditioners, such as compressors, inverter controllers, plastic, and copper. In addition, "We estimate that the bill of material going into the 2024 summer season is down by around 6-7% y-o-y," it said. "Our channel checks across regions and retail formats suggest that product prices are broadly stable."
If this margin improvement plays out, the brokerage noted that it would also negate the hypothesis that there has been a structural profitability impairment in the unitary cooling products segment.
Downside
However, there are some risks on the brokerage call, which include continued market share loss for the room AC business, lower-than-forecast operating margins for the room AC business due to increasing commodity costs, and slower and lower-than-expected market share gains for the Voltas Beko JV.
Shares of the company rose as much as 1.48% to Rs 1,236 apiece, the highest level since May 4, 2022. It pared gains to trade 0.5% higher at Rs 1,224.25 apiece as of 9:27 a.m. This compares to a 0.22% decline in the NSE Nifty 50 Index.
The stock has risen 53.24% in the last 12 months. Total traded volume so far in the day stood at 0.20 times its 30-day average. The relative strength index was at 73.12, indicating that the stock may be overbought.
Out of 43 analysts tracking the company, 18 maintain a 'buy' rating, 15 recommend a 'hold', and 10 suggest a 'sell', according to Bloomberg data. The average 12-month consensus price target implies a downside of 9.2%.