Voltas Share price today: Morgan Stanley highlights key pointers for investors

Voltas Share price today: Morgan Stanley’s price target of Rs 844 is derived using SOTP valuation. Morgan Stanley applies 5%/85%/10% weights to Bull, Bear and Base case. Morgan Stanley hosted the company at their Vitual Asia Pacific Summit 2020.

UCP business:

Window AC is 100% locally sourced from OEMs (Original Equipment manufacturers), while split ACs ODUs (Outdoor Designed Units) are manufactured in-house and components get sourced locally and also imported. After investing in moulds, 65-70% of IDUs (Indoor Designed Units) are now imported (vs 85-90% 2-3years ago) and in the next two years 70-80% will be sourced locally. For specific sku's where scale is a challenge IDUs could continue to be imported. Voltas imports a very small quantity of CBUs and incrementally there is an import ban in place.

Voltas is import dependent on compressors and controllers. The company is exploring the possibility of in house component manufacturing, except for compressors and controllers where it could consider joint development. However, Chinese players could well be more cost competitive for these two components. PLI is open to Chinese players and contours are yet to be announced. Highly & GMCC (Guangdong Meizhi Compressor Co) are looking at India as a potential manufacturing base. Highly is about to increase capacity. GMCC's commercial production in India may commence in the next 3-4 months.

China's import dependence is likely to come down significantly over the next 2-3yrs as the component manufacturing value chain gets developed locally. Voltas' north India factory has a capacity of 1 mn units while its south India factory has a capacity of 0.5mn pieces and can be scaled to 1 mn pieces with minimal capex, thus taking care of incremental demand over the next 3-4 years.
Market share gains of over 200 bps in F21 YTD are broad based and have been driven by a combination of factors like sourcing, supply chain, quality, value for money products and innovation based on customer feedback. In the AC segment, Voltas has access to 19000+ touch points vs. market dealer base of 32000-35000 dealers. There are 45000 dealers in the white goods market of which 80-85% sell AC’s.

Projects Business:

Execution has reached 65-70% levels driven by site and labour availability; however productivity remains a concern (social distancing). Cash collection is a concern mainly in some legacy international projects. Most domestic projects are from the government hence there is certainty of cash conversion while timing could be a concern. Q3 & Q4 may remain stressful mainly due to liquidity concerns and it would take a few quarters to come back to 6.5-7% margin. The rationale of separation of the B2B operations is to increase the focus on the business. Management sees the possibility of a double digit RoCE in domestic project business.

Valuation Methodology and Risks:

UCP: Morgan Stanley values the UCP business at 40x F21e P/E in line with consumer durable peers;
EMP: Morgan Stanley value the business at 12x P/E in line with EPC peers
JV: Morgan Stanley expects the JV to turn profitable in F25. They value it based onF21e P/S multiple of 3x lower vs consumer durable peers as the JV is yet to establish itself.

Risks to Upside:

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Stronger growth &/or margins in UCP business
Stronger execution in non UCP business
Faster adoption of JV products combined with lower initial losses

Risks to Downside:

Heightened competition in the AC segment: followed by margin pressure
Sluggish ordering in domestic business and margin dilution in international projects
Voltabek JV is not successful and cash losses continue for a longer timeframe