Following ~25% volume decline in the COVID-19-disrupted CY20, we believe India’s room AC industry has entered CY21e with significant pent-up demand (near 2 mn units). With a strong recovery in secondary sales in recent months, an early onset of the summer season and considering the composition of room AC demand, we expect the room AC industry to grow ~53% in CY21e (2-year CAGR = ~7%).
Voltas should continue to gain market share: We see Voltas gaining market share on: (i) the ongoing inflationary commodity price environment helping larger players; (ii) expected market consolidation in favour of larger players due to prohibition of imports of ACs; (iii) accelerated e-commerce adoption by customers (Voltas has higher market share in E-commerce channel). We also think the much broader product range of Voltas (compared to competitors) will provide a market share tailwind given our expectation of down-trading by customers due to rising product costs.
Upgrade to Buy: We value Voltas and its VoltBek joint venture using a discounted cash flow methodology (WACC: 9.5%). We trim our earnings estimates by 1-4% over FY22-23e on increased commodity costs, leading to a 1% cut to our TP to Rs 1,185. Our TP implies 20% upside to the current share price and we upgrade our rating to Buy as we have a high degree of confidence in the company’s growth outlook. We think Voltas is the best way to play the long-term, structural, high growth of the Indian room AC industry. Voltas is currently trading at an FY23e PE of 38x while our Rs 1,185 TP implies 46x. Our TP also implies a room AC segment FY23e PE of 50x.
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