Voltas :Reiterate Buy; TP raised to INR301 Strong consumer franchise in domestic room AC segment, but EMP segment is a drag: Nomura Research

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Action: Accumulate for strong room AC franchise, though EMP segment

remains a drag; prefer Crompton Greaves and Havells over Voltas

Voltas (VOLT) has consistently surprised us positively on better room AC

segment (UCP) performance over the past year led by market share gain as

well as margin improvement. However, its electro-mechanical projects (EMP)

segment has been a drag and levered to Middle East (ME) capex and

domestic commercial realty markets. A comparison with the rest of the

electrical consumer durables sector suggests that room AC is the only

category that has been doing well, largely due to severe under-penetration in

India. Voltas, being a market leader with a strong distribution and brand

franchise in that segment, remains a clear beneficiary of rising penetration in

that segment, in our view, thus driving our Buy rating. However, the strong

franchise in room AC is partially offset by a weak outlook in the EMP segment

which is levered to ME capex and domestic realty segments, both of which

seem unlikely to recover in the medium term. We also note that VOLT

compares unfavourably with Havells on key financial metrics such as FCF

generation, ROE as well as a stable growth outlook. As such, we prefer

Havells (HAVL IN, Buy) and Crompton Greaves (CRG IN, Buy) over Voltas.

Catalysts: Domestic as well as Middle East capex revival

Valuation: Trading at 17x FY17F P/E; reiterate Buy, revised TP INR301

Our TP has increased to INR301 from INR260 largely due to roll forward and

slight upward revision in FY17F EPS estimate of 6%. We now value the stock

on FY17F EPS (vs. Sep-16F earlier) of INR16.7. Our target multiple remains

unchanged at 18.0x (+1SD above the mid-cycle multiple). With ~6% potential

upside to our TP, we reaffirm our Buy rating, though we prefer CRG and HAVL

over Voltas.