Shares of Voltas Ltd. gained for the third straight day as rising heat is expected to boost demand for the maker of air conditioners.
"We believe FY24 should see both AC and engineering segments of Voltas being in a sweet spot," Jefferies said in a Feb. 21 note. Jefferies maintains a 'buy' rating on the stock with a target price of Rs 1,050, implying a potential upside of 20%.
The Indian Metrological Department recently issued the first heat wave alert of 2023. While March usually witnesses the rise in temperature, but February itself is showing the trends, Jefferies said.
The Tata Group company has not passed on the lower commodity prices, Jefferies said, citing dealers. "This points to an improved volume and margin outlook for Voltas ahead."
Citing the summer season as a positive near-term catalyst, Jefferies said that the third quarter is a 'sweetener.'
In the last 10 days, many districts in Gujarat and Maharashtra, including Mumbai, recorded daytime temperatures that were 5-7 degrees higher than normal. Even the northern region of Delhi, Himachal Pradesh, and Uttarakhand states recorded higher-than-usual temperatures in the month of February.
As Voltas clocks 40% of its sales from the northern region and 20–25% of its sales from western India, it is "well-positioned" to benefit from the demand uptick in 2023, Jefferies said.
The company should see a margin expansion of over 250 basis points in the fourth quarter of fiscal 2023 and the first quarter of fiscal 2024. The fact that market share is stable at 22.5% versus 22.8% quarter-on-quarter in Q3 is a comfort, the brokerage said.
Jefferies, however, cited sustained margin pressure in the cooling segment is a downside risk.
Voltas is still 33% below its 2022 peak because of market share and margin declines seen the fourth quarter of the fiscal ended March 2022, it said. AC margins should close at 9% in fiscal 2023, compared with the 11–12% range of earlier years, the brokerage said.
The company has recovered its market share, and the stock should retrace close to half the journey left to its peak, Jefferies said. It maintained its earnings per share forecast for Voltas in fiscal 2024–2025.
The stock closed up 2.05% at Rs 914.2 apiece, compared with a 1.53% decline in the NSE Nifty 50. Over the past month, it has gained 16.5% versus a decline of 2.56% in the benchmark index.
The total traded volume stood at six times the 30-day average. The relative strength index stood at 75, indicating that the stock may be overbought.
Of the 44 analysts tracking the stock, 20 maintain a 'buy,' 17 recommend a 'hold,' and seven suggest a 'sell,' according to Bloomberg data. The stock's return potential is 3.8% over the next 12 months.
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