Voltas Rating ‘buy’; Prospects for Voltbek JV are bright

We hosted Arcelik A.S. (ARCLK TI, Not Rated) management to better understand their global experiences and strategy for India. Management indicated that a strong brand and distribution network, rather than manufacturing, are the two critical ingredients for success, based on their experience in other markets.

This is addressed with a strong partner like Voltas, in India. Moreover, Arcelik’s strong R&D/technology, expertise in the white goods segment, efficient single-product plants, affordable positioning and experience of grabbing share from rivals (e.g., large Korea-based companies like LG, Samsung, etc) in other competitive markets should help the company be successful in India.

In terms of payback period, while Arcelik usually targets seven years for investments, it is fine with a slightly longer tenure for strategic investments like India. We believe Voltbek has the catalysts to become successful in India, given the consolidated nature of the segments like refrigerator, individual strengths of network/service of Voltas and technology/ experience of Arcelik.

As highlighted earlier, we believe there is strong potential of value accretion from this JV, even with conservative assumptions of ~10% market share in segments by 2030 (which the company targets by 2025) and Ebitda margins of ~10%. This could potentially lead to ~Rs 298/sh of value (Voltas’ share) over the next ten years compared to ~Rs 120/sh currently, based on our assumptions.

We also anticipate strong long-term growth visibility for the AC segment in India. Thus, we maintain Voltas as our top pick in the sector with a TP of Rs 840.