Investing.com -- Bank of America downgraded Voltas (NSE:VOLT) Ltd to “Underperform” from “Buy” given its stretched valuations and medium-term concerns which offset the near-term strong demand for air conditioners.
“We see Voltas shares as expensive…see risk versus reward as unfavorable for Voltas from here on out,” BofA said as it downgraded the stock while giving the price target of ₹1,503, slightly above the current price of ₹1,495.
BofA noted that Voltas’ stock has surged 15% in the past month, pushing its valuation to 39x two-year forward price-to-earnings, beyond +1 standard deviation from its historical average and above the sector’s 37x average.
There is a strong near-term demand drivers for ACs, with a likely harsh summer, recent tax incentives, and relaxed lending restrictions by the Reserve Bank of India (NSE:BOI), which supports financing-driven sales that account for 50% of the market.
But market consensus already factors in 15-17% sales growth for the AC industry this summer, leaving limited room for further earnings upgrades.
BofA’s earnings estimates for Voltas over FY25-27 are already 4-9% above Street expectations, making further revisions unlikely.
Additionally, a recent Department for Promotion of Industry and Internal Trade (DPIIT) notification allowing compressor imports without BIS certification has cleared supply chain uncertainties.
BofA remains cautious about Voltas’ medium-term prospects, pointing to continued losses from its Voltbek joint venture, which contributes 14% of overall losses and is unlikely to achieve PAT breakeven before FY27.
While peak capital expenditure of ₹3.7 billion was incurred in FY24, any revival in compressor investment plans, expected to cost ₹2.5 billion, could push capex higher and delay a meaningful return on equity (RoE) expansion.
Significant management exits, including senior and mid-level positions since Q2, have also raised concerns among investors. Further disruption in management continuity could impact execution, market share, and margins going forward.
Voltas, a Tata Group company and India’s leading air conditioning and engineering services provider, maintains a dominant market share in the Indian AC segment.
BofA believes strong near-term volume growth expectations are already priced in, while medium-term concerns related to Voltbek losses, potential capex increases, and intensified competition in the Unitary Cooling Products business pose downside risks.