In today’s article we are going to discuss why Consumer Durables companies gave solid returns over the past 6-8 months and why Voltas specifically gave such amazing returns. As seen in our previous article (01), IIP Index of consumer durables gave early signs of a pickup in demand in Nov-Dec’23 which made us curious about identifying stocks in the consumer durable space.

Now let’s talk about Voltas. The company has three revenue segments viz. Unitary Cooling Products, EMP segment and Engineering segment. Let’s start with the Unitary Cooling Products. Unitary Cooling Products consists of Room AC, Air Coolers, Air Purifiers, Water Heaters, Water Dispensers, Water Coolers, Visi Coolers, Chest Freezers, Ducted AC, VRF and Chillers.

In the RAC category, the company used to be a market leader enjoying a market share of ~26% in FY21. After touching the highest RAC market share of 26.7% in Q1FY22, Voltas started losing market share every quarter due to intense competition. As you can see from the chart below, RAC market share was continuously decreasing over the past 17-18 quarters which was visible in the stock performance of the Voltas.

Every stock or a company is assigned a P/E or a certain value by the market participants. In case of Voltas, they deserved a higher valuation as they were a market leader in RAC category. When the RAC market share started to decrease in Aug’21 (which was their moat), the market understood this threat and investors started selling and the share price of Voltas dropped 15% in 4 days because of this update.

Now decreasing market share was one reason for the stock price to underperform. Another reason was the company’s dismal performance in its EMP segment. EMP or the projects business of Voltas does the MEP work like Electricals, HVAC, Plumbing, Fire Fighting etc. This business is order book driven where the company reports order intake every quarter and executes the order for a period of 6 – 18 months. As seen from the table below, the order book was stagnant till Aug’22 and when it started to pick up, the margin started to decrease from 5% to -10% levels due to provisions made by the company as they were facing some challenges in projects in Qatar.

Voltas’ stock price had factored all the negatives at Rs750 per share and now was awaiting some kind of positive news. Now refer to the price chart of Voltas above. It started moving up from Dec’23 at Rs850 odd levels. That is the time when 3 things happened; (i) IIP Consumer Durable Index showed positive signs, (ii) Voltas’ RAC segment market share made a bottom of ~19% and also the management and certain news specified that summer season is quite strong and (iii) management indication of completion of provisions which lead to rise in margin as seen in the above chart. Voltas’s share from Rs850 in Dec’23 touched all time high of Rs1,829 on 3 Sep’24, a return of 115% or 2.15x.