Is it Time for This Sleeping Mid Cap Giant To Awaken?

Just like Diwali is the festival of India, Ganpati is undoubtedly the festival of Maharashtra and Mumbai.

It feels good to begin writing my thoughts with Lord Ganesha in our homes and hearts.

Yesterday, I was at a fellow investor's place for Ganapati Darshan and Aarti.

After the initial pleasantries, the conversation turned to 'Market Kya Teji Mein Hain'! (We are in a Bull Market). The body language of investors was upbeat.

I noticed that the people who weren't active in the stock markets were also discussing stocks.

Normally a fortnight away from the cricket world cup, the talking point is the batting and bowling line ups and picking favourites to win the cup.

However, this time not a word was uttered on cricket or even Bollywood. I thought at least some people would have talked about Jawan's success.

I had two options. Either discuss stocks and their potential with the seasoned investors or try to understand the psychology of the people in the non-investing camp.

I chose to spend some time understanding market psychology.

After all, investors come with a certain baggage and are biased towards their views.

The mood was buoyant. The rally in the railway and PSU stocks was the talk of the town.

However, there was one part of the conversation which stood out.

A gentleman among the not to active investor camp wasn't fascinated at all with the momentum in the markets especially in small and mid-cap stocks.

For a moment, I thought he was one of those contrarian investors who looked smart only in conversations but seldom makes money.

After all he had little interest in talking about sectors like electronic manufacturing, diagnostics, AI, and machine learning, or even defence, which in my view is going to be a big theme for the next decade.

As a research analyst, it's my endeavour to identify themes and sectors before they become news.

This gentleman spoke about stocks which are...

a) Not in favour
b) Trading close to multi-year lows
c) Top quality companies quality
d) Were negatively spoken about by analysts in terms of earnings visibility.

While this philosophy has echoes of contrarian investing, points c and d are a bit different.

He told me every year he finds out the top quality companies which are underperforming and match the above criteria.

My eyes lit up when he told me he has been investing in stocks HUL and MRF since the late 1990s.

The counter intuitive question from my side was... 'Why is it such a big deal? It's just SIP in bluechip companies, right?

Well, there was more to it.

This gentleman tried to time his buying and as a result, made a much higher profits in individual stocks.

He did that for HUL when the inflation cycle was at its peak, demand was hit, and margins were subdued.

He did that for MRF too, when the industry's competitive scenario was very high. Most of the players in the tyre industry had just commissioned capex. This resulted in suppressed return ratios.

He timed the Nestle Maggi controversy too when the stock plummeted on allegations of lead in some of their samples.

For not so seasoned investors, you really need to be smart, have a knack and also be equally lucky to time individual stocks and buy them near bottom.

Coming back to the drawing board next day, I did my search on some of his criteria.

The search results were encouraging with one top quality stock standing out.

This stock has not participated at all in this snowballing mid and smallcap rally.

The icing on the cake is, it's a market leader which has not been doing well due to a price war being waged in the industry.

I am talking about one of TATA group's priced possessions - Voltas

Voltas is one of the most trusted brands in the air conditioning market.

The stock is down 30% in the past 1 year.

So what is ailing this A/C stock?

Is a 30% correction in a market leader a value buy or are we missing out on something?

The main issue with Voltas is the loss in market share.

New players have started a price war which is leading to market share loss for companies like Voltas.

The competitive scenario is becoming increasingly intensive.

Voltas ended FY21 with a 25% market share while FY23 market share was down to 21.6%.

Voltas too has partially participated in the price war which is evident from the margin erosion over the past many quarters.

In fact, profitability is at a decadal low. The company closed FY23 with a net profit of Rs 1.4 bn while its FY12 profit was Rs 1.6 bn.

Even if we take profitability from FY19 to FY22, the numbers have stagnated at around Rs 5 bn.

Basically, there is no growth since 2019. No profit growth and a loss of market share, was perfect recipe was de-rating.

If you go by my MRF and HUL investor friend, all ingredients are in place, in fact most of the brokerage houses have downgraded the stock.

If you look at the valuation picture, Voltas is trading at roughly 80 times P/E multiple.

The reason is extremely subdued growth. Profits have plummeted in FY23 and have stagnated from FY19-FY21.

Hence the PE ratio is elevated. In fact, the moment there is even marginal turnaround, the P/E will halve from here.

Equitymaster Conference 2024: View Your Invitation

My final point is, Voltas is a TATA company. It's said in the investing community, TATAs are blessed by God.

We have seen price wars happen in many industries. While the pain is short term, market leaders always emerge stronger on the other side.

In my view, everything fundamental is against Voltas, while the only thing in favour of it is its valuations.

The only downside is price stagnation which may not be a problem for long term investors who are willing to take the risk.

Warm regards,


Aditya Vora
Research Analyst, Hidden Treasure
Equitymaster Agora Research Private Limited (Research Analyst)