When Not To Buy

Let’s take a look at Air Conditioner Industry, where Industry Leader is “Voltas”.

Answers to Questions related to Air Conditioner Industry:

1. What is industry’s barriers to entry?
   Ans – Air Conditioners are a low margin business. Voltas and Blue Star both have a single digit Operating Margins. It’s difficult to enter into the market with price war in mind.

2. Is the industry an oligopoly or fragmented?
   Ans – An Oligopoly with 4 to 5 recognized players taking the cake.

3. What’s the future of the industry in the next 10 years?
   Ans – People won’t stop using Air Conditioners, instead as Indian Economy grows, more and more families will afford to buy an air conditioner.

4. What is the bargaining power of the buyers?
   Ans – Customers do have some bargaining power when it comes to appliances, but the talk can be negotiated to improve warranty services (after sales service) more.

5. Does the industry depend on other industries?
   Ans – No

6. What the industry leader has, which makes it an industry leader?
   Ans – Difficult question to answer, but I would say better after sales service and better brand value. Voltas marketing is based on Word-of-Mouth. (these are my opinions, you can add more!)

After getting to know the industry, below is a simple DCF (Certainty Equivalent) Valuation. Although, the Value per share comes out to be Rs. 513.17, a 50% Margin of Safety would push down the value to Rs. 256.58.

So, if I see Voltas Market Price around Rs. 250, it’s screaming at me as an obvious bargain!

Disclosure: Not a Recommendation! Just for academic purposes.