Out of the woods
Voltas posted its strongest UCP performance in the last 9 years with rev/EBIT growth of 47/54%. Co beat street/our UCP revenue expectation of 15-20%/25%. Outlook is bright given low inventory levels. We expect FY20 performance to be robust led by low inventory levels and recovery in EMPS performance. We value Voltas on SOTP basis, we value EMPS/EPS/UCP at 17/20/35x on Jun-21E EPS and Volt-Beko at 1x P/S, translating to a TP of Rs 690. Maintain BUY.
HIGHLIGHTS OF THE QUARTER
* UCP growth of 47% was driven by
(1) Co’s focus on normalising channel inventory prior to season,
(2) Heat wave (RAC market grew by 36%) and
(3) Market share gains (up 60bps YoY to 24.1%).
Summer-19 was strong across markets and products (inverter, fixed, window). Heat wave in North in June aided demand for window & fixed speed (Voltas benefited). Voltas gained sharp market share in June (25.3%; >100bps). We model UCP growth of 30/14/14% in FY20/21/22E.
* UCP EBIT margins expanded by 60bps to 13.1% (exp. 12.9%) despite higher custom duty and no price hikes (late onset of summer, stiff competition). We expect 12.1% UCP EBIT margins for FY20 (vs. guidance of 11%), driven by oplev, higher local sourcing and ramp up of inhouse manufacturing (Tirupati plant). We model UCP margin of 12.1/12.6/12.8% in FY20/21/22E.
* The EMPS business has been steady over the last two years. Voltas has been choosy on orders and focused on execution efficiencies. Segment revenue/EBIT margin was up by -5%/-221bps YoY in 1Q owing to impending elections (similar trend for the sector). Revenue/EBIT margin was up by 27%/115bps in FY19. We model 8/14/14% revenue growth with 8% EBIT margin for FY20/21/22E.
* Voltas continues to expand Volt-Beko’s distribution and SKUs. Initial feedback from the channel is positive. JVs and associates losses increased to Rs 214mn (Rs 715mn loss over last 9M) vs. Rs 5mn profits YoY. The upcoming festive season (first season) and progress on the planned manufacturing unit are key monitorables.
Voltas and RAC industry is now out of the woods w.r.t. high channel inventory. Although, price hikes remains a key monitorable owing to custom duty hike. However, we expect UCP EBIT margin expansion owing to oplev and favorable base. Voltas is winning in its product segment strategy as it is able to meet demand across the pyramid i.e. mass (window), mass premium (fixed speed and inverter) and premium (7 star products for EESL). This is in contrast with peers who have migrated towards inverters and 5-star products. At current valuations, we believe there is alpha to be made in Voltas given high growth visibility at a time when macros have stumbled.
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