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Poor show from UCP impacts overall profitability
Voltas Ltd’s Q4FY19 numbers were below our estimates on all parameters. Consolidated net revenue increased marginally by 0.7% YoY, impacted by poor show from unitary cooling products segment, which reported de-growth of 6.3%. Further, EBITDA declined by 43%, while EBITDA margins contracted sharply by 536bps YoY to 7%, led by a sharp margin erosion of 680bps in unitary cooling products. Notwithstanding the near term challenges, we remain constructive on Voltas’ long term growth prospects, considering anticipated revival in demand and company’s continued efforts towards brand building & enhanced product offerings. We maintain a Buy on the stock with revised target price of Rs 655.
Q4FY19 Result Update:
* Consolidated net revenue increased marginally by 0.7% YoY, impacted by poor show from unitary cooling products segment, which reported de-growth of 6.3%, as delayed onset of summer, high inventory in channels and high competition impacted primary sales of room ACs in the first two months of Q4. However, the company maintained its leadership position in the room AC market, improving its market share to 23.9% YTD. Air Cooler sales also de-grew during the quarter, in line with industry. However, Electro-mechanical projects business [EMPS] displayed relatively better performance with 11.7% YoY growth in revenue, led by pick up in execution of order. EMPS order book stood healthy at Rs 49.8bn (1.4x FY19 segment revenue).
* Consolidated EBITDA declined by 43% to Rs 144.3cr, while EBITDA margins contracted sharply by 536bps YoY to 7%, led by a sharp margin erosion of 680bps in UCP business (impacted by inability to pass on the high input cost, custom duty hike and INR depreciation). Projects business witnessed 34% fall in EBIT along with 310bps YoY fall in margins. Further, PAT fell by 27.5% YoY, impacted by higher interest cost and losses from Voltas Beko operations (Rs 19.3cr), partly offset by higher other income and lower effective tax rate.
* Other key highlights:
i) In the Projects space, the company’s main focus will be on building a larger order book, albeit continuing its practice of extensive risk assessment;
ii) The company has invested in a land parcel near Tirupati, to set up a manufacturing facility for cooling products. This facility, which is likely to be operational by end of 2020, will cater to demand from the fast growing southern and western markets;
iii) The management expects sustainable margins for UCP and EMP to be 11% & 7-7.5% respectively for FY20E.
Outlook & Valuation:
Led by revival in consumption and capex cycle and company’s efforts towards brand building, enhanced product offerings and widening distribution reach, Voltas’ consolidated net revenue and PAT are estimated to grow by 11.3% & 21.7% CAGR respectively over FY19-21E. We expect relatively better demand scenario for room AC and Air Coolers in the coming quarters, which will result in improved volume offtake in UCP. Despite elevated competition, we are confident of Voltas sustaining its leadership position in room ACs. Further revenue growth in EMPS should remain healthy and margins should revive with better quality order book and efficient execution. We estimate 188bps improvement in EBITDA margins for Voltas over FY19-21E, led by improving mix, selective price hikes and operating leverage. Based on weak Q4, we have downgraded our earnings projections over the next two years. Nonetheless, we maintain a Buy on the stock with revised target price of Rs 655.
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