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Published on 15/05/2019 11:01:09 AM | Source: Prabhudas Lilladher Ltd

Hold Voltas Ltd For The Target Rs.584 - Prabhudas Lilladher

Posted in Broking Firm Views - Long Term Report| #Voltas Ltd. #Broking Firm Views Report #Prabhudas Lilladher Ltd #Quarterly Result

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EMPS orders, JV losses a drag: downgrade to HOLD

We are downgrading our rating from Accumulate to Hold following 16.5% and 4.6% cut in FY20 & FY21 EPS on account of 1) estimate loss of Rs750mn and Rs600mn in FY20 and FY21 due to increased spends on brand building and distribution in Voltas-Beko JV to establish itself in highly competitive white goods market 2) low growth of EMPS in FY20 due to poor order inflow and 3) limited pricing power in RAC market due to rising competition

Voltas is focusing on consolidating its leadership (YTD market share gain of 180bps to 23.9%) and look at margin expansion mainly through cost optimization in 1) launch of new technology products in AC with rising share of inverter AC 2) expected savings in logistics and distribution costs post starting of Tirupati unit 3) increased local sourcing. We expect EMPS order inflow to improve in Middle East given firm crude prices, the benefit of which will accrue in FY21. Although Voltas-Beko JV will improve the effectiveness of distribution with full range of white goods, initial expenses on revamp and brand building will increase losses in JV to est Rs1.5bn in FY20 and Rs1.2bn in FY21. We estimate 15.9% EPS CAGR over FY19-21 and value the stock at 28xFY21. We downgrade to Hold with a target price of Rs584. Sharper recovery in EMPS and lower losses in Voltas Beko is a key risk to our call.


Sales growth flat at 0.7% / Adj PAT down by 28%:

Revenues grew by 0.7% YoY to Rs20.6bn as 12% YoY increase in EMP segment revenues was offset by 6% degrowth in UCP revenues. Input cost pressure, depreciating INR & increase in customs duty led to a 330bps YoY decline in gross margin to 23.5%. Absolute EBITDA was down by 43% to Rs1.4bn while margins declined 540bps YoY to 7%. Adj PAT declined by 28% YoY to Rs1.4bn despite 31% increase in other income to Rs572mn & lower tax outlay (12.9% vs 31.4%) which was partially offset by 144% increase in finance cost to Rs106mn & Rs193mn share of loss in JV.


EMP/UCP segment EBIT down 34%/43% respectively:

EMP segment recorded 12% YoY growth in revenues to Rs9.8bn while EMP EBIT declined by 34% YoY to Rs441mn with margins falling by 310bps to 4.5%. UCP segment revenues de grew by 6% to Rs10bn. UCP EBIT declined 43% to Rs1bn while margins contracted 680bps YoY to 10.4%. Cumulative impact of depreciating INR, rise in custom duty & inability to pass on higher costs has impacted margins. Engineering products & services segment revenues were down 5% YoY to Rs785mn while EBIT grew by 10% YoY to Rs274mn. EBIT margins expanded by 510bps to 34.9%.


Concall Takeaways:

1) RAC industry de-grew 3% in FY19 However, witnessing strong demand in the current summer season 2) Price hikes to be taken selectively on certain SKUs & regions as competition intensity continues to remain high 3) Rating change unlikely to come into effect by January 2020 4) YTD RAC market share at 23.9% (180bps increase YoY), 5) Voltas’s AC and related products unit in Tirupati (cost of Rs5bn) will enable better & quicker reach to western & southern markets will come up by end of 2020. 6) Although initial feedback for Voltbek has been positive, JV will be in investment mode for next 3 years 7) Electro-mechanical Projects (EMPS) order book at Rs50bn. EMPS will focus on government infrastructure & electrification projects. 8) Voltbek product range widened with launch of 31/17/1 SKUs in Refrigerators/ Washing Machines /Dishwasher’s.


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