Primary push led to strong uptick in UCP growth
Voltas reported better than expected performance in the UCP segment in Q4FY20 with 20% YoY growth. We believe, the company was able to push primary volumes to dealers aggressively with attractive discount schemes vs peers. Reduction in advertising and promotion expenses also supported the margins. Overall growth outlook for FY21E continues to be challenging due to lockdown; hence we believe growth will be subdued in H1FY21E. Factoring-in the better than expected growth and margins, we raise FY21E and FY22E earnings by 14.7% and 5.6% respectively. Given strong cashflows and benign valuations, we upgrade the stock to ADD from Hold with a revised target price of Rs526 (previously Rs444).
* Push of primary sales to dealers led to strong growth in UCP segment: Voltas reported strong 20% YoY growth in the UCP segment while listed peers reported 10- 15% drop in sales during Q4FY20. We believe, Voltas was able to tactically push primary sales with attractive discount schemes and attractive volume incentives vs peers. However, the lack of secondary sales during April and May is likely to impact overall growth in H1FY21E.
* Macro headwinds to project execution; orderbook strong: Impacted by domestic market headwinds, EMP segment revenues declined 17.6% YoY and margins shrunk by 310bps YoY. Order intake was healthy at Rs16bn and current orderbook worth Rs77.8bn (2.4x TTM project sales) provides growth visibility. Some project sites have reopened, especially in the green zones and rural areas. However, urban projects such as metro rail, etc. are likely to get delayed. Hence, we estimate 8% decline in project segment growth in FY21E.
* Migrant worker exodus to impact project margins: We expect the impact of migrant worker exodus to be more pronounced in urban projects like metro rail, etc. (30% of total orderbook) where majority of the workforce deployed are migrants, who cannot be easily replaced by locals.
* Voltbek JV loss continues: Given the initial costs of marketing, advertising and promotion, the reported share of loss from the JV for Voltas stood at Rs195mn for Q4FY20 and Rs687mn for FY20.
* Upgrade to ADD on strong cashflows and benign valuation: Headwinds from Covid-19 are expected to delay execution of projects. Incremental push towards local manufacturing is likely to impact overall margins and return on capital. However, Voltas has a strong balance sheet (~Rs8.3bn of cash and current investments) and healthy cashflows. We value the consolidated business at Rs504 (31.4x FY21E earnings) and Voltbek at Rs22 (2x of investments) arriving at an SoTP-based target price of Rs526 (previously Rs444).
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