Hold Voltas Ltd For Target Rs.1,100 - Emkay Global
Continues to deliver ahead of expectations
* Voltas saw strong revenue growth across segments in Q3, beating our estimates by 10- 37%. UCP revenue growth of 40% yoy (ahead of listed peers) in a seasonally lean quarter reflects channel filling ahead of price increases initiated in Jan’21.
* Revenue growth of 26% in the Projects business was a positive surprise, while margins were compressed by legacy project-based ECL provisioning. UCP EBIT growth and margin expansion (+235bps yoy) compensated for the weakness in EMPS.
* Due to commodity price inflation, Voltas has effected 5-6% price increases across UCP product categories. Favourable summers & sustained consumer demand will keep outperformance intact. Order book of ~Rs73bn continues to remain healthy.
* Given the strong Q3 print, we raise estimates across business segments, leading to 7- 20% earnings upgrade for FY21-23E. Maintain Hold, with a revised FY23E SoTP-based TP of Rs1,100, as we raise the target multiple for UCP business to 48x from 40x.
UCP drives margin expansion:
Revenue growth of 33.6% yoy to Rs19.9bn was driven by strong topline performance across business segments. Volume-led revenue growth in the UCP business (+39.8% yoy), pick-up in execution on a low base of EMPS (+25.8% yoy) and 46.4% yoy growth in EPS revenue have driven this strong outperformance. EBITDA margin expanded 78bps yoy to 7.3% as EBITDA stood at Rs1.5bn (+49.6% yoy). Despite strong revenue growth, employee cost was down 11% yoy. While ETR was lower (22.4% in Q3FY21 vs. 26.3% in Q3FY20), JV losses widened qoq to Rs201mn (Rs71mn in Q2FY21), which can be attributable to higher spends during festive period. PAT grew 46.3% yoy to Rs1.3bn.
Outlook:
Voltas has been surprising positively with strong execution across business segments after Covid-19-related disruptions. Market share gains in 9MFY21 and continuous outperformance on a high base underscores the company’s robust execution capabilities.
A favorable upcoming summer season, market share gains, benign base (Q1FY21) and strong execution should continue to drive Voltas ahead of industry growth. The EMPS business has seen better-than-expected recovery on revenues, while provisions for legacy orders have been impacting profitability from the last five quarters. We are penciling a gradual margin recovery in EMPS and factor in 7% margins (lower than FY19 levels) in FY23. The order book remains robust at Rs72.7bn, providing strong revenue visibility.
Voltas-Beko’s focus is on maximizing production to meet increasing demand for DC refrigerators and plans are in place to start manufacturing frost-free refrigerators in the coming months, followed by top-load fully automatic washing machines as well as dishwashers. Expensive valuations restrict us for rating upgrade. Key risks: sustained market share gains in RACs; better-than-estimated performance of Volt-Bek; lower-than-estimated impact in the projects business; sustained commodity inflation and macroeconomic slowdown.
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