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Cautiously optimistic on RAC demand recovery; maintain ADD

Valuation and view –

Strong growth momentum that was witnessed in Q4 continued in till first fortnight of April; however since then, the disruption on account of the COVID second wave has resulted in muted demand for RAC. South and East were severely impacted while North and Central region did well on the back of extended summer. Higher A&P spends impacted UCP margins. Project business saw improved execution and margins were better on back of lower ECL provisions.       

Voltas being a strong brand and with its solid distribution presence and increase in product offerings on the commercial refrigeration and air conditioning side should continue its outperformance. This along with improved execution and better order book mix will drive improved performance in projects business. Its Volt‐Bek JV has stared gaining prominence in the market and localized production is expected to increase efficiency and bring down losses.

We cut our FY22 and FY23 EPS estimate by 12% and 9% to factor in a slower recovery from the pandemic and higher losses in the JV. We now estimate FY21‐24E Revenue/EBITDA/PAT CAGR of 10%/14%/22% and continue with our ADD rating with SoTP based TP of Rs1,167 as we roll forward our valuation multiple to FY24E. We value the products business (UCP) at 50x and projects business at 15x.

Result Highlights

* Quarter summary – Voltas delivered lower than expected revenue growth of 37% yoy as UCP business was impacted more than expected due to country wide restriction on back of Covid second wave. EMPS business saw improved execution.   

* UCP – UCP business was impacted due to patchy summer in South and East which led to slower recovery on resumption of business activity. North and Centralregion saw robust sales which led to a partial recovery. Voltas continues to remain the market leader with exit market share of 26.7%.

* EMPS – Execution of projects was not much impacted as construction activity was allowed during second wave of Covid. Weakened sentiment and curtailment of project related capex led to muted order booking. Carry forward order book stands at Rs61.5bn, down 20% yoy.   

* Volt‐Bek – Production at Sanand facility has crossed 0.5mn units and cumulative sales have crossed 1 mn units. Volt‐Bek products continue to gain acceptability in the market. Volt‐Bek market share in refrigerator and washing machines stands at 3.1% and 2.7% respectively.

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