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Expect RAC segment’s market share at 21-22% in FY24/25

* Leadership to sustain in RAC: Voltas (VOLT) is a market leader in the room air conditioners (RAC) segment. Its share had gradually risen to 25.2% in FY21 (from 20.8% in FY15) before declining to 23.4%/21.6% in FY22/FY23. We estimate VOLT to lead the RAC segment with a market share of 21-22% in FY24/25.

* Voltbek’s losses continue but strong revenue traction visible: Voltbek (Voltas Beko) posted volume growth of 45%/15-18% YoY in FY22/FY23. The segment achieved a cumulative sales volume of over 3.3m units until FY23. Voltbek’srevenue rose 17% YoY in FY23 with an operating loss of INR1.6b. We estimate Voltbek to be profitable at operating level in FY26 and it should start contributing to profitsin FY27.

* EMPS segment to recover aided by strong order book: Electrical, mechanical and plumbing solutions (EMPS) segment caters to industrial customers in GCC as well as in domestic markets. The segment was hit in FY23/1QFY24 led by write-offs in the international business. However, we believe the strong order book of INR81.9b (INR52.4b of domestic and INR29.5b of international orders) will drive revenue growth and margin should improve in 2HFY24.

* Lower ad/sales promotion expenses drive margin expansion: VOLT’s ad and sales promotion expenses are much lower than peers, which help it maintain industryleading margins in the UCP segment. Its ad spends as a % of revenue stood at 0.7% in FY23 vs. 0.9%/2.6% for Blue Star/Havells. Similarly, sales promotion expenses (including commission on sales) for VOLT was at 0.1% vs. 0.9%/0.7% for Blue Star/Havells in FY23.

* Long-term positives to outweigh near-term challenges; reinitiate with a BUY: We reinitiate our coverage on VOLT with a BUY rating and a TP of INR1,000 premised on 40x FY25E EPS (similar to last 10 years’ one-year forward average P/E multiple, before losses of Voltbek) and INR38/share for Voltbek. We expect VOLT to retain a market share of 21%+ over the next few years as it would continue to enjoy the leadership position in RAC segment.

* Key downside risks: 1) sustained competition in the RAC segment for a longer period, 2) weather-related disappointments as the dependence is largely on a single category, and 3) reduced discretionary spends of consumers.

Leadership in RAC segment to continue

* VOLT’s Unitary Cooling Products (UCP) segment caters to a diverse range of customers in both B2B and B2C. This segment contributed 68% to FY23 revenue and 79% to EBIT. UCP offers various products including RAC, air coolers, water coolers, visi coolers, cold rooms, chillers, etc. We believe that over 60% of revenue of this segment is being contributed by RAC.

* The market share of the company had gradually increased to 25.2% in FY21 from 20.8% in FY15. However, its market share declined to 23.4%/ 21.6% in FY22/FY23 due to higher competition and gain in market share by a few peers such as Llyods, Blue Star, Daikin, etc. VOLT’s market share in window AC stood at 36.4% in FY23.

* VOLT’s exit-market share in Jun’23 stood at 20.6% (18.2% in Feb’23). The company believed that the price levels at which a few competitors were offering their products were not sustainable and management expected the market to stabilize.

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