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Gains market share in an inflationary context; maintaining a Buy

Voltas reported strong Q1 FY23 revenue growth (on the lower base) as rising mercury aided recovery in UCPs, leading to market-share gains. However, margins were hit and passing inflationary pressures are critical for the summer of CY23. We lower our FY23e/FY24e EBITDA/net income 12% and 17% on average to factor in the inflationary scenario.

Strong growth on lower base. Q1 FY23 consolidated revenue rose 55% y/y on the lower base. The EBITDA margin dipped 121bps y/y due to the 730bp gross-margin compression as higher UCP costs could not be passed on, and to staff costs rising 2% and other expenses 13% y/y. With a tax rate of 27%, PAT dropped 34% q/q. The loss in the Beko JV was Rs310m, up 7% q/q. As a result, net income was 11% lower y/y

Gains market share q/q, keen competition limits hikes in peak season. The 111% y/y UCP volume growth supported 125% y/y revenue growth in Q1 FY23 on the lower base. Q/q, UCP revenue rose 19% q/q. Commercial cooling and refrigeration also reported strong growth, supported by capex in leading industries like food-processing and beverages & ice creams.

Pending order book at Rs58bn, up 8% q/q; cautious order bookings. The pending order book, post-Q1 FY23, was Rs58bn, 8% higher q/q. The domestic order book was Rs36bn, flat q/q. Orders of >Rs6.6bn were booked in Q1 FY23. The pace of order inflows is cautious, seeing volatile commodity prices

Outlook, Valuations. Post Q1 FY23, our FY23e and FY24e revenues are largely intact. We lower EBITDA and net income by respectively 12% and 17% on average. We lower EBITDA to factor in inflationary scenario in UCPs and projects. At the CMP, the stock trades at 53x/38x FY23e/FY24e EPS of Rs18.5/26. We maintain a Buy rating on a sum-of-parts basis with a TP of Rs1,318 (earlier Rs1,400). Risks: Softer AC demand amid competition can limit transmission of higher costs. Significant delays in work certification can lead to higher provisions, impacting projects margins.

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