Buy Voltas Ltd For Target Rs. 973 - Anand Rathi Share and Stock Brokers
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Despite 20% y/y growth in FY23 revenue, higher material costs weighed on EBITDA margins. One-offs led to its FY23 net income dropping to a nadir. The falling market share in room A/Cs amid stiff and mounting competition is still a major concern. However, the 52% y/y higher projects OB is a positive. Earnings are expected to normalise in FY24 after reaching a nadir in FY23. We upgrade the stock to a Buy.
Q4FY23 revenue growth supported by all categories. Q4FY23 revenue at Rs29.6bn was up 11% y/y, supported by growth in all verticals. The EBITDA margin dipped 240bps y/y as the gross margin was 120bps lower y/y, while other expenses shot up 35% y/y. EBITDA was Rs2.2bn. The Beko JV Q4 loss was Rs282m (Rs289m a year ago). Net income fell 21% y/y to Rs1.44bn.
FY23 revenue rose 20% y/y, high material costs weighed on margins. Voltas’ FY23 revenue rose 20% y/y as its UCP revenue jumped 33% y/y while its project revenue slipped 3% y/y. The professional electronics revenue rose 7% y/y. The EBITDA margin dipped 260bps y/y as the gross margin was 340bp lower y/y while other expenses rose 19% y/y.
Market share in room A/Cs reaches a low 21.9%. Voltas’ market share in room A/Cs at end-Feb’23 had reached a low 21.9% (it has been dropping since Q1FY22). Unseasonal rainfall affected volume offtake in Mar’23, which is expected to pick up in Q1FY24. This is an important monitorable.
Outlook, Valuations. The outlook for UCP segment is bright, aided by mounting demand for room air-conditioners and commercial cooling products. Prospects for the projects business appear bright considering strong order book. Timely execution is the key to margins, which dipped in FY23. Post-FY23 results, we have raised our FY24e/FY25erevenue/net income an average of 4%/11%. We upgrade the stock to a Buy, with a 12-mth TP of Rs973 as we value each business and the JV with Beko separately. At the CMP, the stock quotes at 52x/37x the FY24e/FY25e EPS of Rs15.5/ 22.1.
Risks: The continuous drop in the company’s room A/C market share could hurt its UCP margins. Stretched working capital requirements could compel us to lower our net income estimates for the projects business.
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