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Mixed results; outlook positive

Voltas is India’s leading air conditioning and engineering services company. In Q1FY24, it derived ~75% of its revenue from the unitary cooling products (UCP) segment and 33% from electro-mechanical projects and services (EMPS).

• Revenue surged 21.7% YoY to Rs. 3,335cr in Q1FY24, driven by growth in the UCP and EMPS segments.

• EBITDA increased, while margin shrank 90bps YoY to 5.6% due to higher operating expenses. Adjusted PAT grew 18.7% YoY to Rs. 129cr due to an increase in revenue and other income.

• Efficient working capital management, incentive schemes across sales channels, a growing network of exclusive brand outlets, and tie-ups with modern and retail channels are expected to drive growth in the long term. Softening of commodity prices and cost efficiency measures are expected to support margin in the future. Demand is expected to improve from Q3FY24 onwards on account of festive season. Hence, we upgraded our rating to BUY on the stock with a revised target price of Rs. 991 based on 42x FY25E adj. EPS.

UCP drove topline growth

Consolidated revenue surged 21.7% YoY to Rs. 3,335cr in Q1FY24, led by a 16.3% YoY rise in UCP’s revenue to Rs. 2,514cr owing to 15% YoY growth in volume, higher than the industry growth on a YoY basis. Further, EMPS revenue grew 49.3% YoY to Rs. 679cr., driven by a rise in domestic projects segment orders. EMPS carry forward order book stood at Rs. 8,193cr (up 53% YoY). UCP revenue is expected to remain subdued in Q2FY24 owing to the rainy season. However, it will start picking up from Q3FY24 onwards as demand rises during the festive season.

Key concall highlights

Consolidated revenue surged 21.7% YoY to Rs. 3,335cr in Q1FY24, led by a 16.3% YoY rise in UCP’s revenue to Rs. 2,514cr owing to 15% YoY growth in volume, higher than the industry growth on a YoY basis. Further, EMPS revenue grew 49.3% YoY to Rs. 679cr., driven by a rise in domestic projects segment orders. EMPS carry forward order book stood at Rs. 8,193cr (up 53% YoY). UCP revenue is expected to remain subdued in Q2FY24 owing to the rainy season. However, it will start picking up from Q3FY24 onwards as demand rises during the festive season.

Key concall highlights

• Voltas Beko secured a market share of 5% in the washing machine category and 3.5% in refrigerators.

• The air cooler segment increased 49% in volume with improved gross margin due to reasonable pricing tie-ups with modern and retail channels, active channels participation and aggressive pricing with effective dealer incentive schemes.

Higher costs constrained margin

EBITDA increased 4.7% YoY to Rs. 185cr in Q1FY24. However, margin declined 90bps YoY to 5.6% due to higher cost of sales. Cost of sales grew 20.5% YoY to Rs. 2,650cr on account of a 33.3% YoY surge in ‘consumption of materials, cost of jobs and services’ to Rs. 1,539cr. Further, employee benefits expense and other expenses increased 19.9% and 42.4% YoY, respectively. We expect margin to improve gradually on account of softening of commodity prices, tactical sourcing, manufacturing efficiencies, and various value engineering initiatives by the company across all products. Adjusted PAT grew 18.7% YoY to Rs. 129cr.

Valuation

Better working capital management, incentive schemes across sales channels, a growing network of exclusive brand outlets, and tie-ups with modern and retail channels are expected to drive overall performance in the long term. Additionally, cost efficiency measure and softening of commodity prices are expected to support margin in the future. Voltas market shared improved sequentially during the quarter and upcoming festival season expected to drive overall demand from Q3FY24 onwards. Therefore, we upgraded our rating to BUY on Voltas with a target price of Rs. 991 based on 42x FY25E adj. EPS.

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