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EMP segment a drag; no further share loss in room ACs

Voltas’ 3QFY23 results saw a sharp miss. Net sales grew by 11.8%YoY to INR20.1bn (7% above JMFe), while EBITDA was 39% below estimates (INR 764mn; -51% YoY). UCP segment recorded 11.2% growth, a tad lower vs domestic peers Lloyds (+30%) and Blue Star (+15%), but materially better than MNC brands – Hitachi (-10%), Whirlpool (-18%) and IFB (-20%). EMP segment grew 17.1% YoY, while Engineering Products segment witnessed decline of 5.4% YoY. EBITDA margins came in at 3.8% (JMFe: 6.7%), mainly due to loss of INR460mn vs profit of INR360mn last year, owing to delay in collections and settlements of claims. UCP segment margins were in-line with estimates at 7.4% vs 9.3%, expected to improve in 4Q as channel stocking picks up prior to summer season. Excluding provision of INR1.4bn towards the termination of one of the overseas projects, adjusted net profit came in at INR270mn,-72%YoY. We expect Voltas’ market share to stabilise in 21-22% range, as we expect competitive intensity to ease out during summer season. However, we maintain our stance as we believe margins have bottomed out and a cyclical recovery in EMP and better than expected summer season 2023 will drive positive surprise in profitability. We maintain BUY with revised SOTP based TP of INR1,100.

* Revenue growth remain decent: Net sales stood at INR 20.1bn, where EMP segment grew by 17% YoY to INR6.5bn with improvement in order inflows and build up in order book. UCP segment reported growth of 11.2% YoY, due to better consumer sentiments. The company expects demand to pick up from 4Q and expects channel inventory filing at similar compared to pre-Covid levels. However, the industry is yet to take price hikes, which may materialise from 1QFY24, as per mgt. EPS division sales were down 5% YoY. 

* Toll on margin continues: Operating margins stood at 3.8%, resulting in 51% YoY decline in EBITDA. Margins in UCP segment declined by 190bps to 7.4%, on account of competitive pricing and delay in passing off the price hikes due to tepid demand, but were significantly better vs peers. On the other hand, EMP segment reported EBIT loss due to delays in settlement of claims (adjusted for one time provision of INR1.4bn) and EPS division margins expanded to 39% vs 32% in 3QFY22, on higher service income.

* Remains a leader, market share to stabilise at these levels in the near future: Voltas continues to maintain its market leadership position with 22.5% YTD market share till Dec’22 (vs 22.8% in Aug’22). Management highlighted that they aspire to regain market share to 25% levels going forward, but will be prudent in striking a balance between market share and margins. Improvement in margins would also come by improving share in inverter ACs and penetration in South India (new facility). Share of inverter ACs increased to 82% of split ACs vs 65% earlier; inverter window ACs to be launched.

* Maintain BUY with a revised TP of INR1,100: We believe competitive intensity is likely to ease out as demand improves during summer season and expect UCP margins to improve to 9%/10% in FY24/25. We maintain BUY with TP of INR1,100, as we value the consumer business at 40x, non-consumer business at 20x at Mar’25E EPS, Voltbek at INR125/share and cash at INR115/share.

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