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Coolest performance despite headwinds…

Despite various headwinds in FY21 such as peak season sales loss, supply chain disruptions and inflationary pressures, Voltas has maintained its market leadership position with market share of 25.6%. For FY21, Voltas’ sales recovery was at 85%, much ahead of industry sales recovery of 71%. The better than industry growth of RAC sales is attributable to Voltas’ inherent strength of its robust supply chain networks, strong brand and its ability to pass on inflationary pressure thereby keeping profitability intact. Also the management’s guidance of market share gain of 1% every year is very encouraging. The company’s FY21 EBIT margin of UCP division was higher by 150 bps YoY to 14.1%, much ahead of management guidance of 11%-12%. Further, the current lockdown situation across the country in the wake of second wave will lead to loss of peak season sales even this year. We tweak our revenue, PAT estimate downward by ~7.5%, ~18% YoY, respectively, for FY22E, factoring in the same. However, the management has guided for full effort to recoup sales losses in subsequent periods post opening up of the economy. We build in 11%, 12.5% of segment EBIT margin for FY22E, FY23E, respectively vs. 14.1% EBIT margin in FY21 factoring in higher input prices and restoration of some operating costs.

Strong recovery in all three segments

Voltas’ consolidated revenue growth of ~27% YoY to ~| 2652 crore was much ahead of our revenue growth estimates of 19%. The growth was led by UCP, electro mechanical project and services (EMPS) with strong revenue growth of 37% and ~20% to | 1104 crore and ~| 1438 crore, respectively. The strong revenue growth in the EMPS segment was largely driven by execution of both domestic and international orders. Project work being designated as essential activity in the Middle East helped the company in faster execution of quality orders.

Higher profitability of project business drives overall Q4 margin

The Q4 consolidated EBITDA margin was higher by 330 bps YoY at ~12.5%, led by 700 bps increase in profitability of the EMPS segment. Higher margin is attributable to execution of higher margin orders. UCP EBIT margin was up 100 bps YoY to 15.6%, led by higher operating leverage.

Valuation & Outlook

We model UCP segment sales CAGR of 26% in FY21-23E will be driven by 16% volume CAGR during the same period. At the same time, we also believe Voltas will be the frontrunner to recoup its sales whenever the economy opens up given the lower penetration of ACs in tier II and III cities. We ascribe PE multiple 11x, 11x and 52x to EMPS, EPS and UCP segment, respectively, and maintain BUY rating on the stock with a revised target price to | 1150/share (earlier | 1260).

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