IGI Logo

A tight rope walk between margins and market share

Voltas 2QFY23 revenues came in line with our and consensus numbers, however EBITDA/PAT came in lower vs our estimates. Net sales grew by 4.7%YoY to INR17.7bn, while EBITDA was down 22% YoY (INR1bn; 12% below JMFe). Lower sales growth was on account of moderate growth in UCP segment (c.10% lower vs JMFe, +4% YoY), due to weak consumer demand and incessant rains. After series of subdued quarters, EMP segment recorded sales growth of 3% YoY (9% above JMFe). Engineering Products segment witnessed growth of 9.5% YoY. EBITDA margins came in at 5.7% (JMFe: 6.3%), due to lower margins in UCP segment at 7.3%, a tad lower vs JMFe of 8% (7.7% in 1QFY23), given high cost inventory and absence of price hikes. Adjusting for one time provision ofINR1.06bn, regarding an overseas project, net profit came in lower by 31% YoY at INR709mn (12% below JMFe). We believe near term margins to remain under pressure due to high cost RM inventory, delayed price hikes due to lean season and weakening of INR. 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 SOTP based TP of INR1,150, as we roll forward to Mar’24.

* Subdued demand stalls growth: Net sales stood at INR 17.7bn, +5% YoY where EMP segment grew by 3% YoY to INR5.5bn with improvement in order inflows and build up in order book. UCP segment reported growth of just 4% YoY, due to incessant rains and subdued consumer sentiments because of high inflation. EPS division sales were up 10% YoY. Share of the inverter ACs increased to 77% (of split ACs) vs 66% in 2QFY22.

* Consumption of high cost inventory drags margin: Operating margins stood at 5.7%, resulting in 22% YoY decline in EBITDA. Margins in UCP segment declined significantly by 280bps to 7.3%, on account of utilisation of high cost inventory, competitive pricing and delay in passing off the price hikes taken given tepid demand, but margins were significantly better vs peers. On the other hand, EMP segment reported EBIT margin of 2.6% (adjusted for one time provision of INR1.06bn) and EPS division margins expanded to 35% vs 31.3% in 2QFY22.

* Remains a leader, however market share declined: Voltas continues to maintain its market leadership position with 22.8% YTD market share till Aug’22 (vs 24.1% in Jun’22 and 25.9% in Jun’21). 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 come by improving share in inverter ACs and penetration in South India (new facility coming up). Currently, their share is 750bps higher vs No.2 player in RACs.

* Maintain BUY with a TP of INR1,150: We cut our EPS estimates by 13%10%/5% for FY23/24/25, as we reduce UCP margins by 100bps, as we believe competitive intensity is likely to sustain longer than expected. We roll forward by 6 months to Mar’24 TP of INR1,150, as we value the consumer business at 40x Mar’25E EPS, non-consumer business at 20x Mar’25E EPS, Voltbek at INR120/share and cash at INR115/share.

To Read Complete Report & Disclaimer Click Here

Please refer disclaimer at https://www.jmfl.com/disclaimer

SEBI Registration Number is INM000010361

Above views are of the author and not of the website kindly read disclaimer