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Strong recovery despite disruption in peak season…

About the stock: Voltas is a home appliances company specialising in air conditioning and air cooling technology in the B2B and B2C space.

* The company is a market leader with ~26% market share in the RAC

* Healthy b/s reflected by strong return ratios (RoE: ~11%, RoCE: ~15%)

Q1FY22 Results: Healthy performance with revenue, PAT beating our estimates.

* Voltas’ consolidated topline grew ~38% YoY to ~ | 1785 crore aided by strong growth in all business segments

* EBITDA margin increased ~246 bps to ~7.6%, UCP segment EBIT margin came in at 12.3% and EMPS segment EBIT margin came in at 4.4%

* PAT increased ~50% to | 122 crore.

What should investors do?

Voltas’ share price has grown by ~3x over the past five years (from ~| 360 in July 2016 to ~| 1030 levels in August 2021).

* We maintain our BUY rating on the stock

Target Price and Valuation: We value Voltas at | 1170 using SOTP i.e. 7x P/E for EMPS, 7x P/E for EPS and 56x P/E for UCP on FY23E EPS for each.

Key triggers for future price performance:

* Structural demand owing to changing consumer lifestyle (work from home) post pandemic is likely to drive near term demand for RAC

* On a long term basis, we believe, rising income and aspirations of middle class household in India will be a key demand driver for cooling products. AC’s penetration at 7% is lowest among white goods segment

* Higher demand of energy efficient products would help drive premiumisation in the air conditioner industry

Alternate Stock Idea: We also like Havells in our coverage universe

* Havells is India’s leading electrical appliances & equipment manufacturer and includes other major brands such as Crabtree, Lloyd and Standard

* BUY with a target price of | 1345

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