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Healthy growth and margins

Voltas has reported 37.6% YoY growth in Q1FY22 to Rs17.8bn (Isec: Rs15.6bn) led by 67% YoY growth in EMP and 19% YoY growth in UCP segment. Despite the headwinds, gross margin has improved 300bps QoQ, while higher other expenditure, due to increase in discounts and marketing-related expenses limited EBIDTA margin growth to 7.6% (Isec: 5.8%).

Factoring in the beat in revenue and margins, we raise earnings by 4.8% and 7.6% for FY22E and FY23E, respectively. The likely switch over to new energy-efficiency norms from January 2022 can lead to pre-buying in Q3FY22 and price increase Q4FY22E onwards. Given healthy growth and higher contribution from B2C segments in the overall earnings, we upgrade the stock to BUY from Hold with a revised target price of Rs1,217 (previously: Rs1,044)

* Leadership in domestic room AC segment continues: Voltas was able to maintain its leadership in domestic room AC market with a current secondary market share of 26.7%. The distribution reach with 19,000 touch-points is Voltas’s key USP along with strong branding and advertising.

* Good revenue traction in Voltbek in FY21, but still in loss: Voltbek booked Rs6.4bn of revenue in FY21 vs Rs2.9bn in FY20, while the JV booked net loss of Rs1.3bn in FY21 vs loss of Rs1.5bn in FY20.

* Healthy performance by project segment: Project segment revenue grew 67% YoY led by strong execution and margins turned around to 4.4% from -10.6% in Q1FY21, driven by cost control and higher proportion of government jobs having price escalation contract. Current orderbook of Rs61.5bn (60% domestic) lends growth visibility.

* Doubtful provision and forex loss offset lower advertisement spent in FY21: As per the annual report fine print, some of the key highlights under other expenditures were: (i) Bad and doubtful debts doubled to Rs1.4bn, (ii) forex loss of Rs600mn, and (iii) advertisement expense reduced to Rs208mn vs Rs720mn in FY20.

* Upgrade to BUY on healthy growth outlook: We value consolidated business at Rs1,173 (48x FY23E earnings) and Voltbek at Rs44 (4x of investments) arriving at an SoTP-based target price of Rs1,217 (earlier: Rs1,044). Given the increased focus towards B2C, improvement in market share, both under inverter room AC and air cooler market, we assign target multiple of 60x for UCP.

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