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Positives factored in; downgrade to REDUCE on margin, competition and valuation headwinds

Our view

Voltas has seen growth returning to the cooling products after a difficult summer; however, commodity headwinds continue to put pressure on margins. While the company sustained its market leadership in RAC, commercial refrigeration air coolers delivered strong growth. Volt‐Bek is gaining decent acceptance in the refrigerator and washing machine segment. Moreover, project business is seeing execution challenges with delay in certification of projects. We continue to remain cautiously optimistic on the stock, however we downgrade the stock to REDUCE from ADD as 1) we feel there could be margin pressure in the near to medium term, 2) Further market share gains would be difficult in the current hyper competitive environment and 3) Recent run up in stock price does not provide much room from upside despite giving higher multiples to both the RAC and the Project and service businesses.    

Result Highlights

* Quarter summary – Voltas revenue growth of 4.7% yoy was marred by 28% decline in revenue of project business, while UCP and EPS business delivered growth of 34% each. 

* UCP – UCP business grew 34% yoy. Growth was aided by 24% volume growth in RAC 31% growth in commercial refrigeration products and 78% growth in air‐cooler on favourable base. Margin remained under pressure on back of higher input prices which are difficult to pass‐on.

* EMPS – Execution of projects impacted as there has been delay in getting certification for work completes. Carry forward order book stands at Rs58bn, down 15% yoy. 

* Volt‐Bek – Production at Sanand facility has now started with manufacturing of top load washing machines. Volt‐Bek products continue to gain acceptability in the market. Volt‐Bek market share in refrigerator and washing machines stands at 2.7% and 2.6% respectively.   

Valuation

Voltas being a strong brand and with its solid distribution presence and increase in product offerings on the commercial refrigeration and RAC should continue growth momentum. This along with improved execution and better order book mix will drive improved performance in projects business. Its Volt‐Bek JV has stared gaining prominence in the market and localized production is expected to increase efficiency and bring down losses. We now factor in FY21‐24E Revenue/EBITDA/PAT CAGR of 11%/16%/24% and downgrade stock to Reduce rating with SoTP based TP of Rs1,248 as we feel recent run‐up in stock price has limited room for further upside. We continue valuing the products business (UCP) at 50x and now value projects business and EPS business at 20x now vs 15x earlier.

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