Buy Voltas Ltd For Target Rs.1,434 - ICICI Securities
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Strong Growth Under Cooling Products
Voltas has reported a muted 5% YoY revenue growth in Q2FY22 to Rs16.9bn due to 28% YoY decline in EMP segment. However, UCP segment delivered strong YoY revenue growth of 34% led by pick-up in RAC sales. With 24% volume growth in RAC category, the company’s market leadership remained intact at 25.9%. Despite the headwinds, overall EBITDA margin has improved by 150bps YoY on the back of gradual price increases taken by the company in UCP segment combined with prudent cost management. Factoring in the beat in revenues and margins in the UCP segment, we raise our earnings estimates by 2.2% and 10.1% for FY22E and FY23E, respectively. We maintain our BUY rating on the stock with a revised target price of Rs1,434 (earlier: Rs1,217).
* Strong performance in UCP segment: In AC / commercial refrigeration / air cooler categories, YoY volume growth during the quarter was 24% / 31% / 78% respectively. High commodity prices and logistical challenges continue to impact the margins. However, a better product mix and prudent inventory planning helped arrest the margin decline in the segment to 132bps.
* Slowdown in projects business: EMP segment revenue during the quarter was impacted by unseasonal rains. Margin contracted 233bps QoQ due to unfavourable job mix. With the persisting logistical challenges combined with high material costs, the near-term outlook on margin improvement remains weak. Orderbook in the segment also remains low at Rs58bn, limiting execution visibility.
* Structural outlook on Voltbek intact: Losses in the business continue due to increased marketing spends and high commodity costs. However, Voltbek’s market share in the highly competitive segments of washing machine and refrigerator remained stable at 2.6% and 2.7%, respectively.
* Maintain BUY on healthy performance in UCP segment: During the quarter, Voltas showcased its ability to pass on high input costs to the customer while maintaining its leadership position in the RAC category. We have raised our target multiple for UCP segment from 60x to 65x owing to strong revenue growth during the quarter. We value the consolidated business at Rs1,390 (51.7x FY23E earnings) and Voltbek at Rs44 (4x of investments) arriving at an SoTP-based target price of Rs1,434 (earlier: Rs1,217).
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