Hold Voltas Ltd For Target Rs. 1,040 - ICICI Securities
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Healthy growth, uncertain outlook
Voltas has reported 19% YoY growth in Q4FY21 in UCP segment supported by price hikes and up-stocking by the channel expecting a strong summer season. The advent of second covid wave has slowed down growth traction resulting in higher channel inventories of ~40-45 days currently. Project segment witnessed strong execution over a low base and control over fixed overheads supported higher margins.
Factoring in near-term stress in growth, we cut earnings by 8.2% and 8.7% 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. Hence, we maintain HOLD with a revised target price of Rs1,040 (previously: Rs1,065).
* 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 25.6%. Invertor RAC witnessed strong growth and now contributes 77% of overall split AC sales. The distribution reach with 19,000 touch-points is Voltas’s key USP along with strong branding and advertising.
* Healthy performance by project segment:
Project segment revenue grew 37% YoY led by strong execution and margins improved to 8.4% from 1.4% in Q4FY20, driven by cost control and higher proportion of government jobs having price escalation contract. We believe this is likely to normalise going forward.
* Eyeing Rs764bn domestic home appliances market:
The JV, Voltbek, is currently focusing on refrigerators, washing machines, dish washers and microwave ovens. It targets 10% market share in each of these segments by 2025. Despite headwinds, the JV was able to garner 30% market share in dishwashers, 3% in refrigerators and 2.5% in washing machines.
* Maintain HOLD:
Voltas continues to maintain strong balance sheet with adequate cash and current investments. We value the consolidated business at Rs996 (44x FY23E earnings) and Voltbek at Rs44 (4x of investments) arriving at an SoTP-based target price of Rs1,040 (earlier: Rs1,065). 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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