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Market share gains in RAC; margins under pressure

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 RAC

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

Q1FY23 Results: Strong growth in the UCP segment led by market share gains; EBITDA margin under pressure.

* Revenue increased 55% YoY to ~ | 2768 crore led by 125% growth in the UCP segment. Strong demand of cooling products helped drive volume growth. EMPS segment disappoints with lower revenues in Q1

* EBITDA margin declined 121 bps YoY to 6.4% dragged by high raw material costs and increased advertisement spends. EBIT margin of unitary cooling products (UCP) dipped 457 bps to 7.7%

* PAT declined ~11% to ~| 110 crore tracking lower EBITDA margin and losses from JVs/associates in Q1FY23

What should investors do: Voltas’ share price has grown by ~1.82x over the past five years (from ~| 537 in August 2017 to ~| 978 levels in August 2022).

* We maintain our HOLD rating on stock

Target Price and Valuation: We value Voltas at | 1075 using SOTP i.e. i.e. 9x P/E for EMPS, 9x P/E for EPS and 55x P/E for UCP on FY24E 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 for energy efficient products would help drive premiumisation in the air conditioner industry

Alternate Stock Idea: We like Polycab India in our coverage.

Polycab is the market leader in the wire & cable business with organised market share of 22%-24%. In the FMEG segment, it is growing through new product launches and dealer addition across India. Robust b/s with a 3-year average RoE, RoCE of 18%, 22%, respectively

* BUY with a target price of | 2680

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