IGI Logo

Delay in price hike hits UCP segment profitability…

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%)

Q4FY22 Results: The company’s Q4 performance was hit by lower EMPS revenues and sharp decline in the profitability of UCP segment.

* Voltas reported a muted topline growth of ~1% YoY to ~ | 2667 crore due to de-growth in EMPS segment. UCP segment grew 10% led by price hikes

* EBITDA margin down 268 bps YoY to 9.8%, led by high raw material costs. Gross margin declined 278 bps YoY. EBIT margin of Unitary cooling products (UCP) dipped 522 bps to 10.6%

* PAT declined ~24% to ~| 183 crore tracking lower EBITDA in Q4FY22

What should investors do? Voltas’ share price has grown by ~2.4x over the past five years (from ~| 433 in May 2017 to ~| 1044 levels in May 2022).

* We maintain our HOLD rating on stock

Target Price and Valuation: We value Voltas at | 1120 using SOTP i.e. 9x P/E for EMPS, 9x P/E for EPS and 50x 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 of energy efficient products would help drive premiumisation in the air conditioner industry

Alternate Stock Idea: We like Supreme Industries in our coverage universe.

* BUY with a target price of | 2320

To Read Complete Report & Disclaimer Click Here

https://secure.icicidirect.com/Content/StaticData/Disclaimer.html

Above views are of the author and not of the website kindly read disclaimer