Hold Voltas Ltd For Target Rs. 1,120- ICICI Direct
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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
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