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About the stock: Started in 1954, Voltas Ltd is part of the Tata Group and the largest air conditioning company in India. The company operates mainly in three business segments, viz. unitary cooling products (UCP), electro mechanical projects and services (EMPS) and engineering products & services (EPS) with topline contribution of 68%, 25%, 7%, respectively, in FY23. It has one of the largest distribution networks in India with more than 24,000 touch points in FY22. It was a leader in the room ACs segment with ~22% market share in FY23, whereas, in air coolers, it held the second position, with 12% market share (inFY22).

Q4FY23 Results: Margin recovery was led by the UCP segment. • Revenue increased ~11% YoY to ~| 2957 crore on a favourable base. UCP segment saw a recovery in demand thereby leading to increase in revenue by ~13% YoY to | 2049 crore • EBITDA margin declined 241 bps YoY (up 357 bps QoQ) to 7.4%. QoQ recovery in margin was led by improved profitability in UCP segment. EBIT margin of UCP remained flat YoY (up 268 bps QoQ) to 10% • Voltas reported a net profit of | 143.2 crore, down ~21% YoY due to losses in the EMPS segment

What should investors do? Voltas’ share price has grown by ~1.3x over the past five years (from ~| 614 in April 2018 to ~| 776 levels in April 2023).

• We maintain our HOLD rating on the stock

Target Price and Valuation: We value Voltas at | 870 using SOTP i.e. 7x P/E for EMPS, 8x P/E for EPS and 44x P/E for UCP on FY25E 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 Havells in our coverage.

• Havells has a strong presence in the organised product category across its segments. Havells’ market share ranges between 6% and 20% across these segments. It has a robust balance sheet with five-year average RoE & RoCE of 19% & 24%, respectively

• BUY with a target price of | 1420

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