Hold Voltas Ltd For Target Rs.1,120 - Emkay Global
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RAC recovery weaker than expected
* Headline performance was weak, with revenue/EBITDA miss of 9%/23%. Gross margin was up 230bps qoq, while EBITDA margin contracted by 487bps. Voltas has reorganized Commercial AC and Customer care business under UCP segment (EPMS earlier).
* UCP segment revenues (adj.) saw a 13% miss, but EBIT margins were largely in line. After the easing of lockdowns, UCP recorded a 10% volume growth. Its RAC market share was 26.7% vs. 25.6% as of Feb’21. EBIT margins of the segment saw a sharp sequential dip.
* Company-level inventory for RAC raw materials is similar to last year, while channel inventory has been managed well. Management expects inventory levels to normalize in Q3FY22, similar to commentary from other companies.
* Our FY22E RAC revenues are marginally higher vs. FY20 as we await demand trends in the upcoming festive season and summers in Q4. Retain Hold, with a revised SoTP-based TP of Rs1,120 (roll forward to Sept’23E).
A weak quarter:
Revenue growth of 38% yoy missed our expectations by 9%, due to the underperformance of EMPS and UCP segments. Though the UCP segment’s revenues fell 42% qoq, it saw a 10% rise in volumes post lockdown easing. Despite input cost pressures, gross margin improved by 230bps qoq to 28%. EBIT margin slid sequentially across segments, with group-level margins contracting by 501bps qoq.
The subdued margin performance was due to weak top-line expansion and higher other opex (up 7%/30% qoq/yoy). On a 2-year CAGR basis, the UCP segment’s revenues (adj. for the reporting change) fell by 30%. Further, PAT was impacted by a higher loss from JV (Volt-Bek) at Rs306mn and ETR of 27.1%, though partially offset by higher other income of Rs750mn.
Outlook:
Continued market share gains in the RAC segment and a superior margin profile have been the key execution strengths of Voltas, which we expect to sustain. The improvement in product mix in RACs has been favorable for margins, while higher promotional spending in Q1 impacted the segment’s margins. Management is optimistic about demand recovery in the upcoming short summer in West India and in the festive season. Improving execution and a focus on collections have restricted ECL provisioning in Q1, and the trend is expected to continue.
However, localized lockdowns may delay the execution of these orders. Volt-Bek has grown at a faster pace, although on a smaller base, with its market shares in Refrigerators and Washing Machines improving to 3.1% and 2.7% YTD, respectively. The billing points have been scaled up to more than 1,200. Key risks: sustained market share gains in RACs; better-than-estimated performance of Volt-Bek; lower-than-estimated impact on the projects business; sustained commodity inflation; and macroeconomic slowdown.
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