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Disappointing results; outlook remains cautious

Upcoming festive season key for RAC offtake

* Voltas (VOLT) reported a weak set of earnings, with revenue/EBITDA miss of 9%/27%. The strong show in the Electromechanical Projects (EMP) segment failed to offset the weakness in the Unitary Cooling Products (UCP) segment.

* The ordering intake/outlook for the Projects business remained subdued with clients delaying their capex spends. AC sales volumes may fall short of FY20 levels, with no sign of pent-up demand this time around during a lean summer. However, this would still mean some growth in YoY terms. On a positive note, unlike last time, channel inventory is not high, although brands have higher inventory this time around.

* We cut our FY22/FY23/FY24 EPS estimate by 8%/3%/4%. Our new TP stands at INR1,065 as we roll forward to Sep’23 EPS (target multiple of 45x to the UCP segment v/s 50x earlier – to account for segmental reclassification). At CMP, the UCP business is trading at an FY23E/FY24E PE multiple of 46x/40x. Maintain Neutral.

Weak performance from UCP segment leads to earnings miss

* 1QFY22 snapshot: Consolidated revenue grew 38% YoY and was 9% below our expectation. EBITDA doubled to INR1.4b and was 27% below our expectation. JV losses increased to INR306m v/s loss of INR117m last year. Adj. PAT grew 50% YoY to INR1.2b and was 15% below our expectation.

* Segmental highlights: Voltas has reclassified its segments and moved its Commercial Air Conditioner (CAC) and Customer Care business from the EMP segment to the UCP segment. The said business reported PBIT of INR818m in FY21. On a reported basis: a) EMP | 1QFY22: Revenue grew 67% YoY to INR6.9b, and the PBIT margin came in at 4.4%; b) UCP| 1QFY22: Revenue grew 19% YoY to INR9.6b, and the PBIT margin stood at 12.3% (- 170bps YoY). We note that the restated UCP segment PBIT has grown just 4% YoY, a reflection of weak topline growth despite a favorable base and margin compression.

Key takeaways from management commentary

* UCP: The management expects FY22 industry volume growth to be lower than FY20 levels. Voltas has taken a price increase of 8–10% in the current calendar year and is yet to fully pass on the commodity price inflation to the end consumer. Inventory levels are normal with trade partners, but higher at the company level. The management does not anticipate any pent-up demand this time around during non-season, but hopes for a good festive season. Daikin, Hitachi, Samsung, and Lloyd have gained market share, while Samsung has seen minor moderation lately.

* EMP: Order inflow stood at INR5b during the quarter, while the order book at INR61.5b (Domestic: 60%; International: 40%). Order inflows were moderately subdued as clients delayed their capex plans as well as due to a cautious stance adopted by the company in taking new orders.

* Voltbek: Market share in Refrigerators stood at 3.1%, while that in Washing Machines stood at 2.7% on a YTD basis. Production at the Sanand factory exceeded the milestone of 0.5m since its opening, with cumulative sales since inception crossing 1m.

Valuation and view

* With the summer season behind, Voltas has limited room to surprise on earnings, especially given the strong base quarters. Not only has the AC category lagged behind other categories in terms of growth, but the price hikes have been inadequate thus far to offset the commodity price inflation. The demand elasticity impact owing to price hikes is yet to be ascertained in ACs, although we continue to believe a strong summer is a bigger driver of demand. Given the seasonality, the answers can be gauged only in the next summer season.

* We lower our FY22/FY23/FY24 EPS estimate by 8%/3%/4%. We roll forward to Sep’23 EPS, but lower our target PE multiple in the UCP segment to 45x, from 50x earlier, to account for a new classification. Our new TP stands at INR1,065. At CMP, the UCP business is trading at an FY23E/FY24E PE multiple of 46x/40x. Maintain Neutral.

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