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Strong performance by the UCP segment led to earnings beat

Margin pressure to persist as price hikes inadequate

* VOLT’s 2QFY22 revenue stood in line with our estimates, with strong performance by the UCP segment, offsetting the weak performance in the EMPS segment. Adjusted PAT came in 23% ahead of our estimate.

* Despite a 24% volume growth in the UCP segment (RAC: +19% YoY), it witnessed a 130bp decline in PBIT margin. As VOLT had the advantage of low cost inventory as well as strong operating leverage due to volume growth, the margin contraction indicates higher competitive intensity in the AC segment. The management raised prices by 3-5% in Oct’21, but needsto take further hikes to offset margin pressures.

* Owing to its superior 2QFY22 performance, we raise our FY22E/FY23E/FY24E EPS estimate by 5% each. Our new TP stands at INR1,185 as we value VOLT on a SoTP basis (UCP/EMPS segment: 45x/12x FY24E). At the CMP, the UCP business is trading at an FY23E/FY24E P/E multiple of 55x/48x. We maintain our Neutral rating.

EMPS segment remains subdued

* 2QFY22 snapshot: Revenue grew 5% YoY to INR16.9b and was in line with our estimate. EBITDA grew 32% YoY to INR1.3b and was 24% ahead of our expectation. EBITDA margin expanded by 150bp YoY to 7.6% v/s our expectation of 6.4%, aided by a favorable sales mix. Losses from associates more than doubled to INR196m. Adjusted PAT grew 32% YoY to INR1.05b and was 23% ahead of our estimate.

* Segmental highlights: a) EMP | 2QFY22: Revenue fell 28% to INR5.4b and was 23% below our estimate. PBIT margin stood at 2.1% and was below our estimate of 2.5%; b) UCP| 2QFY22: Revenue grew 34% YoY to INR10b and was 26% ahead of our estimate. Overall volume growth of 24% was contributed by 19% growth in Room Air Conditioners (RAC), 31% in Commercial Refrigeration products, and 78% in Air Coolers. Voltas continues to be the market leader and has sustained its numero uno position in RACs, with its market share at 25.9% till Aug’21 YTD. PBIT margin declined by 130bp to 10.1%.

Key takeaways from the management commentary

* UCP: VOLT is undertaking price hikes, albeit with some lag effect. It has already initiated a 13-15% hike in the past one-year. A 3-5% hike has been initiated in Oct’21. As the RAC industry prepares for the upcoming summer season, the cost of procurement will be higher, given the current commodity prices. With consistent input cost pressures, the next summer season will be the real test for demand elasticity as non-seasonal quarterly revenue may be just pent-up.

* EMP: Revenue was weak as larger orders in the international market are nearing closure, coupled with weaker domestic execution on account of erratic rains. The management expects it to take 3-6 months for margin in this segment to scale up to 4.5-5%.

* Voltbek: Market share in Refrigerators/Washing Machines stood at 2.7%/2.6%. The increased losses are attributable to higher commodity price inflation and ad-spends. The management expects price hikes across all brands in the near term, which should aid in reducing losses to some extent.

Valuation and view

* With the key summer season behind it, the upcoming festive season offers little hope. The AC category has lagged behind other segments in terms of growth. Also, the price hikes have been inadequate, so far, to the offset commodity price inflation. Demand elasticity, 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.

* Owing to its superior 2QFY22 performance, we raise our FY22/FY23/FY24 EPS estimate by 5% each. Our new TP stands at INR1,185 as we value VOLT on a SoTP basis (UCP/EMPS segment: 45x/12x FY24E). At the CMP, the UCP business is trading at an FY23E/FY24E P/E multiple of 55x/48x. We maintain our Neutral rating.

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