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Cost pressure continues to weigh on margins; reiterate Neutral

Result Synopsi

Voltas has delivered in line revenue performance with UCP growing by 11.2% and EMPS segment growing 17.1%. Voltas has managed to stem its market share loss with YTD December market share stood at 22.5. Voltas has not taken any price increase in Q3 and does not intend to take any price increase in Q4 which will lead to lower margin then its historical average. Volt?Bek has seen subdued demand on poor consumer sentiment which resulted in volume decline in Q3. The projects business was marred by provisioning of Rs1374mn related to international arising out of delay in collections and settlement. Cumulatively VOLT has taken provision of Rs2438mn in its project business for internal geographies.   On the positive side order inflow in the EMPS has remained strong with inflow amounting to Rs22bn in Q3 .We however continue to remain cautious on the stock with Neutral rating as 1) market share gains will be difficult to come by, 2) Margins in UCP are structurally trending lower, 3) Project business continues to face execution and collection challenges particularly in international geographies, and 4) Volt?beck continues to incur losses and is expected to take more time than estimated to achieve break?even status..  

Voltas being a market leader with solid distribution presence and increasing product offerings on the commercial refrigeration and RAC segments should see growth momentum returning as it has taken corrective actions to re?gain its market share. This along with better focus on project business along with better risk mitigation policies will result in improved performance. Volt?Bek JV has stared gaining prominence in the market and localized production is expected to increase efficiency and bring down losses. We have modeled lower margins of UCP segment for FY24 and FY25. We now factor in FY22?25E Revenue/EBITDA/PAT CAGR of 19%/14%/17% and maintain our neutral rating with SoTP based TP of Rs885. We continue to value the products business (UCP) at 50x (higher than peers) and value projects business at 25x in line with peers). We see strong momentum for RAC continuing upcoming summer and steady improvement in project business

Result Highlights

* Quarter summary – Voltas delivered revenue growth of 11.8%. UCP registered revenue growth of 11.2%, EMPS (Electromechanical Projects and services) saw revenue growth of 17.1%; while EPS (Engineering products and Services) segment declined by 5.4% yoy.  

* UCP –: Revenue grew 11.2% yoy. UCP business was better despite muted festival sale amidst inflation woes and subdued consumer sentiment. EBIT margin stood at 7.4% vs 9.3% in Q3FY22 contraction of 194bps yoy. Voltas continues to be the market leader in ACs with YTD December market share of 22.5%.

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