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RAC market share and margins to recoup gradually; reiterate REDUCE

Result Synopsis Voltas, after consistently gaining market share since FY16 has seen its market share decline in FY22; decline in share in the Southern region has dented overall market share for the company as South has seen early summers. The company has already initiated corrective actions and expects to re‐gain its lost market share in South. Margins in cooling products have taken a hit as competitive pressures and quest to re‐gain its lost market share are resulting in company holding on to prices despite raw material inflation. Volt‐ Bek continues to do well on the revenue front with company achieving exit market share of 3.5% and 4% respectively in refrigerators and washing machines. The projects business is now witnessing improved profitability on back of selective execution resulting in revenue decline and lower order book for FY22. We continue to remain cautiously optimistic on the stock, however we retain our REDUCE rating as 1) we feel there would be margin pressure in the near to medium term, 2) Further market share gains would be difficult in the current hyper competitive environment and 3) The stock is trading at premium valuation as compared to its peers.

Voltas being a strong brand 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 improved execution and better order book mix will drive margin improvement in projects business. Volt‐Bek JV has stared gaining prominence in the market and localized production is expected to increase efficiency and bring down losses. We now factor in FY22‐24E Revenue/EBITDA/PAT CAGR of 12%/20%/30% and maintain REDUCE rating with SoTP based TP of Rs1,081 as we feel there is limited room for upside from CMP. We continue valuing the products business (UCP) at 50x (higher than peers) and value projects business at 25x (in‐line with peers). We see strong demand for RAC in upcoming summer season after two back to back lost summers and steady improvement in project business.

Result Highlights

* Quarter summary – Voltas revenue was flattish yoy marred by market share losses in RAC and selective execution in project business leading to 21% revenue decline in Q4. EPS business grew 26.4% yoy on higher service revenue.

* UCP – UCP business grew 9.9% yoy (lower than peers). Market share losses especially in South has resulted in subdued performance of RAC. Margin remained under pressure on back of higher input prices which are difficult to pass‐on.

* EMPS – Revenue decline was on account of lower order book. Carry forward order book stands at Rs53.6bn, down 19% yoy. Lower order inflow is on back of company bidding for selective order‐inflow as company is currently undergoing restructuring.

* Volt‐Bek – Company has now sold 1mn units of white goods under Volt‐Bek brand in past 1 year and manufactured 1mn units of washing machine and refrigerator at its Sanand Plant. Volt‐Bek exit market share in refrigerators and washers stands at 3.5% and 4.0% respectively.

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