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Complete recovery few quarters away, valuations remain rich; maintain REDUCE

Result Synopsis

Voltas hasmanaged to protectitsmarket share in a difficult environment with RAC volume registering a 4% decline with industry volume declining 5% in 3Q; however, commodity headwinds continue to exert pressure on margins. While the company sustained its market leadership in RAC, air coolers saw substantial decline as channel is saddled with high inventory. Volt‐Bek also registered subdued performance on low seasonal demand and conscious decision of the company to limit inventory resulting in lower production and sales. Volt‐Bek JV is estimated to achieve EBITDA break even only by FY25.The projects business is now witnessing better execution; however, the order‐inflows have been impacted as there is delay in getting orders from state and central government. 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 price has not seen much correction from its peak and there is limited upside despite assigning premium multiples to the RAC business.

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 once the market improves. 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 FY21‐24E Revenue/EBITDA/PAT CAGR of 9%/17%/19% and maintain REDUCE rating with SoTP based TP of Rs1,190 as we feel there is limited room for upside from CMP. We continue valuing the products business (UCP) at 50x and now value projects business at 25x vs 20x earlier. We see industry tail winds in the medium term for the projects business on rising industry capex cycle where Voltas is well positioned for steady revenue growth with stable margins from hereon.

Result Highlights

* Quarter summary – Voltas revenue decline of 10.1% yoy was marred by 34.6% decline in revenue of project business, while UCP and EPS business delivered growth of 9.1% and 3.1% respectively.

* UCP – UCP business grew 9% yoy. Growth was aided by aided by price increase as it saw volume decline of 4% vs industry volume decline of 5%. 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 Rs56bn, down 23% yoy. Lower order inflow is on back of delay in getting orders from central and state government and some customers holding back awarding as the company is undergoing transition in terms of restructuring.

* Volt‐Bek – Company has added one line of fully automatic washing machine at Sanand plant. Low seasonal demand and conscious decision to limit inventory resulted in lower revenue. Volt‐Bek market share in refrigerators and washers stands at 2.8% and 3.4% respectively.

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