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Margin pressure to stay elevated amid fierce competition  

Voltas’  (VOLT)  consolidated  sales  grew  5%  YoY  to  Rs17.7bn,  broadly  in?line  with  our/consensus  estimates.  UCP  sales  grew  only  4%  YoY  to  Rs10.5bn  due  to  low consumer demand in a non?seasonal quarter. VOLT’s AC market share fell 1% QoQ from  24.1% exit?June 2022 to 23% exit?August 2022. Gross margin fell 220bps YoY to 24.4%  while EBITDA margin fell 190bps YoY to 5.7%, below our/consensus estimate of 6.7%/  6.5%. UCP’s EBIT margin fell 280bps YoY and 40bps QoQ to 7.3% due to liquidation of high cost inventory while EBIT margin of EMPS segment was up 50bps YoY to 2.6%, on  a  low  base.  Provision  worth  Rs1bn  in  an  overseas  project  due  to  cancellation  of  a  contract led  to net loss of Rs74mn. With  rising competitive intensity in AC,  the EBIT margin target has reduced to high single digit over the next year. We further trim our UCP margin  estimates  to  8.2%/9.0%  for FY23E/FY24E, leading  to  5%/12%  cut in  our  EBITDA estimates. We roll forward the valuation to H1FY25 with a revised SoTP target  price of Rs895. We assign P/E of  45x  (down  from  50x  earlier)  to UCP, P/E of  15x  to  Projects business and P/BV of 6x to Voltas Beko. Retain REDUCE.

UCP ? Muted demand impact sales; margin pressure unlikely to fade away in near term

UCP sales grew only 4% YoY to Rs10.5bn due to weak consumer sentiments amid high  inflation. EBIT margin fell 280bps YoY and 40bps QoQ to 7.3% due to high cost inventory  liquidation and aggressive competition amid weak demand. VOLT’s AC market share fell 1% QoQ to 23% (exit?August) from 24.1% (exit?June), albeit in a non?seasonal quarter.  Secondary sales volume in Q1FY23 was at 3.4mn units vs. only 0.6mn?0.7mn units in July? August 2022. VOLT aims to achieve a balance between market share and margin profile and has reduced its target EBIT margin to high single digit over the next year vs. 11?12%  earlier. Commercial Refrigeration business (16?18% of UCP sales) also witnessed softer  demand across OEMs and channel partners.  Commercial AC business  (16?18% of UCP  sales) grew well led by demand for ducted AC and VRF in commercial and retail outlets.

EMPS update: EMPS sales were Rs5.5bn, up 3% YoY with order book rising to Rs59.8bn vs. Rs58bn YoY. Domestic order inflow in 2QFY23 was strong at Rs9.5bn (vs. Rs1bn YoY) leading to order book at Rs38.7bn, while international order book was at Rs21.1bn. On a low base, EBIT margin was up 50bps YoY to 2.6%

Voltas?Beko JV update: Voltbek’s salesfell 15?20% YoY due to muted demand amid weak trade & consumer sentiments. VOLT’s share of the JV loss was Rs289mn. Over the span of three years, the JV has sold 2.5mn units and has established its brand.

OCF and NWC update: Ex?cash NWC days in H1FY23 reduced to 71 days (annualized) vs. 90 days YoY. OCF in H1FY23 stood at negative Rs3.4bn vs. negative Rs2.4bn YoY.

Maintain REDUCE rating with a revised target price of Rs895 

We expect 15%/16% sales/EPS CAGR over FY22?25E. While long term driver of AC under? penetration is intact; we expect industry?wide margin profile to remain weak over the  next 2?3 years. Further loss of market share and weakening of margin profile are key risks for VOLT, which will hamper its valuation.

Valuations

We assign P/E of 45x  to Unitary Cooling Products segment and 15x  to projects  business’  H1FY25E  earnings.  We  assign  6x  P/B  to  Voltbek segment’s H1FY25E book value. We arrive at SOTP?based target price of Rs895

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