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Margin fall led by volume push for UCP

Voltas (VOLT IN) continued to witness growth in RACs in the off-season due to stocking ahead of summer season demand, and robust growth in domestic EMP. However, margin took a hit, likely due to push for higher RAC volumes. We lower our TP to INR 1,385 (from INR 1,530) on 35x December FY26E P/E, due to persistent margin drop and delayed break-even for Voltbek. But we upgrade VOLT to Accumulate from Sell as it has underperformed the Nifty by 21% in the past two months. Rise in RAC exports, faster turnaround in Voltas Beko and recovery of provision in EMP are triggers to a rerating.

RAC continues to grow, led by stocking ahead of summer demand:

The UCP segment continued to witness robust growth, led by RACs. RACs continued to witness healthy volume growth despite Q3 being an off-season as brands aggressively stocked in anticipation of strong summer demand. VOLT continued to maintain its leadership in RACs, with an exit market share of 20.5% as of December. The Commercial Refrigeration category witnessed headwinds due to decreasing capex by companies, but good growth in air coolers, visi coolers and glass top freezers helped offset the slowdown in other products. In Commercial ACs, VOLT witnessed robust growth in Variable Refrigerant Flow (VRF), Cassette and Ducted ACs.

EMP – Domestic growth robust, Cautious approach for international:

EMP revenue grew 21% YoY to INR 11.9bn in Q3, led by robust growth in domestic inflows and orderbook, along with focused execution. In the international projects sector, VOLT continued its cautious approach, resulting in no new order inflows in Q3, with focus only on execution of the current orderbook. VOLT is witnessing good traction in the US, Saudia Arabia and the UAE.

EBITDA margin down led by fall in UCP margin:

EBITDA margin fell by 20bps YoY to 5.8% in Q3. This was led by a 240bps YoY drop in UCP margins, due to elevated cost such as BTL advertisements, growth in in-shop demonstrators and new channel adoption. Also, VOLT is likely aggressive on pricing to push volumes in RACs, in line with its focus of chasing market share over margin. The EMP segment saw margins expand 250bps YoY to 4.8%, while margin for engineering products plunged 380bps YoY to 28.4%.

Upgrade to Accumulate with a lower TP of INR 1,385:

We cut FY25E EPS and FY26E EPS by 6% and 8% respectively, given persistent decline in UCP margin. We lower our TP to INR 1,385 from INR 1,530 on 35x (from 38x) December FY26E P/E due to higher competition in RACs impacting overall margins and delayed break-even of Voltbek.

However, we upgrade VOLT to Accumulate from Sell as the stock has underperformed the Nifty by 21% in the past three months, and VOLT retains its leadership in the RAC industry with a large lead over the #2 player. Expect an earnings CAGR of 33% in FY24- 27E and an average ROE and ROCE of 16% and 15% respectively. Rise in RAC exports, faster turnaround in Voltas Beko and recovery of provision in EMP are triggers to a re-rating.

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