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Robust RAC demand; compressor JV announced

Voltas (VOLT IN) reported strong revenue growth, driven by robust room air conditioners (RAC) demand during Q1, sustaining market leadership with market share gains of ~400bp over the second player. RAC volume growth stood at 45% YoY with price hikes undertaken in the range of 10-12% YTD (BEE norms change + input cost inflation). EBITDA margin remains resilient despite input cost inflation and forex loss, due to price hikes and operating leverage. VOLT has announced a JV with Atomberg Innovation to manufacture RAC compressors, initially with a capacity of ~2.8mn units. We retain Accumulate with a TP of INR 1,410 on 37x June FY28E P/E, as it is the market leader in RAC, the turnaround in Voltbek, pickup in the electromechanical projects (EMP) segment, and compressor JV to support margin expansion.

Robust RAC demand drives Q1 sales:

Q1 sales grew 18% YoY to INR 46.2bn, led by growth in unitary cooling products (UCP). UCP (82% of sales) jumped 32% YoY with RAC growth at ~50% YoY and volume growth at 45%. YTD market share of VOLT in secondary RAC sales stood at 17.3%, gaining 400bp lead over the second player. Price hikes were undertaken in the range of ~4-5% to offset input cost inflation. Commercial refrigeration remains muted due to price hikes of ~10-15%, leading to slower demand. EMP saw sluggishness, down 27% YoY, due to disruption in the international business. The engineering products and services (EPS) segment saw 17% growth, due to an uptick in the textiles machinery division, crushing machines, and revival of the Mozambique business. Voltbek witnessed strong growth, due to higher premium mix, channel penetration, and new product launches.

Compressor JV with Atomberg:

VOLT has signed a binding term sheet with Atomberg Innovation to set up a 50-50 JV to manufacture RAC compressors. The aim is to reduce compressor imports and backward integration of RAC components to increase margin since compressors form ~30% of RAC bill-of-material (BOM). As per management, the facility will take 18 months to build with a gradual increase in capacity of up to ~2.8mn units. The product is developed and undergoing testing phase. The final JV details are awaited.

Resilient Margin despite input cost inflation:

Q1 EBITDA margin rose 80bp YoY to 4.7%, led by price hikes and operating leverage. Segment-wise, EBIT margin for UCP surged 170bp to 5.3%, while EMP margin inched up 30bp. However, EPS margin tanked 370bp YoY to 25.9% on product mix.

Retain Accumulate with a higher TP of INR 1,410:

We lower our EPS estimates by 8% for FY28 as near-term margin pressures persist due to geopolitical tensions; however, we raise our EPS estimates by 5% for FY29 as compressor JV would support margin expansion. We increase our TP to INR 1,410 from INR 1,360 on 37x (unchanged) June FY28E P/E and retain Accumulate. RAC remains underpenetrated in India and VOLT being the market leader, is the key beneficiary from this tailwind. We expect an earnings CAGR of 62% during FY26-29E and an average ROE and ROCE of 15% & 14%, respectively, during FY27-29E.

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