IGI Logo

Betting big on a 2H revival

Voltas’s 2Q performance was lower than our and Street estimates. While revenue performance was not much of a surprise, EBIT loss in the UCP business, lower-than-expected other income and higher-than-expected finance costs impacted 2Q performance. Margin in the UCP business was impacted by higher channel support expenses and negative operating leverage. However, as demand picks up in 2H, margins are likely to trend upwards driven by better absorption of fixed costs, and cost-saving initiatives fructifying. Incrementally, as demand normalises, support schemes provided to the channel will eventually reduce. That said, Voltas reported a sequential gain in market share to 18.5%, from 17.8% in 1QFY26, and 16% in 4QFY25. Our FY26E EPS sees a 20% cut, as we factor in weaker margins, while our FY27-28E EPS sees a 3-5% cut. We maintain ADD with a target price of INR 1,430, basis our SoTP valuation.

* EBIT loss in UCP business drives 2Q PAT miss: Revenue, at INR 23.1bn, -11% YoY, was 2% ahead of our estimate and 6% below consensus estimate. This was driven by a 23% YoY decline in UCP revenue to INR 12.2bn, while revenue from EMP grew 10% YoY to INR 9.7bn, and that from engineering products declined 5% YoY. Gross margin stood at 23.8%, contracting 150bps YoY and 250bps lower than estimate. EBITDA, at INR 375mn, declined 74% YoY and was lower than our estimate of INR 806mn, and consensus estimate of INR 1bn. 2Q PAT, at INR 343mn, declined 75% YoY and was lower than our and consensus estimates of INR 818mn and INR 890mn respectively. This, besides a weak operating performance was impacted by higher finance costs and lower other income YoY.

* Segmental performance: UCP revenue declined 23% YoY to INR 12.2bn. Further, this segment posted an EBIT loss of INR 458mn (-3.8% margin) vs. EBIT of INR 1.2bn YoY (7.3% margin). The EMP business reported 10% YoY growth to INR 9.7bn. Within this segment, margin improved to 9.5%, vs. 5.2% YoY. Lastly, revenue in the engineering products and services vertical declined 5% YoY to INR 1.4bn; however, EBIT margin improved to 31.6%, vs. 27% YoY.

* Industry headwinds impact UCP performance; expect an improved scenario in 2H: The UCP segment was impacted owing to muted retail offtake due to an extended monsoon, deferred purchases due to the expected GST rate cuts, and high channel inventory. Margin in this segment was temporarily impacted by higher marketing support and negative operating leverage (lower fixed cost absorption in the new Chennai and Waghodia facilities). However, as demand picks up in 2H, margins are expected to trend upwards driven by easing absorption of fixed costs, and cost-saving initiatives fructifying. Incrementally, as demand and sales normalise, support schemes provided to the channel will eventually reduce.

* Market share gains a silver lining: Voltas has posted sequential market share gains over the last few quarters. Its share has improved from 16.0% in 4QFY25 to 17.8% in 1QFY26 and further to 18.5% in 2QFY26, representing a ~250bps increase over 6 months. Resultantly, the gap in market share between Voltas and the #2 brand has widened to 290-300bps.

* Commercial ACs doing well; presents an opportunity in data centres: The commercial AC business has been doing well, but Voltas’ market share remains lower than peers. The company has added several new products including centrifugal chillers and VRF systems. Strong presence here also opens up an opportunity in data centres. Besides commercial ACs, the EMP business can also benefit from data centre capex, which is currently 5-10% of segment revenue, with potential to ramp up to 30%.

Please refer disclaimer at https://www.jmfl.com/disclaimer

SEBI Registration Number is INM000010361