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RAC witnessing strong recovery; outlook positive

RAC’s market share at 18.7% YTD; volumes rise ~35% YoY in FY24

* Voltas (VOLT)’s 4QFY24 performance was below estimate due to lower-thanestimated margins across segments. Revenue was up 42% YoY to INR42.0b (in line with est.). However, EBITDA declined 13% YoY to INR1.9b (est. INR2.9b). OPM contracted 2.8pp YoY to 4.5% (est. 6.7%). Adj. PAT (adjusted for prior-period tax) declined 28% YoY to INR1.0b (est. INR2.3b).

* The management highlighted the unprecedented ~72% YoY volume growth in RAC during 4QFY24. This has resulted in stock-outs from warehouses, prompting factories to boost their production capabilities. The primary focus is on driving growth to achieve higher profits in absolute terms, consequently boosting EPS. Further, provisioning for the Qatar projects has been completed, and the company anticipates no further setbacks from this region. It expects the international business to deliver positive results in FY25.

* We largely maintained our earnings estimate for FY25/FY26. In our recent note, we highlighted RAC is a long-term structural play and expect the RAC industry to register a CAGR of 15% over FY24-26. The company’s RAC market share is estimated at ~22% over FY25-26. We maintain our BUY rating on the stock with a price target of INR1,590 (vs. INR1,650 earlier) based on 50x FY26E EPS for the UCP segment, 35x FY26E EPS for PES and EMPS segments, and INR38/share for Voltbek.

UCP margin declined 90bp YoY to 9.2% (est. 10.1%) in 4QFY24

* Consolidated revenue/EBITDA/Adj. PAT stood at INR42.0b/INR1.9b/INR1.0b (up 42%/down 13%/28% YoY and in line/down 34%/55% vs. our estimates). Gross margin declined 1.9pp YoY to 19.8%. OPM declined 2.8pp YoY to 4.5%.

* Segmental highlights: a) UCP – revenue was up 44% YoY at INR29.6b and EBIT rose 31% YoY to INR2.7b. EBIT margin declined 90bp YoY to 9.2%. b) EMPS – revenue grew 47% YoY to INR11.0b. The segment reported a loss before interest and tax of INR1.1b (vs. a loss of INR140m in 4QFY23) due to higher provisioning in international projects. c) PES – revenue increased 10% YoY to INR1.6b, while EBIT declined 14% YoY to INR478m. EBIT margin was down 8.7pp YoY at 31%.

* In FY24, revenue was up 31% YoY at INR125b, but EBITDA declined 17% YoY to INR4.7b. OPM contracted 2.2pp YoY to 3.8%. Adj. PAT declined 37% YoY to INR2.4b. The UCP segment’s revenue was up 26% YoY at INR81.6b and EBIT grew 29% YoY to INR6.9b. EBIT margin expanded 20bp YoY to 8.5%.

* VOLT’s CFO surged 4.8x YoY to INR7.6b, driven by profitability improvement reduction in working capital. Capex stood at INR2.9b vs. INR1.8b in FY23. The company generated FCF of INR4.7b vs. FCF outflow of INR21m in FY23.

Key highlights from the management commentary

* Strong brand positioning and leveraging distribution reach within the supply chain have enabled the company to retain its leadership position for the year with a YTD Mar’24 market share of 18.7%. Having sold over 2m ACs in a market estimated at about 10m units, the company’s primary market share is estimated to be ~20%.

* The expansion in Chennai is expected to become operational by May’24-end, adding a capacity of 2m units going forward. The company expects to achieve manufacturing of 1m units within the first year of operation.

* Voltbek has crossed cumulative sales volumes of 5m units since the launch of commercial sales. It has delivered volumes growth of 60% YoY in FY24. It targets to break-even in FY25 with a market share of 10%.

Valuation and view

* We expect VOLT’s EBITDA/adjusted profit to report a CAGR of 65%/110% over FY24-26, partly due to a low base (in FY24, the company provided higher provisioning in the EMPS segment for losses in Qatar projects). RoE should be at 10.8%/14.4% in FY25E/ FY26E vs. 4.1% in FY24 (average of 12.3% over FY13-23).

* We expect the UCP margin to improve to 8.8%/9.3% for FY25/26E vs. 8.5% in FY24. We maintain our BUY rating on the stock with a revised price target of INR1,590 (vs. INR1,650 earlier) based on 50x FY26E EPS for the UCP segment, 35x FY26E EPS for PES and EMPS segments and INR38/share for Voltbek

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