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Strong volume growth; market share to increase

RAC segment’s market share is estimated at ~22% in FY24-26

* Voltas (VOLT) stock has appreciated by 50%+ in the last six months and has performed well since the reinitiation of coverage in Sep’23. Interactions with dealers in a few regions indicate that there has been an increase in demand for cooling products in Mar & Apr’24. Industry estimates indicate that the demand for RAC has increased by over 30% during the period.

* VOLT indicated that its volume growth in RAC stood at 71% YoY in 4QFY24 and we believe that the company recently gained market share after the declines seen in the last 1.5 years. As per our estimate, market share of the company should be at ~22% in FY24.

* We believe that RAC is a long-term structural story, given the low penetration level in India, rising income levels, and thus, aspiration of middle-income group people and rising heatwaves across the globe. We expect the company to maintain its market share at ~22% in FY25/26 and expect the RAC industry to register a CAGR of 15% over FY24-26.

* We raise our EPS estimates by 20%/16%/11% for FY24/FY25/FY26, and expect the company to deliver EPS CAGR of 72% over FY24-26 after subdued performance in FY22-24 (earnings declined at 15% p.a. in this period). We maintain BUY on the stock with a revised price target of INR1,650 (vs. INR1,410 earlier) based on 50x FY26E EPS for the UCP segment, 35x FY26E EPS for PES and EMPS segments and INR38/share for Voltbek.

RAC sales estimated to increase 25% YoY in FY24

* We expect RAC sales volumes to increase ~25% YoY in FY24 (five-year CAGR at 10%) and cross the mark of 10m units ACs. As per our estimates, volumes have registered a CAGR of 28% over FY22-24 after remaining almost flat in FY19-22. Our discussions with dealers in a few regions indicate that industry volumes have seen an uptick in Mar-Apr’24, with estimated growth surpassing 30% for RAC during this period.

* VOLT continues to be the Numero Uno brand in the RAC segment and the management indicated that its volume grew 71% in 4QFY24 in the RAC segment. The company also indicated that volumes growth was robust in other cooling products, including air cooler and commercial refrigeration products.

* We believe that RAC is a long-term structural play, given the low penetration level in India (the RAC segment is estimated to penetrate only about 16-18% of households with an overall penetration level of only 7-8%, much lower than the global average of ~30%), hotter summers, rising disposable income, and thus, aspiration levels, easy financing schemes, etc. We estimate RAC volumes to register a CAGR of 15% over FY24-26.

VOLT continues to be the market leader

* VOLT has remained the market leader in the RAC segment for a long time, though there has been some decline in its market share in the last six quarters. Its market share had gradually risen to 25.2% in FY21 (from 20.8% in FY15) before declining to 23.4%/21.6% in FY22/FY23.

* We estimate the company’s market share in the RAC segment to be ~22% in FY24. Going forward, we believe that the company will continue to enjoy the leadership position and would maintain a market share of ~22% during FY25/26.

EMPS segment to recover, aided by strong order book

* Electrical, mechanical, and plumbing solutions (EMPS) segment caters to industrial customers in GCC as well as in domestic markets. The segment was hit in FY23-24, led by write-offs in the international business. However, we believe the strong order book of INR82b (INR52b of domestic and INR30b of international orders) will drive revenue growth and margin should start improving from FY25.

* The management had earlier indicated that provision were created for delay in the collection of the outstanding amounts and encashment of bank guarantee by a few customers. It remains hopeful for reversal of these provisions. We have estimated EBIT margin of this segment to be at (2%)/3% for FY25/26 vs. (2.4%)/ (7.5%) in FY23/24E. Margins of this segment have been volatile historically, but average EBIT margin has been at 4.7% over FY06-22.

Strong traction in revenues for Voltbek

* Voltbek has seen strong traction in revenues, following the commencement of its operations in FY19. The company had sold 3.3m units of home appliances products cumulatively until FY23, achieving revenues of INR11b in FY23.

* The company has indicated that it has sold 2m units of home appliances products (Refrigerators & Washing Machines) in FY24 and achieved a volume growth of 52% in 4QFY24.

* Market share of Voltbek in home appliances had increased to 5.3% in Mar’23 from 4.4% earlier with an 8.9% market share in semi-automatic washing machine. The management targets to achieve a 10% market share in the home appliances segment by FY25. We expect Voltbek to turn EBITDA positive in FY26 and achieve PAT break-even in FY27.

Raised earnings estimates; maintain BUY rating

* In 4QFY24, we now expect VOLT’s revenue/EBITDA/PAT to grow 45%/31%/61% YoY to INR42.9b/INR2.9b/INR2.3b. We expect VOLT’s EBITDA/ adjusted profit to report a CAGR of 54%/72% over FY24-26, supported by a) volume growth and margin improvement in UCP segment; and b) reduction in losses of EMPS and Voltbek. RoE should be at 11.5%/15.2% in FY25E/FY26E vs. 6.5% in FY24E (average of 12.3% over FY13-23), while RoCE is likely to be at 12.4%/15.4% in FY25E/FY26E vs. 8.1% in FY24E (average of 12.8% over FY13-23).

* We maintain our BUY rating on the stock with a revised price target of INR1,650 (vs. INR1,410 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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