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Aims to retain market share and high single-digit margins RAC market share improves to 19.5% in 1QFY25

* Voltas (VOLT)’s management in the 1QFY25 earnings call indicated that it maintains its leadership position in the RAC segment, with a market share of 19.5% in 1QFY25. It maintains margin guidance to be in the high single-digit, with continuing leadership position in the RAC segment. In EMPS, domestic business grew 50% YoY, whereas in international business, the UAE and Saudi Arabia continued to deliver healthy growth. It also highlighted that in respect of claims pertaining to FY23, the arbitration was awarded in the company’s favor. However, the collection of the proceeds will take some time. Though the second quarter remains a lean period for cooling products, the start of the festival season would lead to a spurt in demand.

* In our 1QFY25 result update, we raised our EPS estimates by 19%/4% for FY25/FY26, led by strong revenue growth and 1Q performance. We reiterate our BUY rating on the stock with a TP of INR1,800 based on 50x Sep’26E EPS for the UCP segment, 35x Sep’26E EPS for the PES and EMPS segments, and INR38/share for Voltbek.

Conference call highlights

Unitary Cooling Products (UCP)

* The rising demand and intense summer helped it report stronger growth in the UCP segment in 1QFY25. The cooling product continued to outperform the market and maintained its growth momentum with an overall volume growth of 67% YoY.

* With joint efforts of sales, planning, marketing, and manufacturing teams, it sold 1m ACs within the first 88 days of the quarter (the fastest) given the unprecedented demand for cooling products. The extraordinary demand due to extreme weather conditions in most parts of the country has pressurized and disrupted supply chains across the industry. However, round-the-clock operations at factories and strong support from OEMs have largely helped it meet market demand.

* All the products in the RAC category saw high demand, led by consumers' desire to have products with advanced features and the long-term advantages of energy cost savings. It recorded around 65% growth in split AC categories, with demand coming from across the country. Strong demand for premium product categories that are 5-star rated continued, and the overall sales mix for these products also improved.

* In the past few quarters, it has continued to strengthen its brand proposition and product placements across all channel formats. During the season, for RAC, the performance and leadership position continued to remain strong.

* The company also registered a surge in volumes for other cooling products, including air coolers and commercial refrigeration (CR). The CR industry garnered traction, leading to a high demand for cold beverages and ice creams, thus helping it clock positive results for the business.

* Within the CR category, demand was buoyant for water coolers and water dispensers. The business recorded all-time high sales in 1QFY25, driven by sales across all CR products, which led to a growth higher than the industry. This helped it retain market leadership in freezers, water coolers, and water dispenser categories. Its new products in cold rooms and medical refrigeration have also registered good growth and healthy order booking, ensuring good volumes in the category. However, stock liquidation of non AC inventory has led to a slight drop in margin during the quarter.

* Air cooler vertical also added growth with a staggering 170% volume growth YoY. High sales in the 1QFY25 have set the path for an exciting year ahead with advanced booking of coolers for the next season. New cooler models were well accepted and further fueled the growth story for the category. As per the latest report, market share has also grown to 10.5%, helping it become the #2 brand in Jun’24 in this category, widening the gap with brands at third and fourth positions.

* Water heater sales had a good start for the vertical and are likely to grow bigger in the coming months despite there being a lean period for this.

* The commercial air conditioning (CAC) vertical performance also remained steady during this quarter. Sales of VRF, and ducted ACs drove the revenue and profits for the quarter. Unlike product sales in the current quarter, margins from retrofit jobs were lower, which moderated the overall event performance for the vertical for the quarter. This, however, will improve over the next few months.

* Consumer-centric finance schemes contributed significantly to the increase in sales this season. Additionally, on the cost front, commodity prices have started to accelerate upwards with USD INR depreciating over the quarter, and both have been detrimental to the profitability of the business.

* Considering the feasibility of the business, IPL, a move towards TV advertisements, and higher sales and promotional expenses kept its margins in line YoY. On the other hand, various value engineering initiatives and cost austerity drives have kept the margins stable.

* On capacity expansion, it has started commercial operations at the Chennai plant with a capacity of 1m ACs and a water dispenser line with a capacity of around 0.35m in the Mongolia plant. Both these plants provide it with strategic locational advantages and help it cater to the market in South and West India. This will enable it to meet the growing demand for the under-penetrated AC and CR product markets. This would in turn help it to deliver a powerful performance to give our consumers comfort and convenience. It remains optimistic on capacity utilization of its factories to the optimum levels and cost efficiencies for the business going forward.

Electro-Mechanical Projects and Services (EMPS)

* The domestic projects business recorded a growth of 50% YoY. Elections in India have kept order booking muted for the domestic project business, and the order book stood at INR47.69b. Order booking is expected to pick up in 2HFY25. Total carry-forward order book was INR75.0b as of Jun’24.

* For the international projects business, projects in the UAE and Saudi Arabia continued to deliver healthy performance and drive revenue growth for the business. It informed that for claims pertaining to FY23 in the matters of BG and cash, the arbitration was awarded in the company’s favor. While the collection of the proceeds may take some time, its efforts of demonstrating part fulfillment of the job and defying an unwarranted encashment have worked positively. The carry-forward order book for the international business stood at INR27.34b, largely in the UAE and Saudi Arabia region.

PES segment

* The Mining and Construction vertical achieved positive revenue momentum, ensuring continuation of business activities in terms of U&M jobs and the sale of power screen machines. However, margin reductions and ancillary overhead costs relating to the business led to lower EBIT. Going forward, robust growth abilities in both Mozambique and India will help it to maintain the business momentum for the year.

* The textile industry experienced headwinds owing to fluctuations in cotton and yarn exports. As a result, capex within the industry decreased across the sector, which led to reduced utilization levels of spinners and thereby a corresponding reduction in demand and margins for agency business. Despite these headwinds, the business performance of its after-sales and post-spinning businesses has been positive.

Voltas Beko

* The home appliances brand continues to grow with the support of VOLT’s strong brand presence and distribution network. The home appliances industry in India witnessed healthy growth, fueled by a surge in demand for both large and small appliances, and Voltas Beko offered an impressive array of products to meet the demands of the consumer.

* Voltbek has delivered a volume growth of +50% YoY in 1QFY25. With increased volume and a gradual reduction in losses, VOLT has continued to reduce loss per unit and move towards its goal of achieving an EBITDA breakeven in the near future. Volbek has strengthened its position among the top three brands in the semi-automatic washing machine category with 14% market share, and having 7.8% market share in the overall washing machine category to date.

* The refrigerator segment also achieved +50% growth in business, reporting a market share of 5.2% YTD Jun’24. Other segments, such as dishwashers and microwaves, also achieved better business performance.

* Voltas is committed to meeting its two objectives of enhancing its market presence across various product categories by deploying customized approaches for market penetration and to attain profitability. These initiatives involve expanding distribution reach, adopting channel-specific tactics to enhance market reach in key regions through retail and distribution channels, and maintaining a strong focus on boosting e-commerce and omnichannel development.

Valuation and view

* We expect VOLT’s EBITDA/adjusted profit to report a CAGR of 51%/79% over FY24-27, partly due to a low base (in FY24, it provided higher provisioning in the EMPS segment for losses in the Qatar projects). RoE should be at ~15%/16% in FY26E/FY27E vs. 4.1% in FY24 (average of 12.3% over FY13-23).

* We expect UCP’s margin to improve to 8.8%/9.3%/9.5% for FY25E/26E/27E vs. 8.5% in FY24. We reiterate our BUY rating on the stock with a revised TP of INR1,800 (vs. INR1,670) based on 50x Sep’26E EPS for the UCP segment, 35x Sep’26E EPS for the PES and EMPS segments, and INR38/share for Voltbek.

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