Buy Voltas Ltd For Target Rs.1,640 by Motilal Oswal Financial Services Ltd
Margin pressure in UCP dampens robust revenue growth
RAC’s market share dips 50bp QoQ to 20.5% as of Dec’24
* Voltas (VOLT)’s 3QFY25 EBITDA was largely in line with our estimate as higherthan-estimated revenue was offset by lower-than-estimated margin in UCP (5.9% v/s estimated 7.8%). Revenue grew 18% YoY to INR31.1b (10% beat), while EBITDA surged 6.7x YoY to INR2.0b, albeit on a low base (in line). OPM jumped 5.3pp YoY to 6.4% (-30bp vs. our estimate). It reported a profit of INR1.3b (-14% vs. est. due to lower other income) vs. a loss of INR304m in 3Q.
* Management indicated that the pressure on UCP's margins is due to its focus on gaining market share, which involved significant spending on advertising, promotions, and in-store demonstrations. It aims to retain the UCP segment’s margin in the high single digit in 4QFY25. With the upcoming summer season, management remains optimistic about strong demand across product categories, aided by positive consumer sentiment.
* We cut our EPS estimates by 8% for FY25 and 14% for FY26/FY27 each, considering lower margin in the UCP segment (reduced segment margin by 70bp through FY25-27) and higher loss in Voltbek until FY27 as focus on network expansion/branding will continue. We reiterate our BUY rating on the stock with a revised SoTP-based TP of INR1,640 with 50x Dec’26E EPS (earlier 55x) for the UCP segment, 25x Dec’26E EPS for the PES and EMPS segments, and INR22/sh for Voltbek (earlier INR38/sh).
UCP’s margin contracts 2.4pp YoY and 1.5pp QoQ to 5.9% (est. 7.8%)
* VOLT’s consol. revenue/EBITDA stood at INR31.1b/INR2.0b (up 18%/7x YoY and up 10%/4% vs. our estimate) in 3QFY25. Adj. PAT stood at INR1.3b vs. a loss of INR304m in 3QFY24 (-14% vs. our estimate). Gross margin improved 1.8pp YoY (down 2.5pp QoQ) to ~23%.
* Segmental highlights: a) UCP – Revenue was up 19% YoY at INR17.7b, while EBIT declined 15% YoY to INR1.0b. EBIT margin contracted 2.4pp YoY to 5.9%; b) EMPS – Revenue rose 21% YoY to INR11.9b. It reported an EBIT of INR567m compared to the loss of INR1.2b in 3QFY25; c) PES – Revenue declined 16% YoY to INR1.3b, and EBIT declined 26% YoY to INR368m. EBIT margin contracted 3.8pp YoY at ~28.4%.
* In 9MFY25, VOLT’s revenue/EBITDA/Adj. PAT stood at INR106.5b/INR7.8b/ INR6.9b (up 29%/176%/191% YoY). OPM improved 3.9pp YoY to 7.4%. In 4Q, we estimate revenue will decline 1% YoY, while EBITDA/PAT will rise 61%/ 122%, albeit on a low base due to higher losses in the EMPS segment in 4QFY24.
Highlights from the management commentary
* The revenue mix in the UCP segment was 61% from RAC, followed by 19% from commercial airconditioning, 15% from commercial refrigerator, and the remaining 5% from air cooler & water heater.
* VOLT did not implement any price hikes in 3Q, as it is a lean period for ACs, and the focus remained on increasing sales volume. If commodity prices and forex pressures persist, the company may explore value engineering to offset costs while considering the need for potential price adjustments.
Valuation and view
* VOLT’s operating performance was in line; however, margin contraction and a dip in market share in the UCP segment disappointed. We expect VOLT’s revenue/EBITDA/adj. PAT to report a CAGR of 12%/20%/23% over FY25-27. We estimate OPM to be at 7.3%/7.9%/8.5% in FY25/FY26/FY27.
* We estimate UCP’s margin at 7.6%/8.0%/8.5% for FY25E/26E/27E vs. the previous estimate of 8.3%/8.7%/9.2%. We reiterate our BUY rating on the stock with a revised TP of INR1,640 (earlier INR2,190) based on SoTP with 50x Dec’26E EPS (earlier 55x) for the UCP segment, 25x Dec’26E EPS for the PES and EMPS segments, and INR22/share for Voltbek (earlier INR38/share).
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