Buy Voltas Ltd for the Target Rs 1,500 by Emkay Global Financial Services Ltd
Voltas’s 2Q results were mixed, with UCP/EPS delivering robust growth of 29%/33% yoy, while EMPS revenue declined ~16% yoy (overall revenue was in line with our estimates). EBITDAM stood at 4.7% (largely in line), declining ~100bps sequentially. UCP performance was supported by strong 32% volume growth in RACs, ahead of the industry, with Voltas retaining its #1 position at 17.4% market share (up 150bps yoy; leading the #2 player by 4.2ppt). The management remains focused on sustaining market leadership, improving absolute profitability, and strengthening cost competitiveness. While 2Q is seasonally a lean quarter, the management expects a strong 2H, supported by healthy demand, an extended summer, premiumization, and customer loyalty. Channel inventory remains lean at ~3 weeks (4-6 weeks last year), aiding further growth momentum. The past 6M have witnessed significant volatility, with West Asia developments driving commodity inflation, a near doubling of ocean freight rates, and currency depreciation, resulting in an overall cost impact of ~18%. Voltas has undertaken calibrated price hikes of ~14% through 2Q (including energy-label-related increases), followed by a further 5-7% hike in Oct-26. However, with ~35% of sales to trade partners operating on 4-5M price locks, the full benefit of price hikes will reflect with a lag, with a larger impact expected in 4Q. We largely maintain our FY28E/FY29E EPS. Valuations remain attractive, with the stock trading near the lower end of the historical 1YF PER range (close to -1SD), offering a favorable risk-reward. We retain BUY with an unchanged SoTP-based TP of Rs1,500 at Sep-28E (roll-forwarded).
Mixed set of results; UCP gains share, but cost inflation hits margins
Voltas posted a mixed 2Q, with UCP/EPS delivering robust growth of 29%/33% yoy, while EMPS revenue declined ~16% yoy. Overall EBITDA was ~100bps down sequentially, driven by ~1.3% UCP EBITM (vs 5.3% in 1Q), which was partially offset by 9.2% EBITM in EMPS (vs 5.6% in 1Q) and ~28.5% in EPS (vs 25.9% in 1Q). Reported PAT was up ~54% yoy.
Earnings call highlights
1) Voltas delivered 32% RAC volume growth, ahead of the industry, with market share at 17.4% (up 150bps yoy) and a 4.2ppt lead over #2. The management expects strong 3Q/4Q demand, supported by an extended summer, lean channel inventory (~3 weeks), and potential El Niño-led demand.
2) Against ~18% cost inflation, Voltas has taken ~14% price hikes through 2Q (including energy-label changes), followed by another 5-7% in October. The hikes should cover cost pressures, with benefits expected from 3Q and more meaningfully in 4Q.
3) The management prioritizes market share and absolute margin over margin percentages.
4) An installed base of ~26mn units and replacement demand from 7-9Y old RACs provide growth visibility.
5) The management expects sustainable EMPS margins of 4-6%, supported by selective, value-accretive order booking and a strong order book of over Rs68bn.
6) The 1.5mnunit South facility is expected to operate evenly through the year.
7) Compressor localization is being evaluated, while PLI benefits of ~Rs50mn per quarter should continue for 5-6 quarters.
8) Voltbek targets EBIT breakeven by FY28, with 8.8%/7% share in washing machines/refrigerators, respectively (#2 player in semi-automatic washing machines with 14.9% market share). Upcoming launches include frost-free refrigerators and fully automatic washing machines.
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