Buy Voltas Ltd for the Target Rs.1,500 By Emkay Global Financial Services Ltd
Weak Q2, as expected; valuation comfort emerging
Voltas (VOLT)’s Q2FY26 results were weaker than expected, with UCP revenue down 23% YoY (~8% below Emkay estimate) due to a lean season and delayed consumer purchase owing to GST-rate reduction. UCP performance (-23% YoY) was much lower than peers’ (-18%/-10% YoY for Lloyd/Blue Star). EBIT margin contracted sharply (negative 3.8% vs 7.3% in Q2FY25) due to higher marketing support to push retail momentum and manage channel inventory. The mgmt flagged ~2M of industry channel inventory; however, it is hopeful of demand recovering from Q3 as Oct-25 saw decent growth and was led by prebuying ahead of the BEE norm change. In EMPS, VOLT remains focused on longterm strategic growth, maintaining order-booking discipline with 5% EBIT margin seen as sustainable ahead. Also, tactical cost-reduction steps are underway to support profitability. A significantly lean season with GST transition and its resultant impact on revenue/margins drove a meaningful cut (~11%) in FY26E EPS. However, we expect growth/margins to rebound in FY27E (refer to our report Untimely rain: Killjoy for AC demand, apt time to BUY AC stocks). We maintain BUY, with unchanged TP of Rs1,500, as valuations remain supportive (UCP P/S trades at ~3.5x, below the LTA) and expect earnings traction to improve as seasonality normalizes from H2.
UCP margins take a major hit due to higher A&P
Q2 consolidated revenue was Rs23.5bn (down 10% YoY; 4% miss on Emkay estimate) owing to weak UCP revenue growth (down ~23% YoY). UCP EBIT margin dipped to a negative ~3.8% (7.3% in Q2FY25) due to higher marketing spend toward sustaining retail momentum and managing channel inventory. EMPS revenue increased ~10% YoY; EBIT margin was 9.5% (5.2% in Q2FY25); consol EBITDA stood at Rs704mn, with margin at 3.0% (missed our estimated ~4.0%). PAT was a miss at -Rs343mn (down ~74% YoY).
Earnings call KTAs
1) UCP retail offtake was muted due to the lean season and delayed consumer purchases owing to GST rate reduction, leading to a higher channel inventory. 2) Q2FY26 required higher marketing support to sustain retail momentum and manage channel inventory; this impacted margins. 3) RAC market share improved sequentially from 16.0% in Q4FY25 to 17.8% in Q1FY26 and further to 18.5% in Q2FY26. 4) Inventory stands at 2 months, and Voltas expects this tom improve with demand expected to pick up in H2FY26. 5) Demand for Oct-25 is witnessing a positive uptick YoY. 6) Voltas believes channel partners will stock up old BEE-rating products during Q3FY26, as they are allowed to sell for the next 3-6 months. 7) Voltbek is seeing steady growth toward breakeven, and focus remains on gaining market share and maintaining presence across channels. 8) EMPS orderbook (OB) stands at Rs62bn, of which Rs48bn is domestic and Rs14bn international. OB is evenly distributed in MEP (private), Electrical, and Solar & Water business (government spending). 9) MEP work for data centers and district cooling is a large opportunity. 10) Data center contribution is low at ~5%, expected to increase to ~30% in the next few years.
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