Voltas Ltd. share price target

Slow execution of orders drags project business While Voltas's UCP segment revenue increased 33% (vs. industry growth of 29% YoY) in 9MFY20, the EMPS segment revenue declined 8% YoY due to slow execution of domestic and international projects owing to liquidity issues. However, strong order book of | 7024 crore in Q3FY20 (up 40% YoY) provides strong revenue visibility for FY21E-22E. We believe sustained demand of room ACs and improvement in execution rate of existing order...

Voltas (VOLT) 3QFY20 earnings disappointed, entirely led by weak execution in the EMP segment and provisions impacting margins. We lower our FY20E EPS by 9% on account of lower contribution from the EMP segment, but maintain our FY21/FY22E earnings as strong order book provides comfort. We maintain our Buy rating with unchanged TP of 3QFY20 revenues were muted at INR14.9b and missed our expectation by 8%, attributable entirely to the EMP segment (12% miss). We lower our FY20E EPS by 9% on account of lower contribution from EMP segment, but maintain our FY21/FY22E EPS as strong order book provides comfort. We estimate UCP revenue CAGR at 13.5% over FY20-22, but near- term disruption due to the Coronavirus issue needs to be carefully with unchanged TP of INR785, based on Sep21E Inverter AC accelerated now forms 43% of total AC sales (35-36% last year).

Voltas Q3FY20 results came below our estimates and flat YoY, however tax benefit & higher OI drives profitability.

Positive outlook on urban infrastructure, water management The company continued its focus on select urban infrastructure and water management business in India (domestic order book of | 3800 crore) where the segment margin is secure at 7-7.5%. The domestic project business was impacted by low pricing and funding issues, which led to a slowdown in the...

Voltas Analyst meet indicated the likelihood of no immediate price hikes owing to benign commodity costs offsetting customs duty hike. Voltas remains hopeful of continuing the UCP momentum in H2 while maintaining annual margin guidance at 11%. MEP business is focusing on domestic projects as the outlook on urban infrastructure and water management remains positive. With commissioning of Sanand facility in the coming two months Voltbek shall be able to fill gaps in key product segments (Direct-Cool refrigerators and semi-automatic washing machines). However, it is expected...

However, industry has made representation that a continuous energy rating change does not make the desired impact as it results in price increases and consequently the shifting of customers to lower energy level products. However, there is a significant difference between the price points of VOLT and Samsung. We believe that any significant market share erosion for VOLT is unlikely, given its pricing strategy, strong procurement and distribution network. However, there is a long tail of AC brands and Samsung may be able to gain market share at the cost of these fringe players in the near term. In the room AC business, VOLT has grown by 42% in 1HFY20 v/s industrys secondary sales growth of 33%. Further, market share for the company in room ACs stood at 24.4%. Management expects strong momentum in the AC business to continue in 2HFY20.

Topline and margins remained under pressure due to weak consumer demand and slower economic growth. Net revenue remained flat at Rs. 1,415cr in Q2FY20 and EBITDA margin declined by 20bps to 7.5% primarily on higher other operating costs (+27.0% to Rs. 140cr). However, adj. PAT rose to Rs. 113cr (+8.7%YoY) primarily benefitting from higher other income (+57.6% YoY to Rs. 73cr). Weaker EMP operations offset growth from UCP segment Voltas recorded robust growth in revenue from UCP segment in Q2FY20 (+19.2% YoY to Rs. 526cr; 37.1% of total revenue) with increased traction and healthy growth in Air...

Voltas Q2FY20 results came broadly in-line with our estimates as improved performance of UCP segment offset the impact of weakness in EMPS division.

Voltas is winning in its product segment strategy as it is able to meet demand across the pyramid i.e. mass (window), mass premium (fixed speed and inverter) and premium (7 star products for EESL). This is in contrast with peers who have migrated towards inverters and 5-star products. Low channel inventory drives visibility for robust growth in 2HFY20. Besides, robust growth in order book is expected to drive recovery in EMPS business. Voltas delivered another strong show in its UCP business while EMPS business was weak. Low channel inventory for RAC supported growth in an off-season quarter (expect it to sustain over 2HFY20). Robust growth in order book signals a recovery in project business. We value Voltas on SOTP basis, valuing EMPS/EPS/UCP at 17/20/35x on Sep-21E EPS and Volt-Beko at 1x P/S, translating to a TP of Rs 742. Maintain BUY.

Voltas's UCP segment revenue growth (19% YoY in Q2, 39% YoY in H1FY20) was much higher than domestic air conditioner industry growth of 33% during H1FY20. With a slight gain in market share (~24% market share in Q2FY20) coupled with rising contribution of inverter AC into sales (inverter AC contributes ~50% in AC sales) helped drive the UCP division performance in Q2FY20. The management guided at intact demand of RAC in H2FY20 supported by intact demand from tier II, tier III cities, expansion in new geographies (expanding in southern regions) and strong order from...