Voltas Ltd. share price target

Despite a strong order book in EMP segment, we remain cautious on company's near-term outlook owing to the current macro environment. Hence, we reiterate our REDUCE rating on the stock with a roll forward target price of Rs. 653 based on 32x FY22E adj. EPS. Weak demand continues to put pressure on topline and margins Tepid economic growth and weak consumer demand slowed down company's growth. Q3FY20 revenue remained flat at Rs. 1,487cr (+0.2% YoY). EBITDA fell 15.7% YoY to Rs. 98cr, as EBITDA margin contracted by 120bps YoY due to higher employee benefit...

Voltas is winning through better product range 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 healthy growth in the coming quarters. While, RAC supply issue from China will remain overhang in the near term. Gradual recovery in EMPS can be a catalyst to improve overall performance in FY21. Voltas delivered another strong show in its UCP business while lumpiness in EMPS dragged the overall performance. UCP rev/EBIT growth at 14/36% with market share gain was heartening. Voltas has been able to manage rising competition better than its peers. EMPS rev/EBIT was down by 8/46% on account of slow execution (liquidity crisis impacting visibility of payments). While strong order book (40% YoY) gives visibility of ramp up in project business in 1HFY21. We cut EPS estimate by ~5% to factor-in delayed recovery in EMPS. We value Voltas on SOTP basis, EMPS/EPS/UCP at 17/20/35x on Dec-21 EPS and Volt-Beko at 1x P/S, translating to a TP of Rs 724. Maintain BUY.

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.