Maintain ADD on Voltas - Surprises continue, strengthening the core - HDFC Securities

Mr. Naveen Trivedi, Institutional Research Analyst, HDFC Securities

Voltas reported a strong 2QFY21 in a challenging time. There is beat on revenue growth and margin for both UCP and EMPS. UCP delivered a growth of 14% YoY (11% volume growth for RAC) despite industry facing challenges (down by 59% in 1HFY21, 8-10% in 2Q) and higher-than-normal trade inventory. Market share gains continued for Voltas across RAC (26.8%, up 240bps YoY) and Inverter AC gained salience with 36% YoY growth, improving margins. We expect Voltas to continue fortifying its leadership in RAC, and margins to improve with better product mix. EMPS too saw positive growth (15% YoY) despite several execution challenges. EMPS margin is expected to improve sequentially, with EBIT margin reaching 5-6% in FY22. Volt-Beko is continuously receiving encouraging response from channel partners and distribution expansion, and own manufacturing should result in quicker success for the brand. We increase our EPS estimates by 3/6/6% for FY21/FY22/FY23. We value Voltas on an SoTP basis, arriving at an implied P/E of 34x (UCP/EPMS/EPS P/E at 40/15/12x, earlier 38/15/12x) and Volt-Beko P/S of 3x, earlier 2x) to derive a target price of Rs 775. Maintain ADD.

Share gain continues in RAC: Revenue grew by 12% YoY (flat in 2QFY20 and -52% in 1QFY21), leading to a beat in the estimate (HSIE -11%). UCP grew 9% YoY, led by 14% YoY volume growth. RAC/Commercial/Air Coolers' volume grew 11/20/28% YoY. Voltas is now the number 2 player in Air Coolers with 10.8% market share. Volt-Beko saw strong traction within the newly-launched range of direct cool refrigerators. Overall, Voltas continues to gain market share.

Healthy margin recovery: GM contracted by 236bps YoY (+87bps in 2QFY20 and +458bps in 1QFY21) vs the expectation of 10bps YoY expansion. Employee/Other expenses grew by 9/11% YoY. UCP EBIT margin improved to 11% (8.8% in 2QFY20 and 15.5% in 1QFY21) but remained below our estimate of 13%. EMPS margin stood at 2.5%, a healthy recovery after a loss of Rs 393mn in 1QFY21. EBITDA declined by 8% YoY. PBT declined by 24% while APAT declined by 29% YoY (HSIE -23%) on lower taxes in 2QFY20.

Call takeaways: (1) E-comm revenue mix in RAC is at 5%; (2) RAC inventory is currently Rs 10bn (~110 days); (3) Volt-Beko has 1.7% market share each in washing machines and refrigerators; (4) EMPS margin is expected to return to ~5% in FY22; (5) EMPS order book stands at Rs 69bn.

Shares of VOLTAS LTD. was last trading in BSE at Rs.757.8 as compared to the previous close of Rs. 755.35. The total number of shares traded during the day was 48735 in over 1654 trades.

The stock hit an intraday high of Rs. 761.2 and intraday low of 748.75. The net turnover during the day was Rs. 36759763.

Source : Equity Bulls

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