Voltas - Q3FY21 - UCP outperformance offsets weak project margins - ICICI Securities

Volta reported strong 40% YoY growth in UCP segment aided by pent-up demand and increased stocking by dealers. Low advertisement spends, favourable mix and lower holding cost of inventory led to 230bps YoY improvement in product segment margin. Company has taken 5%-6% price hike given the rise in commodity prices. Project segment margins were impacted by certain provisions under older jobs due to time and cost overruns. Management clarified that the restructuring of the project segment is mostly an internal functional realignment and there is no intention to hive off the same. Factoring-in the better than expected execution and UCP margins, we raise earnings by 10.7% and 9.7% for FY21E and FY22E respectively. In view of the recent run-up in stock price, we believe the current valuations are rich. Hence, we maintain HOLD with a revised target price of Rs1,065 (previously Rs775).

- Leadership in the domestic room AC segment continues: Voltas was able to maintain its leadership in the domestic room AC market with a current secondary market share of 26%. Invertor RAC witnessed strong growth and now contributes 60% of overall sales (21.8% market share). The distribution reach with 19,000 touch-points is Voltas's key USP along with the strong branding and advertising.

- Project segment cost overruns impacted margins: Project segment revenues grew 26% YoY led by strong execution; however, cost and time overruns at some of the older sites resulted in lower margins at 3.2%.

- Eyeing Rs764bn domestic home appliances market: The JV, Voltbek, is initially focusing on refrigerators, washing machines, dish washers and microwave ovens. It targets 10% market share in each of these segments by 2025; currently, it has captured 1.7% market share in washing machines, 2% in frost-free refrigerators and 0.7% in direct cooling refrigerators. The current emphasis is on maximising production to meet the increasing demand for DC refrigerators.

- Maintain HOLD: Voltas continues to maintain a strong balance sheet with adequate cash and current investments. We value the consolidated business at Rs1,021 (44x Sep'22E earnings) and Voltbek at Rs44 (4x of investments) arriving at an SoTP-based target price of Rs1,065 (earlier: Rs775). We have raised EMP business target multiple from 13x to 15x. Given the increased focus towards B2C business, improvement in market share both under inverter room AC and air cooler markets, we have raised our target multiple for UCP from 50x to 60x Sep'22E earnings.

Valuation and outlook

The stock is currently trading at 49x FY22E earnings and 42.6x FY23E. Our target multiple of 44x Sep'22E earnings is based on a weighted EBIT contribution average of 60x for UCP segment (increased from 50X earlier), 15x for EMP segment (increased from 13x earlier) and 20x for engineering products. Given the localisation of direct cooling refrigerators and the development of 6,000 touch-points currently, we value the Voltbek JV separately at 4x its investments. We have arrived at a valuation of ~4x investments assigning the average of FY21E/FY22E P/BV.

We have introduced FY23E estimates and value the consolidated business at Rs1,021 (44x Sep'22E earnings) and Voltbek at Rs44 (4x of investments) arriving at an SoTP-based target price of Rs1,065 (earlier: Rs775). Maintain HOLD.

Shares of VOLTAS LTD. was last trading in BSE at Rs.1059.55 as compared to the previous close of Rs. 1079.1. The total number of shares traded during the day was 185508 in over 2053 trades.

The stock hit an intraday high of Rs. 1104 and intraday low of 1052.6. The net turnover during the day was Rs. 199861446.

Source : Equity Bulls

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