Voltas - UCP outperformance offsets weak project margins - ICICI Securities

Voltas, in addition to maintaining leadership in room AC domestic market, is consolidating its position under air cooler market, where it is currently placed second. Low advertisement spends and favourable mix led to higher cooling product margins. Project segment margins were impacted by certain provisions under overseas jobs due to time and cost overruns. Management clarified that restructuring of the project segment is mostly an internal functional re-alignment and there is no intention to hive off the same. Factoring in better than expected execution and UCP margins, we raise earnings by 6% and 8% for FY21E and FY22E, respectively. In view of the recent run-up in the stock price, we believe, the current valuations are rich. Hence, we maintain HOLD with a revised target price of Rs775 (previously: Rs660).

- Leadership in domestic room AC segment continues: Voltas was able to maintain its leadership in domestic room AC market with current secondary market share of 26.8%. RAC volume growth in Q2FY21 was 11% YoY with 36% growth in invertor RAC. The distribution reach with 19,000 touch-points is Voltas' key USP along with strong branding and advertising.

- Project segment provisions despite strong execution impact earnings: Project segment revenues grew 14.6% YoY led by strong execution internationally; however, ECL provisions, majorly due to cost and time overruns in the Middle East resulted in lower margins at 2.5%. Middle East market outlook is challenging due to fall in crude prices.

- Eyeing Rs764bn worth of domestic home appliances market: The JV, Voltbek, is initially focusing on refrigerators, washing machines, dishwashers and microwave ovens. It targets 10% market share in each of these segments by 2025; currently, they have captured 1.7% market share in washing machine and 1.8% share in refrigerator. Having started manufacturing of direct cool refrigerators, the JV plans to localise frost-free refrigerators by Dec'20.

- Maintain HOLD: Support extended to vendors led to cash deficit from operations of Rs3.9bn in H1FY21; however, Voltas continues to maintain a strong balance sheet at ~Rs5bn of cash and current investments. We value the consolidated business at Rs731 (37.1x FY22E earnings) and Voltbek at Rs44 (4x of investments) arriving at an SoTP-based target price of Rs775 (earlier: Rs660). Given the increased focus towards B2C, improvement in market share both under inverter room AC and air cooler market, we have raised our target multiple for UCP from 40x to 50x.

Shares of VOLTAS LTD. was last trading in BSE at Rs.755.2 as compared to the previous close of Rs. 758.1. The total number of shares traded during the day was 2758 in over 183 trades.

The stock hit an intraday high of Rs. 765 and intraday low of 755.2. The net turnover during the day was Rs. 2096327.

Source : Equity Bulls

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