ICICI Direct’s research report on Voltas
Voltas’ UCP division performance remained flat in 9MFY19 owing to bad weather, subdued festive demand and a poor second summer. The overall RAC industry de-grew ~4% YoY in 9MFY19. Despite such challenging conditions, Voltas has maintained its leadership position with market share of 24%. With normal inventory of ACs at dealers level (1-1.5 months) and slight demand revival in southern regions, the management expects strong AC volume growth in FY20E. This along with rising contribution of inverter AC sales (inverter AC now contributes ~40% of total split AC sales) would restrict any sharp fall in EBIT margin (the management expects EBIT margin of ~11% in the UCP division, going forward, ~100 bps higher than reported EBIT margin during 9MFY19). We model revenue CAGR of ~14% in FY18-21E in the UCP segment led by volume CAGR of 11% during the same period. On the EMPS front, we slightly cut our revenue CAGR estimate from 14% to 11% in FY18-21E due to mainly focus on execution of quality orders.
Outlook
We believe rising contribution of premium products (inverter AC) and stable raw material/currency movement would help in maintaining EBIT margin at ~11%, going forward. We maintain HOLD on Voltas with a revised target price of Rs 650/share. Under our SOTP based valuation, we value the UCP segment by ascribing PE multiple of 35x FY21E earnings. We ascribe a PE multiple of 15x FY21E and 10x FY21E earning to EMPS and EPS segment, respectively.
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