Management Speak: Voltas (Outperformer) - UCPL demand seeing uptick; EMP steady

We met Voltas’ management; below are key takeaways:

• UCPL - demand seeing an uptick: While the initial sales targets (Rs500m) for Onam festive are likely to be missed due to floods, demand is seeing an uptick and should aid double digit growth in 2QFY20. Overall, Voltas has not seen any significant impact of economic slowdown on UCPL or VoltBek products. Voltas remains confident on sustained mkt share gains (+60bps yoy to 24.1% in 1Q20; 25% in Jun-19; 22% in FY18) led by focus on products, brand & reach.
• UCPL margins to sustain at 11%: Voltas has not yet taken a price hike, despite the hike on customs duty. There would be some tactical hikes in certain markets or products in the festive season. Moreover, considering the lean season, better vendor negotiations would aid in offsetting the impact on higher import duties for IDUs. Overall price hikes would be considered in the upcoming season in 4Q20. On the other hand, the recent sales related to EESL (Delhi; 50K units) and Tata Power (Mumbai; ~20K units) are low in proportion to total sales and are part of the A&P spend of 4-5%. Hence, mgmt. has guided at sustainable margins of 11%.
• EMP – domestic steady; international cautious: Voltas remains quite cautious in the international markets and extremely selective in orders, especially orders of Rs10bn+ considering the delays in project execution. However, management indicated there has been an improvement in domestic ordering with high traction from rural electrification, metros, water, etc. However, execution has been slow in few metro projects (environmental clearances, site availability, etc) and needs to be closely monitored. Also, Voltas is in process of scaling the solar business apart from the water segment which would drive revenues. Accordingly, the segment is likely to grow at a steady pace (our estimate 6% CAGR over FY19-21) with margins to be at 7-8%.
• Voltas-Beko to see traction in FY21: The Sanand plant will be operational by Dec-20 which would enable the JV to address the DC refrigerator (70% of Indian mkt) in the next festive season (Oct-20), with the semi-automatic washing machine (50% of Indian mkt) production to be ramped up gradually (currently outsourced). Concurrently, the JV is expanding its reach and has 156 EBOs (exclusive brand outlets), especially in Tier II & III cities. Accordingly, the JV will likely see a ramp up in 2HFY21 and would be in an investment phase over the next 2-3 years. Hence, the JV losses are likely to sustain over the next 2-3 years.

Valuations and view

Overall, Voltas has seen strong performance in UCPL led by strong summers and market share gains (24% in FY19 vs 22% in FY18). We believe the positive operating leverage and price hikes would drive margins (our est of 11.8% in FY20), while EMP would see steady growth. Sustained focus on brand, reach and product (adjustable inverter) continues to drive market share traction. While the JV is progressing well, the losses are likely to be higher than estimated in FY21 (cut of 3-5% in earnings). We believe the stock looks attractive at 29x FY21E earnings, considering the long-term structural story on room air conditioners (RAC), free cash generation and strong balance sheet. Outperformer.