Voltas' Q3FY19 results (Outperformer) - In line; inventory liquidation key monitorable

Q3FY19 result highlights

• Adj. PAT at Rs927bn (-6.8% yoy): Revenue +8.7% yoy to Rs14.8bn (led by EMP), margins -72bps yoy to 7.3%. Hence, EBITDA fell 1% yoy to Rs1.1bn. However, higher loss of Rs279mn in JVs / associates restricted PAT. The loss was largely related to the launch and promotional spend of Voltas-Beko products that were launched in the quarter.
• UCPL weakness sustains: Revenues fell 3% yoy to Rs5.3bn on high base due to pre-buying in 3Q18 (new energy ratings in Jan-18) and weak festive demand. Voltas widened its mkt share at 24% in 9M19 vs 22% in FY18. However, EBIT margins eroded sharply by 450bps yoy to 8.5% due to negative operating leverage, higher input costs, currency depreciation and intense competition on weak demand.
• EMP growth sustains: Revenues grew 16% yoy to Rs8.8bn on pick up in execution, while margins expanded 82bps yoy to 7.9% due to focus on timely execution and profitable projects. Intake at Rs9.9bn (+78% yoy), with order backlog at Rs50bn (+3% yoy; 62% domestic).

Conf call highlights: (1) RAC inventory created on weak demand has reduced marginally from 2.5 months to 2 months and the upcoming summer would be key to lowering inventory levels. (2) Margins in UCPL for 9M19 at 10.3% and maintain guidance of the sustainable margins 11% despite pressures in currency and hike in import duty (3) Inverter share at 40% of split ACs in 3Q19 (4) MEP margins of 7-8% to sustain (5) Expect MEP intake to pick up in both domestic & intl led by commercial real estate, factories, metros, etc. (6) New plant in Tirupati, AP to localize manufacturing vs imports, aid inventory mgmt. and lower logistics cost. 

Impact on financials: FY19/20 EPS cut by 7/8% to Rs15.9/19.6 on higher than estimated JV losses

Valuations & view

The UCPL segment is seeing near term pain on back of weak demand (unseasonal rain) and higher input costs (RM, rupee depreciation, custom duty hike, etc). We believe once demand revives and inventory is liquidated, the margins will see a reversal led by Voltas’ scale and cost efficiencies. On the other hand, Voltas’s efforts to focus on process improvements and better commercial terms is reaping benefits, as EMP margins have improved to 8%. Accordingly, we believe valuations at 26.6x FY20E earnings are attractive considering the long term structural story on RAC penetration being intact, free cash generation & strong balance sheet. Maintain Outperformer.