Voltas' Q4FY19 results (Outperformer) - Weak FY19, all eyes on summer

Q4FY19 result highlights

• Adj. PAT at Rs1.39bn (-28% yoy): Revenue +1.5% yoy to Rs20.52bn (led by weak UCPL performance), margins fell 470bps yoy to 6.5%. Hence, EBITDA fell 41% yoy to Rs1.3bn. Lower other income (-3.5% yoy) and higher JV loss (Rs215m) further impacted PAT. However, lower tax of 12% (deferred tax asset) restricted PAT decline.
• UCPL weakness sustains: Revenues fell 6.3% yoy to Rs9.98bn on late onset of summer and channel inventory liquidation resulting in limited primary sales for the quarter. EBIT margins eroded sharply by 680bps yoy to 10.4% due to negative op. leverage, higher input costs, currency depreciation, one-off costs (~Rs150m) and intense competition.
• EMP profitability declines: Revenues grew 11.7% yoy to Rs9.76bn on pick up in execution, however, margins fell 310bps yoy to 4.5% due to execution of low margin orders. Intake was at Rs10.2bn (-17% yoy), with order backlog at Rs49.8bn (-2% yoy).
• FY19 performance: Revenues +11% yoy to Rs70.9bn led by EMP (+27% yoy), partially offset by 2% yoy decline in UCPL. Margins fell 165bps yoy to 8.1% led by 440bps decline in UCPL (EMP +120bps) resulting in 7% yoy fall in EBITDA to Rs5.7bn and 7% yoy decline in adj. PAT to Rs5.2bn.

Conf call highlights: (1) Inventory related to weak 1Q19 has been liquidated (2) FY19 – industry saw 3% decline, while Voltas RAC revenues  were flat driving mkt share gains from 22% in FY18 to 23.9% in FY19; (3) Air coolers saw sharp decline on weak 1Q19, while commercial refrigeration too saw muted revenues in FY19 impacting overall FY19 UCPL revenues (-2% yoy); (4) Maintain guidance of UCPL margin at 11% on sustainable basis (5) EMP margins to see quarterly volatility; guidance of 7-7.5% on sustainable basis (6) New plant in Tirupati, AP to localize manufacturing vs imports, aid inventory mgmt. and lower logistics cost for South; (7) VoltBek JV sees launch of 31 new SKUs in refrigerators and 5 SKUs in washing machines, on track for plant to be opnl by 3QFY20. 

Impact on financials: FY20/21 EPS cut by 12/6% to Rs17.3/22

Valuations & view

FY19 has been a tough year for the UCPL segment on weak demand and higher input costs (RM, rupee depreciation, etc). With the onset of summer being strong, we believe demand and thereby margins are likely to rebound over FY20-21 led by Voltas’ scale and cost efficiencies. Concurrently, Voltas’s focus on process and better commercial terms has aided EMP margin expansion. Accordingly, we believe valuations at 26.4x FY21E earnings are attractive considering the long term structural story on RAC, free cash generation and strong balance sheet. Maintain Outperformer.