Voltas' Q2FY20 results (Outperformer) - Voltas continues strong performance

Q2FY20 result highlights

• Adj. PAT at Rs1.13bn (+8.8% yoy): Revenue flat yoy to Rs14.2bn (weak EMP revenues) while margins contracted 20bps yoy to 7%. Hence, EBITDA declined 2.9% yoy to Rs990mn. Higher other income (+51% yoy to Rs795mn), lower finance cost (-23% yoy to Rs49mn) and lower JV losses (Rs92mn) boosted PAT. Tax rate at 26% included Rs323mn DTA reversal. Reported PAT at Rs1.06bn (+2.9% yoy) led by Rs61mn VRS.
• UCPL performance robust: Revenues grew 19.2% yoy to Rs5.3bn on back of market share gains (YTD 24.4%; 1Q20 at 24.1%). Voltas growth was driven by invertor segment (50% of split), various promotional schemes like independence day ‘flash sales’, festive sales, etc and advertising campaigns. Growth was further boosted by traction in Air coolers. EBIT margins expanded 251bps yoy to 8.8% (low base; in line).
• EMP performance muted: Revenues declined 10.2% yoy to Rs8.1bn on slowdown in execution on liquidity crunch and festive season. Margins fell 149bps yoy to 6.9% (high base). Intake was strong in both domestic & intl mkts at Rs26.2bn (+142% yoy), backlog at Rs65.7bn (+34.5% yoy).

Conf call highlights: (1) Low base & decent Onam sales led to 19%/ 33%  industry growth (secondary) in 2QFY20/ YTD FY20 with traction towards inverter sales (2) Voltas’ 19% yoy growth was led by invertor ACs (now 50% of split AC; sustained competition with lower inverter prices), new product launches such as adjustable inverter AC & flexible AC (3) Maintain UCPL margin guidance of 11-12% on sustainable basis; (4) EESL order in Delhi (order for 50K units; 1K delivered) and Tata Power scheme in Mumbai to ramp up gradually (5) UCPL touchpoints at 19k vs 15-16k (~1 year ago) (6) Strong intake momentum to continue in 3Q20 led by wins (L1) in metro, water, etc; (6) Qatar order win in 2Q20 is driven by ease of project execution as also limited complexity, which is likely to drive timely completion; (7) VoltBek JV continues focus on increasing distribution (150 excl outlets); plant to be opnl by 3Q20 end. 

Impact on financials: FY20/21 unchanged at Rs17.4/21.7

Valuations & view

After a weak FY19, demand has bounced sharply in 1HFY20, which Voltas has been able to leverage with market share gains despite competitive intensity. Accordingly, we believe demand and thereby margins are likely to rebound over FY20-21 led by Voltas’ scale and cost efficiencies. Concurrently, recent order wins in EMP provides visibility to uptick in revenues with stable margins. Hence, we believe valuations at 31x FY21E earnings are attractive considering the long term structural story on RAC, free cash generation and strong balance sheet. Maintain Outperformer.