Voltas' Q3FY20 results (Outperformer) - UCPL performance strong; all eyes onsummer season

Q3FY20 result highlights

• Adj. PAT declined 6.2% yoy to Rs869bn: Revenue flat yoy to Rs14.9bn while margins contracted 107bps yoy to 6.2% (weak EMP performance). Hence, EBITDA declined 14.5% yoy to Rs921mn. Lower other income (-4.8% yoy to Rs597mn), higher depreciation (+30% yoy to Rs80mn) and sustained Volt-Bek JV loss impacted profitability.
• UCPL performance sustains: Revenues +14% yoy to Rs6bn led by market share gains (YTD 24.3%; FY19 at 23.9%). Voltas’ growth was driven by inverter segment (43% of AC sales), various promotional schemes and ad campaigns. Growth was further boosted by traction in Air coolers (135% yoy; 11.2% mkt share in 9M20). The positive operating leverage and cost efficiencies led to expansion in EBIT margins by 161bps yoy to 10.1%.
• EMP performance muted: Revenues declined 7.7% yoy to Rs8.1bn on slow project execution, delayed collection and liquidity crunch. Margins fell 327bps yoy to 4.6% as new projects did not cross the profit booking threshold limit. Intake was strong at +16.4% yoy led by 47% yoy increase in domestic to Rs10.8bn while international saw a 50% yoy decline to Rs1.7bn, backlog at Rs70.2bn (+41% yoy; 2.1x FY20E EMP revenues).

Conf call highlights: (1) Strong 35% RAC growth in 9MFY20 (268k units sold) led by low base, strong distribution, market share gains and advertising campaigns (2) Coronavirus impact is expected to be minimal as have inventory till Mar-20; China factories likely to re-open by 3^rd week of Feb-20; 15-20days to reach India; evaluating alternate sources in Korea, Indonesia, etc (3) Competitive intensity has increased with price wars; Voltas has not taken any price cuts and will balance mkt share vs margins; maintain UCPL margin guidance of 11-12% on sustainable basis; (4) EESL order (Delhi; order for 50K units) and Tata Power (Mumbai) scheme is ramping up gradually; (5) Domestic inflow led by Mumbai metro & water projects; (6) VoltBek factory commissioned with 1mn unit capacity to be gradually ramped up to 2.5mn units.

Impact on financials: FY20/21E EPS cut by 2% each to Rs16.9/21.2

Valuations & view

After a weak FY19, demand has bounced sharply in 9MFY20, 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 32x FY21E earnings are attractive considering the long term structural story on RAC, free cash generation and strong balance sheet. Maintain Outperformer.