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MOSL: VOLTAS (BUY)-EMP performance subdued; UCP clocks double-digit margins

VOLTAS: EMP performance subdued; UCP clocks double-digit margins

(VOLT IN, Mkt Cap USD3.2b, CMP INR681, TP INR785, 15% Upside, Buy)

 

Key UCP segment continues to surprise, EMP to bounce back

• Voltas' (VOLT) 3QFY20 earnings disappointed, entirely led by weak execution in the EMP segment and provisions impacting margins. However, good growth in the UCP segment (+14%) was a key positive, along with double-digit margins at 10.1%. Also, ordering in the EMP segment was strong leading to an all-time high order book. This gives comfort of a sharp pick-up in EMP revenues over the next 2 years.
• We lower our FY20E EPS by 9% on account of lower contribution from the EMP segment, but maintain our FY21/FY22E earnings as strong order book provides comfort. We have factored in UCP revenue CAGR of 13.5% over FY20-22, but near-term disruption due to the Coronavirus issue needs to be carefully monitored. We maintain our Buy rating with unchanged TP of INR785, based on Sep'21 EPS. 

EMP segment drags overall performance as earnings miss estimates

• 3QFY20 revenues were muted at INR14.9b and missed our expectation by 8%, attributable entirely to the EMP segment (12% miss). EBITDA was down 16% YoY to INR976m and was 29% below our expectation. EBITDA margin came in at 6.5% (-130bp YoY). On account of the weak operating performance, adj. PAT declined 6.2% YoY to INR869m (30% miss).
• Segment highlights: (a) EMP: Revenue declined 7.7% YoY to INR8.1b. PBIT margin shrank 330bp YoY to 4.6%. Order book was up 40% YoY at INR70b, implying strong order inflows in EMP. (b) UCP: Revenue grew 14% YoY to INR6b (in-line). PBIT margins surprised at 10.1% (+160bp YoY). VOLT remained the leader in the RAC market with a share of 24.3% YTD.