Buy Voltas; target of Rs 700: Motilal Oswal

Motilal Oswal 's research report on Voltas

Voltas's UCP (Unitary Cooling Product) segment performed better than peers. Revenue decline for the segment was limited to 60% (v/s ~70% for peers), and it surprised with margin expansion of 240bps YoY. Inventory remains high, with company-level inventory at 140 days and channel-level inventory at 40-45 days. We continue to expect inventory normalization by Dec'20-end only. Voltas gained further market share in the RAC (Room Air Conditioner) business and emerged as market leader in the Inverter category as well. We are not too concerned about inventory and believe that Voltas deserves the benefit of doubt due to COVID-19-led demand disruption in a seasonal product. However, we do see some risks emerging in the Projects business. OB is up 61% YoY to INR76.6b, of which 38% is in the international markets (largely the Middle East). We expect Voltas to have a better risk mitigation strategy in place on account of having further insight due to its past experience over FY13-16. We cut our FY22 EBITDA estimates by 5% as we lower our margin estimate in the Projects business to model-in some conservatism.

Outlook

We increase our multiple for the UCP segment to 40x from 35x earlier on its relative outperformance v/s white goods companies. Voltas remains our preferred play in the underpenetrated AC industry in India. Maintain Buy, with TP of INR700 (prior: INR600) as we roll over to Sep'22E.

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