Buy Voltas; target of Rs 1260: ICICI Direct

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ICICI Direct's research report on Voltas

Voltas’ Q3FY21 performance was much ahead of our expectation. Unitary cooling product (UCP) division reported strong volume growth of 40% YoY led by pent up demand and inventory building at dealer’s level amid fear of price increase. Inverter AC sales increased sharply by 75% YoY in Q3FY21, and are now 60% of total AC sales (vs. 49% in Q3FY20). The company has also initiated a price hike in the range of 5-6% largely to offset input price pressure (the impact will be visible in Q4FY12). The EBIT margin of the division has also increased ~236 bps YoY to 12.5% supported by better gross margin (use of low cost of inventory) and favourable product mix. According to management, the room air conditioner (RAC) performance is likely to remain strong in Q4FY21 as well due to continuous inventory build-up at dealers’ level (due to upcoming season) and a favourable base. We believe changing lifestyle (rising work from home culture) along with demand staying intact in semi urban and rural India is likely to drive UCP segment sales CAGR of ~15% for Voltas in FY20-23E.

Outlook

We build in revenue, PAT CAGR of ~12%, 27%, respectively, for FY20-23E, and revise our rating from HOLD to BUY by ascribing PE multiple 11x, 11x, 52x to EMPS, EPS, UCP segment, respectively. We also revise target price to Rs 1260 (earlier Rs 845).

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