Strong Q4: Voltas’s FY21 Q4 revenue, EBITDA and PBT grew by 27%, 72%, and 44%, respectively. Strong performance was only partly attributable to a favourable base as Voltas’s 2 year CAGR in revenue and pre-tax profit are 13% and 36% respectively. Earnings came in 18% above consensus expectations as both Projects business (8.4%) and room AC segment (15.6%) profitability surprised positively. Room AC segment revenue grew 20% y-o-y and Voltas’s market share in the segment at multi brand outlets improved to 25.6% (year to date Feb 2021) from 24.2% in same period last year. The projects business’ top line increased 37% y-o-y.
Short-term headwinds: Ongoing lockdowns in many states across India to contain the Covid-19 second wave have coincided with the summer season, materially impacting demand, which had been recovering sharply and strongly post the Covid-19 first wave. Rising commodity cost is an additional short-term headwind on profitability.
Bright outlook medium term: We expect swift and reasonably robust demand recovery for the room AC industry once lockdown restrictions ease, considering low penetration and demand composition. We think the high-growth Indian room AC industry is set for faster consolidation in favour of larger players due to import restriction measures, Covid-19 led supply chain challenges and changing consumer behaviour. Voltas could be a key beneficiary given its leadership position and its position as one of the highest profitability companies in the sector. We think the scaling up of VoltBek joint venture is impressive and still underappreciated by market.
Earnings and valuation: On the back of stronger than expected Q4 21, we raise our FY22e EPS forecasts by 9% on a higher segment margin assumption. Changes to our FY23e are negligible. We value Voltas and its VoltBek joint venture using a discounted cash flow methodology. We assume a weighted average cost of capital of 9.50% (unchanged). Our medium-term forecasts (FY23e and onwards) are broadly unchanged in this report – thus our target price remains at `1,150. The VoltBek JV contributes `180/sh to our target price (unchanged). Downside risks: Slower and protracted demand revival post removal of lock down restrictions and slower than expected ramp-up of VoltBek JV are key downside risks.