In our view, Voltas has consolidated supply chain via robust sourcing strategies and smarter SKU positioning while retaining one of the lowest cost structures versus most peers.
Voltas sustained strong Ebitda beat for second consecutive quarter in Q1FY21, which was marred by 49% industry (RAC) volume dip, high system inventory and price disruptions. Management attributed strong margin to product mix (higher share of inverters), low-cost inventory and agile supply chain and market share gains to better offtake in North, South and East versus peers.
Commentary in projects business remains cautious for the year with Voltas making time-led provisions driving Ebit level loss in Q1. While we remain cautious on the projects business given near-term challenges, we believe the company is on track for meaningful scale up in the Voltbek JV over 12-24 months closing SKU gaps as it ramps-up production and product positioning while retaining its RAC edge. We maintain Voltas as our top pick despite a sharp recent rally (+43% in 3M) and revise up TP to Rs 730 (from Rs 620; SoTP table) as we raise UCP PE multiple to 40x (from 34x) factoring in medium-term scale up in earnings and widened market share/OPMs gap versus peers.
Voltas’ back-to-back Ebitda beat can be attributed to improving market share (acceptance of its inverter ACs in key demand centres), raw material sourcing benefits (some will of course reverse) and strong focus on cost/supply chain. In the past six months, the company has surprised versus peers on growth and OPMs. In our view, Voltas has consolidated supply chain via robust sourcing strategies and smarter SKU positioning while retaining one of the lowest cost structures versus most peers.
Voltas’ project business is facing near-term challenges despite strong order book, especially on OPMs, given cost escalations due to delayed certification, calibrated site mobilisations, etc. In our view, while RAC has surpassed expectations, better execution on Volt-bek JV could add incremental value as market
Voltas has consistently delivered in RACs despite rising concerns, delivering on supply-chain, innovative product positioning and presence across demand centres. This, coupled with potential scale up of the Volt-bek JV augurs well for growth. We maintain ‘BUY/SO’. The stock trades at 35x FY22E PE (UCP segment).