Voltas’ 3QFY16 EBITDA came in 8% below expectations. MEP (projects business) disappointed with -1.2% EBIT margin v/s +1.5% expected. Management anticipates margins should recover to 4-5% in 1-2 years.
We have reduced our FY17E-18E EBITDA by 5%, and FY16E by 8%, and given higher tax rate EPS by 10% for FY17E-18E. Maintain ‘buy’ with a TP of Rs 330 (vs R370 earlier) on a good play on consumption and investment themes in India.
Unitary Cooling was 33% of revenues and 72% of EBIT. Revenue growth came back to double digits at 13% y-o-y v/s -6% y-o-y in 1HFY16.
EBIT margins came in lower at 11.6% v/s 13.3% y-o-y given increased advertising spend. Absolute segmental EBIT came in-line with expectations.
Management has cited rising competition for the last 7-8 quarters. Industry discounts are reflecting in its steady market share at 21-22%, vs the gaining trend it had seen in FY12-14.
Despite competition and weak demand Voltas has seen only 40 bps y-o-y margin decline in 9MFY16 to 11.7%. Factoring the higher advertising expenditure, we have reduced our FY16E-18E EBIT margins by 50-70 bps y-o-y.
Our confidence in margins at 12%+ in FY17E-18E stems from our expectation of the industry returning to double digit growth in the next 12 months.
Chinese players have apparently been offering companies such as Voltas an option to buy ACs at reasonable prices and rebrand them, but Voltas is being selective in this aspect.