Voltas’ Q4FY20 profits were 10% below expectations as the engineering (MEP) segment saw 18% y-o-y revenue decline. Unitary Cooling segment, primarily AC, offset MEP weakness with a 20% y-o-y revenue growth & margin improvement. We reduce FY21E EPS sharply to account for incremental 3-6 weeks of lockdown, but marginally by 5% in FY22E. We believe a strong balance sheet and the management
delivering in a difficult environment will see premium valuations sustain. Maintain ‘buy’.

Voltas has maintained its market leadership in air-conditioners (AC) with a market share of 24% in FY20. Margins improved by 424 bps y-o-y to 14.6%, driven by operating leverage, product mix and pricing. The management was clear on not compromising on margins by giving huge discounts. A 60-day system inventory despite no sales in April 2020 is a function of no production during the lockdown. Utilisation ramp up will be gradual and the focus is on capturing as much sales as possible in May-June 2020. Heatwave in the north has helped and also demand in tier-II and Tier-III cities where dealerships
opened up earlier vs Tier-I. Our Q1FY21E segment sales factors 70% y-o-y decline vs 50% earlier.

The management highlighted there is an intentionally high propensity to delay payments in the current environment.

Monetisation is the focus and execution will be slowed down where payments are delayed. Globally, construction was considered an essential service and did not face the slowdown that domestic projects did due to the lockdown.

However, the pace of execution is expected to slow, given the sharp fall in oil prices and also delays in events. In India, government projects may see delayed payments but the management expects them to come through. Sharp rise in order book by 56.5% y-o-y does leave some buffer on cancellations for
FY20-FY22E revenue CAGR to be met.

Voltas delivering fairly decent results especially in context of peers like Blue Star (Rs 516, buy) and seeing a margin improvement in AC despite muted March 2020 should see premium valuations sustain. We believe Voltas is a good recovery play on both consumption and investment themes in India with a strong balance sheet to back it. Maintain ‘buy’ with a revised TP of Rs 625, which reflects 30xPE FY22Ev/s 28x earlier.