Voltas Q2 gets a thumbs down from analysts

Voltas’ second quarter results failed to meet brokerage expectations, prompting several firms to cut their ratings, estimates and price targets on the stock. The company’s profitability was impacted by continued losses in its electromechanical projects and services (EMPS) business, which is closely aligned to the construction sector.

Analysts acknowledged the company’s growth potential but see near term headwinds due to project losses. Most have turned cautious due to rich valuations and expect the stock’s underperformance to persist in the coming months.

Motilal Oswal cut its FY2024 earnings estimate by 7% and 5% for the current and next financial years, but retained its Buy rating with a price target of Rs 1,000 against the current price of around Rs 800.

Antique Stock Broking maintained its ‘Hold’ rating but lowered EPS estimates for FY2024 and FY2025 by 15% and 5% respectively. It believes the worst is behind in terms of margin erosion but valuations limit upside. Price target is Rs 855.

IIFL Securities retained its ‘Reduce’ rating with a marginal increase in price target to Rs 876 from Rs 810 earlier. It cut FY2024 earnings estimate by 28% on expectations of continued losses in EMPS business.

Kotak Institutional Equities reiterated its ‘Sell’ call citing risks of further negative surprises amidst competitive pressures. It slashed FY2024 EPS estimate by 44% and observed that “return on capital is also likely to erode in the coming years, with management guiding to a 7- to 8-year payback period on capex projects of Rs5-6 bn to be executed in the next two years.” However, estimates for upcoming years were not tweaked much. It has a price target of just Rs 770.

Centrum Broking maintained its ‘Reduce’ rating with a slightly raised target price of Rs 810, up 2%. It cut FY2024 and FY2025 earnings forecasts by 23% and 2.5% respectively due to losses in EMPS segment. “Likely EMPS loss in entire FY24E leads to 23% cut in our earnings estimate while FY25E earnings gets marginally reduced by 2.5%,” it said.

UCP Segment
The UCP segment, which includes AC and commercial refrigeration products, delivered steady 15% revenue growth in Q2. Volume growth was also 15% for ACs. However, most brokers pointed out that margins remain under pressure amidst competition. Voltas lost market share in multi-brand outlets but offset it through higher sales in other channels. The management remains focused on regaining lost AC market share while balancing margins. But competition is likely to remain intense over the next few years.

Voltas is also investing significantly in new capacity expansion and local manufacturing under the PLI scheme to improve cost competitiveness. But the payback period is long at 7-8 years as per management guidance. Hence, return on capital can get diluted in the interim. Air coolers, commercial ACs and refrigeration products saw varied trends during the quarter. But overall business momentum seems decent.

With commodity prices cooling off, brokers expect some respite on margins going ahead. But most believe margin expansion will be gradual as competitive pressures persist. The base effect will also drive strong growth in the coming years as demand normalizes post-covid. But market share losses and high capex remain key monitorables for the UCP segment.

EMPS Segment
The EMPS segment revenue grew 67% YoY in Q2 driven by project execution. The order book remains healthy providing revenue visibility. However, losses continued due to provisions for delayed collections from overseas projects.

As per management, collections have been impacted in some Middle East countries like Qatar where Voltas has executed MEP projects. The company has conservatively accounted for provisions, treating them as credit losses.

But the actual losses may be lower once delayed collections materialize. The domestic EMPS business remains on solid footing with healthy order inflows during the quarter. only the international piece is problematic currently.

The management expects 2-3 more quarters of provisions before the segment returns to profitability. Better project selection and risk management will be the key going forward. The 5% EBIT margin guidance for the segment may get delayed due to the provisioning impact.

Overall, brokers acknowledge the strong growth potential in EMPS business given Voltas’ project execution capabilities and healthy order book. But the drag from provisions will affect near term performance. Risk management in international projects needs improvement to avoid future surprises.

Performance Analysis
On the company’s performance, Motilal Oswal pointed out that the unitary cooling products (UCP) segment delivered steady growth despite losing market share in multi-brand outlets. However, margins remain under pressure. It expects provisioning to continue in EMPS given the management commentary.

Antique Stock Broking noted that operational performance missed estimates due to losses in EMPS business. However, it believes the worst margin erosion seems to be over. It expects long term growth to be driven by AC penetration potential.

According to IIFL Securities, the UCP business performance was stable in Q2 with 15% volume and value growth in ACs. But losses in EMPS offset the execution growth. It sees provisioning impact persisting for 2-3 more quarters.

Kotak Institutional Equities highlighted that losses in EMPS hurt profits although UCP delivered in-line growth. It observed that RoIC is also likely to erode amidst industry-wide margin pressure.

Centrum Broking pointed out that losses in EMPS weighed heavily on margins. While UCP growth met expectations, margin pressure persisted. It sees pain in EMPS to continue based on management commentary.