Rich valuations may weigh on Voltas' cool outlook despite stellar Q3 show

Analysts turn cautious following a near 40 per cent gain in last three months

Shares of India’s largest air conditioning company, Voltas, corrected more than 4 per cent from its intraday high on Tuesday. They closed 2.1 per cent lower as investors booked profits, even as the company reported better-than-expected results for the October-December (third quarter, or Q3) quarter.

Voltas’ earnings in the seasonally lean Q3 beat analyst expectations by a huge margin, thanks to all-round growth across business segments. Revenue from the unitary cooling products (UCP) business rose 40 per cent over the corresponding quarter, aided by pent-up demand and increased stocking by dealers, ahead of price increases initiated in January.

The company maintained its leadership position in room air conditioners, with a market share of 26 per cent as of December 2020 and saw the share of inverter ACs grow 60 per cent, from 49 per cent in the year-ago period.

Additionally, the pick-up in execution in the electromechanical projects business boosted revenue from that segment in Q3. This resulted in a 50 per cent jump in the company’s operating profit, while margins expanded nearly 80 basis points year-on-year (YoY) to 7.3 per cent in Q3.

Overall, net sales were up 34 per cent YoY at Rs 1,995 crore versus consensus estimate of Rs 1,655 crore, while net profit surged 46 per cent YoY to Rs 129 crore, against expectations of Rs 100 crore.

Analysts said this sets a solid foundation for strong growth in the coming quarters.

“A favourable upcoming summer season, market share gains, benign base, and strong execution should continue to drive Voltas ahead of industry growth,” said Naval Seth, research analyst at Emkay Global.

Also, the company’s order book at Rs 7,270 crore at the end of Q3 continues to remain robust, providing strong revenue visibility, he added.

The Street also remains enthused with the long-term potential from the scaling up of its home appliance manufacturing joint venture, Voltbek Home Appliances, with the management hopeful of cornering 10 per cent market share by 2025.

Factoring in the strong beat in Q3 and positive business outlook, most brokerages have increased their earnings and upped the target price estimates for the stock. However, an over 36 per cent rally in the company’s share price over the past three months has turned valuations expensive. Not surprising then, the stock saw some profit-booking, despite Q3 results beating estimates.

“At the current market price, the UCP business is trading at 59x its 2021-22 estimated price-to-earnings. We believe the market price adequately factors in the franchise strength of the UCP business," said analysts at Motilal Oswal Securities.