New Facility And Strong Demand Will Improve Future Profitability Across Segments

Key Takeaways

• Strong demand and consumer strategies are likely to drive revenue growth in cooling products, with operational efficiencies improving margins.
  
• Recovery in Electro-Mechanical Projects, robust international joint venture growth, and strategic initiatives support profitability and sustainable growth.
  
• Elevated commodity prices, operational challenges, and strategic caution impact Voltas' profitability and revenue growth across key segments.

Catalysts

Operates as an air conditioning and engineering solution provider primarily in India, the Middle East, Africa, and internationally.

• The ramp-up of the new air conditioning facility in Chennai is expected to enhance operational efficiency, likely leading to improvements in net margins and earnings as production scales up in the coming months.
  
• Anticipated strong summer demand along with enhanced consumer-facing strategies such as consumer-centric financing schemes and in-shop demonstrators are expected to drive revenue growth for unitary cooling products including both room air conditioners and air coolers.
  
• The Electro-Mechanical Projects and Services segment has shown significant recovery with a strong order pipeline both domestically and internationally, which could positively impact revenues and profitability as execution progresses.
  
• VoltBek, the international joint venture, is experiencing robust growth with a strategy to localize production and premiumize offerings, aiming for EBITDA breakeven in the near future. This could contribute to better margins and earnings.
  
• Strategic initiatives, including backward integration and value engineering measures, alongside expected cost efficiencies from localized production, are set to enhance profitability and ensure sustainable growth across segments.

Voltas Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Voltas's revenue will grow by 9.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.8% today to 7.1% in 3 years time.
• Analysts expect earnings to reach ₹13.9 billion (and earnings per share of ₹42.11) by about May 2028, up from ₹7.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹15.6 billion in earnings, and the most bearish expecting ₹10.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 54.3x on those 2028 earnings, down from 57.1x today. This future PE is greater than the current PE for the IN Construction industry at 21.1x.
• Analysts expect the number of shares outstanding to grow by 0.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.09%, as per the Simply Wall St company report.

Voltas Future Earnings Per Share Growth

Risks

• Elevated commodity prices and a steep depreciation of the USD-INR exchange rate have impacted profitability, suggesting pressure on net margins.
  
• The commercial refrigeration segment faced challenges due to reduced capital expenditure by customers, resulting in a drop in margins, which could impact earnings.
  
• High costs associated with advertising, in-shop demonstrators, and brand building, especially for the VoltBek Home Appliances, have pressured operating margins, affecting overall profitability.
  
• The anticipated ramp-up of new factory operations faced delays, resulting in additional costs and impacted margins, which could affect future earnings.
  
• Concerns in the international projects sector exist due to a focus on consolidation and selective project acceptance, indicating a cautious approach that may slow revenue growth.

Valuation

• The analysts have a consensus price target of ₹1539.029 for Voltas based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1990.0, and the most bearish reporting a price target of just ₹1100.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹196.4 billion, earnings will come to ₹13.9 billion, and it would be trading on a PE ratio of 54.3x, assuming you use a discount rate of 14.1%.
• Given the current share price of ₹1236.1, the analyst price target of ₹1539.03 is 19.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.