Voltas’ fortune tied to AC business despite Voltbek optimism
The cool comfort that stock returns of air conditioner (AC) company Voltas Ltd gives is offset by its valuation. In CY24 so far, Voltas shares rose 86%, compared to 35% returns by the BSE Consumer Durables Index. However, valuations by any means are not cheap. At FY27, the stock is trading at 35x EV/EBITDA, according to Bloomberg.
Optimists would argue for a valuation upside from Voltbek—the joint venture (JV) for manufacturing white goods (excluding ACs). True, the JV has scaled up well, with strong revenue growth of 43% in FY24. Voltbek also reported 54% volume growth in H1FY25. Though it is making a loss at Ebitda level, it is expected to break even soon. But in the larger scheme of things, these factors don’t matter much to the consolidated Ebitda of Voltas. Ebitda is short for earnings before interest, taxes, depreciation, and amortization.
This is because the financials of the JV would not reflect in the sales and the Ebitda of Voltas’ consolidated results as it does not have a majority shareholding. The profit or loss of the venture is directly added to the consolidated net profit.
Real valuation
So, the best way to capture the value of Voltbek is by valuing it separately. Looking at the market capitalization of Voltas at ₹60,000 crore, the company’s 49% stake is valued at about ₹3,500 crore or merely 6% of overall valuation, according to ICICI Securities report dated 10 December. This leaves a residual market capitalization of ₹57,000 crore, mainly for electromechanical projects (EMP) and engineering—combined as non-AC and AC business. So, the question is whether the residual market capitalization is fair.
Motilal Oswal Financial Services expects profit before interest and taxes (PBIT) of ₹381 crore and ₹819 crore for the two businesses, respectively, in FY25. As the company has a small interest outgo, PBIT may be taken as a proxy for profit before tax (PBT). With an average tax rate of 25%, the likely profit after tax (PAT) would work out to ₹285 crore and ₹614 crore for the two businesses. Even if a P/E of 30x is assigned to the non-AC business, it would mean the AC business is valued at about 75x of its FY25 profit.
For perspective, H1FY25 was impressive, with AC sales increasing by 45% year-on-year to ₹5,384 crore and an almost equal jump in the earnings before interest and taxes (Ebit) of the segment to ₹443 crore. However, the high growth rate in profit needs to be sustained for at least a couple of years to justify a 75x P/E multiple for the AC business.
Considering the volatile nature of revenue and profit of EMP business and small engineering business, AC is the only business that can make investing rewarding. In short, despite the optimism around Voltbek, Voltas’ rich valuation isn’t justified.
