Voltas (VOLT) 3QFY21 earnings were 31% better than our expectation, led by betterthan-expected execution in the EMP segment,strong volume growth in the UCP segment, with ongoing cost rationalization leading to higher margin. It has retained its numero uno position in Inverter Air Conditioners/Room Air Conditioners (RAC) with a market share of 21.8%/26% in Dec'20. Share of Inverter ACs now constitutes 60% of RAC sales (v/s 49% in 3QFY20).

With a rise in commodity prices, the management has undertaken a 5-6% price increase across the UCP segment, with COVID-related cost cuts providing a cushion to margin. "We believe the risk to margin exists in this highly competitive industry as companies revert back to their advertising spends and other expenses in the key summer season. AC demand needs to surprise to take care of commodity price inflation worries," said Motilal Oswal Retail Research.

Commenting on the outlook, the brokerage firm said, "We believe the recent market price adequately factors in franchise strength of the UCP business. We note that a large part of the margin surprise is due to cut in ad spends and low-cost inventory that was procured last year.

We increase our FY21E/FY22E/FY23E EPS estimate by 5%/11%/15% owing to the strong performance in 3QFY21 and maintain our Neutral rating with a TP of Rs 1,125/share (FY23E target P/E for the UCP business at 55x).

While VOLT remains our preferred play in the underpenetrated AC industry in India. Valuations are expected to remain elevated going into the summer season, with high expectations as well as likely announcement of a detailed PLI scheme for the AC industry."

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