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Voltas: Margins take a beating
Jan 24, 2009

Performance summary
  • Net sales grow 30% YoY in 3QFY09, 27% YoY in 9mFY09. Growth aided by strong performances from the electro-mechanical projects business, which grows by 68% YoY during the quarter.
  • Operating margins contract by 2.8% YoY during the quarter owing to higher staff and raw materials costs (as percentage of sales).
  • Other income increases by 37% YoY during the quarter.
  • Bottomline declines by 10% YoY for the quarter owing to shrinkage in operating margins.


Financial performance snapshot
(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Sales 6,648 8,625 29.8% 22,024 27,873 26.6%
Expenditure 6,111 8,165 33.6% 20,119 25,933 28.9%
Operating profit (EBDITA) 537 461 -14.2% 1,906 1,941 1.8%
Operating profit margin (%) 8.1% 5.3%   8.7% 7.0%  
Other income 100 137 36.8% 285 635 122.4%
Interest 4 (46)   21 (73)  
Depreciation 32 44 35.0% 95 134 40.4%
Profit before tax 600 599 -0.2% 2,075 2,515 21.2%
Extraordinary income/(expense) 89 (2)   204 261 27.7%
Tax 217 173 -20.0% 749 878 17.2%
Profit after tax/(loss) 472 424 -10.2% 1,530 1,897 24.0%
Net profit margin (%) 7.1% 4.9%   6.9% 6.8%  
No. of shares       330.9 330.9  
Diluted earnings per share (Rs)*         7.4  
P/E ratio (x)*         5.4  
* On a trailing 12-months basis

What has driven performance in 3QFY09?
  • Voltas grew its sales by 30% YoY during 3QFY09. This was largely a result of strong performance from its electro-mechanical projects & services (EMPS) business which contributed to about 72% of the total revenues. This segment recorded sales growth of 68% YoY during the quarter. The management has however indicated that cash flows in domestic projects business are under pressure due to the prevailing liquidity conditions. The company has been putting pressure on clients by slowing down execution on some domestic projects to encourage a better flow of cash. Order book of the EMPS business at the end of December 2008 stood at Rs 53 bn which is about 3.2 times its FY08 sales, thus providing good revenue visibility for the segment.

    Segment-wise performance
    (Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
    Electro-Mechanical Projects & Services (EMPS)            
    Revenue 3,737 6,258 67.5% 11,680 16,764 43.5%
    % share 56.0% 72.4%   52.9% 60.0%  
    PBIT margin 7.4% 6.8%   8.1% 8.2%  
    Engineering Products & Services (EPS)            
    Revenue 1,600 1,099 -31.3% 4,053 4,080 0.7%
    % share 24.0% 12.7%   18.3% 14.6%  
    PBIT margin 17.7% 9.8%   20.3% 13.7%  
    Unitary Cooling Products (UCP)            
    Revenue 1,238 1,177 -5.0% 6,069 6,792 11.9%
    % share 18.6% 13.6%   27.5% 24.3%  
    PBIT margin 5.2% 0.7%   6.5% 6.5%  
    Others            
    Revenue 96 108 12.5% 294 315 6.8%
    % share 1.4% 1.2%   1.3% 1.1%  
    PBIT margin 10.5% 7.1%   12.2% 9.4%  
    Total            
    Revenue* 6,670 8,641 29.5% 22,096 27,949 26.5%
    PBIT margin 9.5% 6.4%   9.9% 8.6%  
    * Excluding inter-segment adjustments

  • Revenues of the engineering products and services (EPS) business fell by 31% YoY. This fall has been especially due to the mining and construction equipment business as also the textile machinery business. The segment saw a sharp drop in EBIT margins due to the underperformance of the textile machinery division followed by mining & construction equipment business. The margins of materials handling business also fell sharply.

  • Unitary Cooling Products saw a 5% YoY decline in sales during the quarter. Margins have been under pressure in this business due to additional provision for staff retirement benefits, substantial warehousing cost incurred and a provision on mark-to-market basis for forward booking of copper of over Rs 15 m.

  • Voltas has reported a 2.8% YoY decline in operating margins during 3QFY09 (decline of 1.2% 2QFY09). This was a result of higher raw material and staff costs. Raw material costs increased from 45.1% of sales in 3QFY08 to 56.7% in 3QFY09, thereby putting pressure on the operating margins. Costs under most heads increased primarily in the international operations due to a substantially higher level of activities. There also was an additional charge in staff cost due to revaluation of retirement benefits.

  • Voltas’ bottomline during 3QFY09 recorded a 10% YoY decline. This was on the back of contraction in operating margins and substantially lower extraordinary income compared to the same period last year.

What to expect?
At the current price of Rs 41, the stock is trading at a multiple of 4.2 times our estimated FY11 earnings. While the management considers the order book position of the company to be good enough, the new inquiry inflows have slowed down. Finalisation of orders for infrastructure projects is taking much longer. The Middle East regions of Abu Dhabi, Qatar and Saudi Arabia are likely to see substantial investments which will benefit Voltas though the fall in crude prices is a big concern for the region. Overall, the company’s performance has been protected by the projects businesses and the company is looking to offset a substantial part of the negative impact of current economic conditions in the domestic market by growth in the international projects business.

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