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Voltas: EMPS business disappoints
Jan 25, 2010

Performance summary
  • Net sales grow 4% YoY in 3QFY10, 12% YoY in 9mFY10. Growth aided by a relatively better performance from the unitary cooling products business, which grows by 27% YoY during the quarter.
  • Operating margins expand by 3.6% YoY owing primarily to substantially lower cost of raw materials (as percentage of sales).
  • Bottomline grows by 60% YoY (excluding extraordinary items) aided by higher operating profits and lower interest outgo.


Financial performance snapshot
(Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Sales 9,538 9,905 3.8% 29,688 33,253 12.0%
Expenditure 9,043 9,030 -0.1% 27,655 30,161 9.1%
Operating profit (EBDITA) 495 875 76.8% 2,033 3,092 52.1%
Operating profit margin (%) 5.2% 8.8%   6.8% 9.3%  
Other income 197 175 -11.3% 737 609 -17.3%
Interest 35 12 -65.0% 82 72 -11.9%
Depreciation 56 55 -2.5% 166 160 -3.7%
Profit before tax 601 983 63.6% 2,521 3,469 37.6%
Extraordinary income/(expense) (9) 94   214 121  
Tax 180 312 73.1% 875 1,114 27.3%
Profit after tax/(loss) 412 765 85.8% 1,860 2,477 33.2%
Minority interest 6 8   7 27  
Share of profit of associate - -   (2) -  
Net profit 405 757 86.7% 1,851 2,450 32.4%
Net profit margin (%) 4.3% 7.6%   6.2% 7.4%  
No. of shares       330.9 330.9  
Diluted earnings per share (Rs)*         9.4  
P/E ratio (x)*         17.0  
* On a trailing 12-months basis

What has driven performance in 3QFY10?
  • Voltas grew its consolidated sales by 4% YoY during 3QFY10. This was largely a result of a weak performance of its electro-mechanical projects & services (EMPS) business during the quarter. This business recorded sales growth of just 2.6% YoY and contributed to nearly 72% of sales in 3QFY10.

    Segment-wise performance
    (Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
    Electro-Mechanical Projects & Services (EMPS)            
    Revenue 6,950 7,131 2.6% 18,108 21,824 20.5%
    % share 72.7% 71.9%   60.8% 65.6%  
    PBIT margin 6.7% 8.9%   8.1% 9.8%  
    Engineering Products & Services (EPS)            
    Revenue 1,099 1,173 6.8% 4,080 3,482 -14.6%
    % share 11.5% 11.8%   13.7% 10.5%  
    PBIT margin 9.7% 13.5%   13.6% 15.2%  
    Unitary Cooling Products (UCP)            
    Revenue 1,212 1,539 26.9% 6,780 7,660 13.0%
    % share 12.7% 15.5%   22.8% 23.0%  
    PBIT margin -3.2% 12.3%   5.0% 9.8%  
    Others            
    Revenue 293 71 -75.8% 797 301 -62.3%
    % share 3.1% 0.7%   2.7% 0.9%  
    PBIT margin 11.0% 9.3%   10.0% 11.7%  
    Total          
    Revenue* 9,554 9,914 3.8% 29,764 33,268 11.8%
    PBIT margin 5.9% 10.0%   8.2% 10.4%  
    * Excluding inter-segment adjustments

  • As for the company's engineering products and services (EPS) business, sales grew by 6.8% YoY during the quarter. The third business segment of unitary cooling products (UCP) did relatively better. Its sales grew by almost 27% YoY during the quarter. The company's order book stood at Rs 40 bn at the end of the quarter.

  • Voltas has reported a substantial 3.6% YoY expansion in operating margins during 3QFY10. This was mainly on the back of lower raw material costs. All the three major segments of the company reported healthy increase in margins.

  • Voltas' bottomline grew at a faster pace (86% YoY) than the growth in topline during the quarter. This was on the back of a strong operating performance, extraordinary income as well as lower interest and depreciation costs. On excluding the extraordinary items, profits are higher by about 60% YoY during the quarter.

What to expect?
At the current price of Rs 160, the stock is trading at a multiple of 13.2 times our estimated FY12 earnings. The company's EMPS segment has seen a sluggish performance as execution has not kept up pace due to the cautious approach and problems faced by the customers. As indicated by the management, the perception of the customers (in the domestic market) regarding the direction of the economy has a lot to do with this. With both negative and positive signals, some customers remain skeptical to committing resources until a definite trend emerges. Many customers are also facing liquidity issues.

The EPS business has started improving and some definite positive trends are visible. The textiles machinery business has been seeing new order inflow increasing month over month. The volumes of the material handling business remain subdued, though there has been some gradual positive movement. Mining and construction business has performed very well in the third quarter of the current year. The order booking has been increasing gradually and the number of inquiries indicates a pick-up in demand. Overall, the textile machinery business has been the biggest contributor to margins during the quarter, followed by the mining and construction and material handling businesses.

Voltas' UCP business has seen a robust performance as a result of a better sales mix as well as higher volumes. The sales volumes have increased both in air-conditioning and refrigeration (which includes commercial coolers) by over 20%.

At the current price, we maintain a 'Hold' view on the stock from a long term perspective.

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