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Voltas: Unitary cooling leads way
Jan 28, 2008

Performance summary
  • Topline grows 17% YoY during 3QFY08, 31% YoY during 9mFY08. Growth led by strong performances from engineering agency and unitary cooling businesses.
  • Operating margins surge from 4.8% in 3QFY07 to 8.3% in 3QFY08. Lower raw material and other costs aid this expansion.

  • Expansion in operating margin coupled with lower interest costs and higher extraordinary income aid strong growth at the net profit level. Excluding the extraordinary effect, net profit growth still stands at a strong 120% YoY during 3QFY08.

Financial performance snapshot
(Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Sales 5,689 6,648 16.8% 16,792 22,024 31.2%
Expenditure 5,414 6,095 12.6% 16,052 20,100 25.2%
Operating profit (EBDITA) 275 553 101.0% 740 1,924 160.0%
Operating profit margin (%) 4.8% 8.3%   4.4% 8.7%  
Other income 85 100 17.6% 340 285 -16.1%
Interest 14 4 -70.1% 32 21 -33.9%
Depreciation 29 32 11.4% 93 95 2.4%
Profit before tax 317 616 94.2% 955 2,093 119.1%
Extraordinary income/(expense) 13 73 460.0% 23 186 724.9%
Tax 136 217 59.4% 316 749 137.1%
Profit after tax/(loss) 194 472 143.0% 662 1,530 131.1%
Net profit margin (%) 3.4% 7.1%   3.9% 6.9%  
No. of shares         330.9  
Diluted earnings per share (Rs)*         8.2  
P/E ratio (x)*         25.2  
* On a trailing 12 months basis

What has driven performance in 3QFY08?
  • Execution delays in some international projects led to Voltas reporting a subdued 6% YoY growth in its electro-mechanical projects & services (EMPS) segment. This segment, which formed 56% of the company’s total sales in 3QFY08, has seen this ort of lumpiness in the past as well. However, the company continues to do well in booking new orders for such projects as seen by the 44% YoY jump in its order backlog for this segment. The backlog stood at Rs 35 bn at the end of December 2007, almost 75% made up of international orders. We expect this segment to clock revenue growth of 40% during FY08 and a CAGR of 35% during FY07 to FY10 (26% CAGR during FY04 to FY07).

    Segment-wise performance
    (Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
    Electro-Mechanical Projects & Services (EMPS)            
    Revenue 3,541 3,737 5.5% 9,117 11,680 28.1%
    % share 62.1% 56.0%   54.2% 52.9%  
    PBIT margin 5.1% 7.4%   4.8% 8.1%  
    Engineering Products & Services (EPS)            
    Revenue 1,164 1,600 37.5% 2,934 4,053 38.1%
    % share 20.4% 24.0%   17.4% 18.3%  
    PBIT margin 21.4% 17.7%   24.1% 20.3%  
    Unitary Cooling Products (UCP)            
    Revenue 888 1,238 39.4% 4,429 6,069 37.0%
    % share 15.6% 18.6%   26.3% 27.5%  
    PBIT margin -3.2% 5.2%   0.2% 6.5%  
    Others            
    Revenue 106 96 -9.5% 338 294 -13.0%
    % share 1.9% 1.4%   2.0% 1.3%  
    PBIT margin 0.4% 10.5%   -7.1% 12.2%  
    Total            
    Revenue* 5,699 6,670 17.0% 16,818 22,096 31.4%
    PBIT margin 7.1% 9.5%   6.7% 9.9%  
    * Excluding inter-segment adjustments

    As for its engineering agency (EAS) business, which was the lead growth driver for the company during 3QFY08, strong performances continued from the mining and construction equipment segments. These sub-segments recorded growth of almost 100% YoY during the third quarter, led by robust offtake from the mining and construction companies. As for the textile machinery business, it grew by 19% YoY during 3QFY08. Although the textile machinery business has recorded some weakness owing to the pressure that textile companies are facing on account of rupee appreciation, Voltas’ management (in a recent interaction with us) has indicated that they expect the growth momentum to be maintained over the next few quarters as well. What they have said is that while new machinery orders have slowed down a bit, considering the already overflowing order books of equipment makers like Lakshmi Machine Works (from where Voltas sources a large part of its trading requirements), growth shall be maintained over the next few quarters.

    Coming to company’s unitary cooling products (UCP) business, sales grew by 39% YoY during 3QFY08. Within this business, while air conditioner sales grew by 36% YoY, water coolers and dispensers grew by 23% YoY (both in volume terms).

  • Voltas reported a 3.5% YoY expansion in operating margins during 3QFY08. This was a result of lower raw material and other costs. Raw materials, which were 58.4% of sales in 3QFY07, declined to 53.5% of sales in 3QFY08. Execution of orders in the EMPS space, where costs are front-ended, has led to the spike in operating margins for Voltas. As for the UCP business, where EBIT margins expanded from –3.2% to 5.2%, improvement was due to higher sales of the company’s energy efficient air-conditioners, which have been well received by the markets. Further, due to the closure of Hyderabad plants and shifting of operations to low cost Uttaranchal have also helped matters on the segment’s profitability front. Also, the fact that the company imports some of the components, the rupee’s appreciation against the UD dollar has also aided margins for the UCP business. As far as the EAS segment is concerned, EBIT margins declined from 21.4% in 3QFY07 to 17.7% in 3QFY08, largely due to slowdown in off-take of machines from the textile sector.

  • Expansion in operating margin has led to Voltas recording a strong 144% YoY growth in bottomline during 3QFY08. However, if one were to remove the impact of extraordinary income from both the quarters, the bottomline growth stands at a lower (yet robust) 120% YoY. The company has generated a higher extraordinary income during 3QFY08 due to Rs 91 m profit on sale of property (Rs 22 m in 3QFY07).

What to expect?
At the current price of Rs 209, the stock is trading at a multiple of 14.5 times our estimated FY10 earnings, which we believe makes the stock attractive from a long-term investment perspective. We maintain out strong outlook for Voltas’ EMPS business, as revenues and profits continue to flow in large numbers from the big contracts that the company is executing in the Middle East.

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