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Voltas: Facing hot weather
Feb 3, 2011

Voltas has declared its 3QFY11 results. The company has reported 5% YoY growth in sales while its net profits have declined by 7% YoY. Here is our analysis of the results.

Performance summary
  • Net sales grow 5% YoY in 3QFY11. Growth was aided by a strong performance in unitary cooling products (UCP) and engineering products & services (EPS) businesses.
  • Operating profits fell by nearly 13%. The electro-mechanical projects and services (EMPS) and unitary cooling products division witnessed a sharp contraction in margins. Higher input cost is the primary reason for the pressure on operating margins.
  • Net profits fell by 7%. The interest cost rose by a whopping 179%. However, a substantial increase in extraordinary income resulting from profit on sale of properties reduced the extent of fall in net profit.
  • Order book for the electro mechanical segment stood at Rs 47 bn down 6% YoY. International market accounts for nearly 65% of the total order backlog. Order inflow during the quarter stood at Rs 5 bn, up around 20% YoY.


Financial performance snapshot
(Rs m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
Sales 9,875 10,393 5.2% 33,016 35,059 6.2%
Expenditure 9,000 9,629 7.0% 29,924 32,012 7.0%
Operating profit (EBDITA) 875 763 -12.8% 3,092 3,047 -1.5%
Operating profit margin (%) 8.9% 7.3%   9.4% 8.7%  
Other income 175 161 -8.1% 609 608 -0.3%
Interest 12 34 178.7% 72 109 51.1%
Depreciation 55 54 -1.8% 160 157 -1.6%
Profit before tax 983 836 -14.9% 3,469 3,388 -2.3%
Extraordinary income/(expense) 94 155   121 325  
Tax 312 302 -3.0% 1,114 1,185 6.4%
Profit after tax/(loss) 765 688 -10.0% 2,477 2,528 2.0%
Minority interest 8 (17)   27 (34)  
Net profit 757 706 -6.8% 2,450 2,562 4.6%
Net profit margin (%) 7.7% 6.8%   7.4% 7.3%  
No. of shares       330.9 330.9  
Diluted earnings per share (Rs)*^         10.5  
P/E ratio (x)*^         17.2  
* On a trailing 12-months basis  ^Excluding extraordinary items

What has driven performance in 3QFY11?
  • Voltas grew its consolidated sales by 5% YoY during 3QFY11. The electro-mechanical projects & services (EMPS) business continued its weak performance with a 3% YoY decline in sales. The EMPS business registered a 4% YoY decline for 9mFY11. Cost overruns in some electrical jobs at its subsidiary Rohini Industrial Electricals resulted in a loss of Rs 90 m during 3QFY11 as against a profit of Rs 40 m during 3QFY10. Cash generation in the EMPS business was low leading to higher working capital requirements..

    Segment-wise performance
    (Rs m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
    Electro-Mechanical Projects & Services (EMPS)            
    Revenue 7,131 6,926 -2.9% 21,824 20,917 -4.2%
    % share 72.1% 66.6%   66.1% 59.6%  
    PBIT margin 8.9% 6.4%   9.8% 7.7%  
    Engineering Products & Services (EPS)            
    Revenue 1,173 1,428 21.7% 3,482 3,899 12.0%
    % share 11.9% 13.7%   10.5% 11.1%  
    PBIT margin 13.5% 17.5%   15.2% 20.3%  
    Unitary Cooling Products (UCP)            
    Revenue 1,509 1,969 30.5% 7,424 10,118 36.3%
    % share 15.3% 18.9%   22.5% 28.9%  
    PBIT margin 12.6% 9.7%   10.1% 10.1%  
    Others            
    Revenue 71 72 1.4% 301 135 -55.0%
    % share 0.7% 0.7%   0.9% 0.4%  
    PBIT margin 9.3% 11.5%   11.7% 11.0%  
    Total            
    Revenue* 9,884 10,395 5.2% 33,031 35,069 6.2%
    PBIT margin 10.0% 8.5%   10.5% 9.8%  
    * Excluding inter-segment adjustments

  • On the other hand during 3QFY11 the sales for unitary cooling products (UCP) and engineering products & services (EPS) business, grew by 30.5% and 21.7% respectively. Sales in UCP business was driven by window air conditioners.

  • Overall operating margins contracted by 1.5% during the quarter. It is the EMPS and UCP business that saw margins decline by nearly 3%. However, for the EPS business margins expanded by 4%. Higher input costs and higher than expected labor and other costs in some electrical projects are the reasons for the margin erosion.

  • Low cash generation in EMPS business and higher finished goods inventories procured for UCP business has led to a significant increase in working capital requirement. Resultantly there is a substantial increase in borrowing, which has resulted in the sharp spike in interest costs.

What to expect?
At the current price of Rs 180, the stock is trading at a multiple of 11.7 times our estimated FY13 earnings. The EMPS business continues to report sluggish performance. Higher costs resulted in pressure on margins. Going forward, the management is positive on the EMPS business on account of low margins jobs taken earlier being completed. The management is hopeful about the improvement in overall execution in the forthcoming quarters because of favorable factors such as completion of the designing work of a large project and the customer's demand to expedite the ongoing project.

The EPS business has performed well with a 57% jump in net profits on the back of 22% increase in sales. Under the EPS business, all three segments namely textile machinery, mining & construction equipment and materials handling contributed to the growth. EPS business was the only division that saw expansion in margins during the quarter. The division continues to see robust order booking for the mining and construction business and material handing business. However, going forward the management has raised concerns over the textile machinery business because of suspension of textile up gradation fund (TUF) and high cotton prices.

Voltas' UCP business continues to see strong volume growth. The company anticipates some pressure on account of increasing competition in air conditioners business; however the management is confident of meeting the challenge. The company's international business is largely exposed to the risks arising from the developments in Egypt and other Middle East countries. At the current price, we maintain our cautious view on the stock.

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