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Voltas: Exceptional gain boosts profits - Views on News from Equitymaster

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Voltas: Exceptional gain boosts profits
Feb 12, 2013

Voltas has announced the third quarter results of financial year 2012-2013 (3QFY13). The company has reported 0.3% YoY fall in sales with net profits of Rs 768 m during the quarter compared to a loss of Rs 1,154 m in 3QFY12. Here is our analysis of the results.

Performance summary
  • Net sales decline 0.3% YoY in 3QFY13. This was mainly due to a 3.3% YoY fall in the Electro-Mechanical & Project services (EMPS) business segment.
  • Operating profits fell 69.9% YoY during the quarter. In line with that, operating margins also declined from 7.0% in 3QFY12 to 2.1% in 3QFY13.
  • The company reported a net profit of Rs 768 m compared to a loss of Rs 1,154 m in 3QFY12. However, after adjusting for the exceptional items related to sale of properties and investments, the net profit stood at Rs 170.6 m, for 3QFY13. Further, it may be noted that the loss in 3QFY12 was predominantly due to an upward revision in estimated cost for one project in Qatar.
  • During the last quarter the company sold off its stake in a subsidiary company called Simto Investment Ltd (SIL) for a consideration of Rs 296.8 m. On 31st August 2012, the company transferred its entire shareholding in SIL effective which it ceased to be a subsidiary of Voltas.

Consolidated financial snapshot
(Rs m) 3QFY12 3QFY13 Change 9MFY12 9MFY13 Change
Sales 11,539 11,502 -0.3% 36,016 39,218 8.9%
Other operating income 42 24 -43.0% 98 120 23.2%
Expenditure 10,774 11,283 4.7% 34,114 37,717 10.6%
Operating profit (EBDITA) 807 243 -69.9% 1,999 1,622 -18.9%
Operating profit margin (%) 7.0% 2.1%   5.5% 4.1%  
Other income 230 243 5.5% 810 775 -4.4%
Interest 64 72 12.6% 219 278 26.8%
Depreciation 84 70 -17.0% 276 218 -20.8%
Profit before tax 890 345 -61.3% 2,315 1,900 -17.9%
Onerous contract (2,766) -   (2,766) -  
Exceptional items 172 598 247.8% 1,236 754 -39.0%
Tax (545) 181   212 674 218.3%
Profit after tax/(loss) (1,160) 761   573 1,981 245.7%
Minority interest 6 7 15.5% 10 8 -22.8%
Share of associates - -   (1) -  
Net profit (1,154) 768   582 1,989 241.4%
Net profit margin (%) -10.0% 6.7%   1.6% 5.1%  
No. of shares         330.9  
Diluted earnings per share (Rs)         6.0  
Reported P/E ratio (x)*         10.3  
* On a trailing 12-months basis

What has driven performance in 3QFY13?
  • Voltas’ consolidated sales declined by 0.3% YoY during 3QFY13. Revenues from the Electro-Mechanical & Project services (EMPS) segment declined 3.3% YoY while margins stood at 0.7% compared to 7.3% in 3QFY12. However, it may be noted that margin swings are a common phenomenon in the industry given the absence of prompt certifications. Unless certifications are received revenues are not recognized. This makes absorption of fixed cost difficult. Also, significant provisioning that is taken upfront with respect to cost escalations foreseen in future makes margins volatile. With respect to the Sidra project it may be noted that it was 90% complete at the end of the quarter. The order book for the segment was relatively flat at Rs 42.1 bn at the end of the quarter.

  • The sales for Engineering & Products Services (EPS) segment increased by 21.6% YoY. Even the margins registered sharp improvement and stood at 24.7% during the quarter.

  • Sales from the Unitary Cooling Products (UCP) business segment increased 2.1% YoY. The performance was noteworthy considering that it was an off-season and the industry de-grew by 1% during the quarter. Margins also improved by 10 bps YoY due to increased indigenization and timely pricing decisions. It may be noted that the company continues to be a market leader in the air conditioning space.

    Segment-wise performance#
    (Rs m) 3QFY12 3QFY13 Change 9MFY12 9MFY13 Change
    Electro-Mechanical Projects & Services (EMPS)
    Revenue 8,241 7,973 -3.3% 22,633 23,162 2.3%
    % share  71.4% 69.3%   62.8% 59.0%  
    PBIT margin 7.3% 0.7%   4.2% 2.0%  
    Engineering Products & Services (EPS)
    Revenue 877 1,067 21.6% 3,052 3,272 7.2%
    % share  7.6% 9.3%   8.5% 8.3%  
    PBIT margin 18.9% 24.7%   16.8% 20.5%  
    Unitary Cooling Products (UCP)
    Revenue 2,338 2,388 2.1% 10,073 12,501 24.1%
    % share  20.3% 20.8%   28.0% 31.9%  
    PBIT margin 6.1% 6.2%   8.3% 7.8%  
    Others
    Revenue 85 77 -9.5% 269 303 12.8%
    % share  0.7% 0.7%   0.7% 0.8%  
    PBIT margin -10.4% -15.7%   1.1% -0.2%  
    Total
    Revenue* 11,541 11,504 -0.3% 36,027 39,238 8.9%
    PBIT margin 7.8% 4.0%   6.4% 5.4%  
    * Excluding inter-segment adjustments
    # The segmental results are before onerous contract & exceptional items

  • Overall operating margins declined to 2.1% during the quarter from 7.0% that prevailed in 3QFY12. Cost overruns, provisioning and execution of low margin orders impacted the operating profitability in the quarter.

  • The company reported net profits of Rs 768 m during the quarter compared to a loss of Rs 1,154 m in 3QFY12. However, after adjusting for the exceptional items relating to sale of properties and investment the net profit stood at Rs 170.6 m, for 3QFY13.

What to expect?
The competitive intensity especially in overseas contracts business has increased substantially in the recent past. Earlier the EBIT margins in the EMPS business were in the region of 7-8%. Now, they have come down 4-5% due to rising competitive intensity. However, the company has decided to not bid at absurd levels to get projects on hand. Its focus remains on profitability and cash flows. Also, it should be noted that the margins in the EMPS business are quite volatile as accretion of the same depends on claims and variations that get affected from time to time.

As far as the UCP segment is concerned, it may be noted that the company continues to be a market leader in this space. Plans to launch new products and thrust on marketing will enable the company to maintain its leadership position in the future. Based on these factors we maintain our BUY view on the stock from a 2-3 years perspective.

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