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Voltas FY06 results: Our view - Views on News from Equitymaster
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Voltas FY06 results: Our view
May 11, 2006

Performance summary
Engineering services and air-conditioning major, Voltas, has reported decent results for the fourth quarter and full year ended March 2006. Led by a strong performance from the company’s electro-mechanical and engineering services divisions, the topline has grown by 34% YoY during the fiscal. Savings in other expenses has helped the company expand its operating margins. However, an extraordinary item on account of VRS expenses for the company’s Hyderabad plant has dented the bottomline growth, which would otherwise have been much stronger. As a matter of fact, for FY06, the company has underperformed our topline and bottomline estimates by 9% and 15% respectively.

Financial performance: A snapshot…
(Rs m) 4QFY05 4QFY06 Change FY05 FY06 Change
Sales 4,878 5,139 5.4% 13,867 18,531 33.6%
Expenditure 4,679 4,838 3.4% 13,422 17,524 30.6%
Operating profit (EBDITA) 198 301 51.7% 445 1,007 126.4%
Operating profit margin (%) 4.1% 5.9%   3.2% 5.4%  
Other income 48 90 88.9% 225 296 31.9%
Interest 2 (13)   39 14 -63.7%
Depreciation 25 36 48.2% 105 111 5.8%
Profit before tax 220 367 67.1% 526 1,179 124.0%
Extraordinary income/(expense) 11 4   50 (262)  
Tax 3 134   73 212 192.4%
Profit after tax/(loss) 228 237 3.9% 504 705 39.8%
Net profit margin (%) 4.7% 4.6%   3.6% 3.8%  
No. of shares 33.1 33.1   33.1 33.1  
Diluted earnings per share (Rs)         21.3  
P/E ratio (x)         48.1  

What is the company’s business?
Voltas is a major player in the electro-mechanical engineering segment, which involves all aspects of construction of infrastructure like electricals and air conditioning, barring the civil structure. The company also has presence in manufacturing of forklifts, textile auxiliary, agro-chemicals and trading of chemicals. On the unitary division front, the company has presence in commercial refrigerators and visi-coolers. Voltas has a joint venture with Fedders of the US for manufacturing of air conditioners.

What has driven performance in FY06?
EMPS and EPS share the honours: Growth in Voltas’ FY06 topline has mainly been a result of the strong performance from the company’s electro-mechanical projects and services (EMPS) segment, where revenues grew by 41% YoY. With this growth, the division’s contribution to the company’s total revenues increased to 59.3% during FY06 (55.7% in FY05). Voltas has especially witnessed strong growth in the Middle East region. The company, in FY06, won some prestigious projects in this region (especially in Abu Dhabi, Bahrain and Dubai). Going forward, apart from the Middle East infrastructure investment boom, we anticipate the Indian infrastructure story (led by airport modernisation) to provide Voltas a way to diversify its EMPS revenue base much wider. However, we expect the international business to continue to be the major driver for topline growth in the future.

At the end of FY06, the EMPS’ division’s order backlog stood at Rs 18.5 bn, up almost 50% over the backlog of Rs 12.4 bn that the company had recorded at the end of FY05. Out of the current backlog, some of the major domestic contracts include heating, ventilation and air-conditioning projects from TCS (Rs 600 m), Ambience Developers (Rs 390 m) and some airport projects.

Segment-wise performance…
  4QFY05 4QFY06 Change FY05 FY06 Change
Electro-Mechanical Projects & Services (EMPS)
Revenue 3,150 2,957 -6.1% 8,037 11,295 40.5%
% share 63.0% 55.7%   55.7% 59.3%  
PBIT margin 7.4% 4.7%   6.5% 6.2%  
Engineering Products & Services (EPS)
Revenue 512 840 64.0% 1,591 2,528 58.9%
% share 10.2% 15.8%   11.0% 13.3%  
PBIT margin 26.7% 26.8%   25.7% 27.6%  
Unitary Cooling Products (UCP)
Revenue 1,198 1,397 16.6% 4,265 4,723 10.7%
% share 24.0% 26.3%   29.5% 24.8%  
PBIT margin -3.1% 1.0%   -1.7% -0.2%  
Others  
Revenue 142 116 -18.2% 547 507 -7.3%
% share 2.8% 2.2%   3.8% 2.7%  
PBIT margin 4.2% 31.0%   10.0% 23.3%  
Total*
Revenue 5,002 5,310 6.2% 14,441 19,054 31.9%
PBIT margin 6.8% 7.8%   6.3% 7.9%  
* Excluding inter-segment adjustments

Voltas’ Engineering Products Services (EPS) division also aided the overall growth (more so in 4QFY06, when EMPS revenues have witnessed a decline) during FY06, with revenues growing by 59% YoY. Strong growth in the company’s textile machinery (45% YoY) and materials handling businesses (52% YoY) has aided the overall performance of the segment during the fiscal. Considering the large-scale capex plans of Indian companies in these sectors, we believe that maintaining a strong rate of growth shall not be a problem for the company.

The third major business segment of Voltas, the Unitary Products business, recorded a revenue growth of 11% YoY during FY06. An aggressive sales and marketing strategy, resulting in 43% YoY growth in air conditioner sales over the previous year, has led the performance of this division during the fiscal. Factors like affordable prices, easy availability of low cost finance, higher disposable income and the urge for better living have seemingly helped Voltas rake in a good performance in air-conditioner sales in FY06.

The year saw the company offering VRS to the entire workforce at its Hyderabad plant, thus incurring a total cost of Rs 650 m. We believe that the reduction in operations at the Hyderabad plant and the consequent decline in employee costs shall aid Voltas’ overall margins for the unitary division going forward. The benefits seem to have begun filtering in during 4QFY06. As we have indicated in the past, in lieu of the closure of the Hyderabad plant and in anticipation of higher demand going forward, Voltas will be setting up a green field unit for manufacture of A/Cs and air coolers in Uttaranchal. By setting up these units in Uttaranchal, Voltas can take advantage of relatively lower employee costs and tax benefits. Total capex for the Uttaranchal venture will be Rs 1.2 bn, spread over a period of three years (FY06-FY08).

Lower staff and other costs power margins: Despite the rise in raw material costs (from 75.3% of FY05 sales to 77.4% of sales in FY06), Voltas has reported a strong expansion in its operating margins during the fiscal. This has mainly been on the back of lower staff costs and other expenses.

Based on segments, while PBIT margins of the EMPS division contracted during FY06, those for the EPS and UCP divisions recorded strong expansions. The EPS division has earned a PBIT margin of 27.6% during FY06, and has contributed to over 46% of the company’s total PBIT during the fiscal (with just 13.3% share in total revenues). Consequently, the rising revenue contribution of the EPS segment has once again proved beneficial for Voltas’ overall margin improvement. Overall, the company’s actual operating margins of 5.4% during FY06 are marginally lower then our estimate of 5.8%.

Extraordinary impact pares bottomline: Despite the strong expansion in operating margins and lower interest outgo, extraordinary expenses to the tune of Rs 262 m have pared Voltas’ bottomline growth during FY06. This extraordinary expense has been on account of the VRS (Rs 650 m) that the company had offered to the entire workforce at its Hyderabad plant. But for gains on sale of some property and developmental rights and reversals of past provisions, the extraordinary impact would have been higher. A higher effective tax rate has also played its part in suppressing the net profit growth. The increase in the effective tax rate was on the back of the tax shelter being used up at one of its units. In fact, on this basis, the company expects its tax rate to increase further in FY07.

What to expect?
At the current price of Rs 1,025, the stock is trading at a price to earnings multiple of 16.2 times our estimated FY08 earnings. The board has recommended a dividend of Rs 6 per share (dividend yield of 0.6%) and a stock split in the ratio of 10:1, i.e., split of shares of face value of Rs 10 each into 10 shares of face value of Re 1 each.

Voltas has done well to improve upon its profitability during FY06, especially when it has faced pressures on the raw material costs front. We believe that the expansion at Uttaranchal shall also stand the company in good stead with respect to lowering its employee expenses and availing of tax benefits, which shall contribute to the improvement in profitability.

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