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Voltas: ‘Extraordinary’ impact on bottomline - Views on News from Equitymaster

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Voltas: ‘Extraordinary’ impact on bottomline
May 15, 2008

Performance summary
  • Sales grow 27% YoY in FY08, both on a consolidated and standalone basis. Growth aided by strong performance of the electro-mechanical and cooling products businesses. Actual consolidated sales figure 7% lower than our estimates.
  • Consolidated operating margins improve from 5.1% in FY07 to 7.9% in FY08. Lower raw material and staff costs (both as percentage of sales) aid this expansion.

  • Higher operating margins lead to a 34% YoY growth in net profits (excluding the adjustment for extraordinary items in both the fiscals). Actual profit figure 5% lower than our estimates.

  • Board recommends dividend of Rs 1.35 per share (dividend yield of 0.8%).

Financial performance snapshot
  Standalone Consolidated
(Rs m) FY07 FY08 Change FY07 FY08 Change
Sales 24,006 30,445 26.8% 25,267 32,029 26.8%
Expenditure 22,916 27,937 21.9% 23,985 29,499 23.0%
Operating profit (EBDITA) 1,089 2,509 130.3% 1,282 2,531 97.4%
Operating profit margin (%) 4.5% 8.2%   5.1% 7.9%  
Other income 581 430 -25.9% 620 443 -28.5%
Interest (5) 27   18 50 181.9%
Depreciation 123 136 10.1% 156 167 7.2%
Profit before tax 1,551 2,777 79.0% 1,728 2,757 59.5%
Extraordinary income/(expense) 677 299 -55.9% 696 316 -54.6%
Tax 368 992 169.9% 407 997 144.6%
Minority interest NA NA   2 1  
Share of profit of associate NA NA   0 2  
Profit after tax/(loss) 1,861 2,084 12.0% 2,016 2,077 3.0%
Net profit margin (%) 7.8% 6.8%   8.0% 6.5%  
No. of shares       330.9 330.9  
Diluted earnings per share (Rs)       6.1 6.3  
P/E ratio (x)         26.0  

What has driven performance in FY08?

The following analysis pertains to standalone results as the company has not divulged segment-wise data for consolidated business.

  • The 27% YoY growth in Voltas’ sales during FY08 was led by 21% YoY growth in its electro-mechanical projects & services (EMPS) business. In the international part of this business, Voltas has been executing certain large projects in the Middle East. Even in 4QFY08, the company secured some very large projects, including the Sidra Medical and Research Centre, Barwa City Project (Qatar), District Cooling Plant at DIFC (Dubai), Ferrari Experience Project, Formula 1 Racing track (Abu Dhabi), and District Cooling Plant at Sentosa Integrated Resort (Singapore). In the domestic market, the company completed execution of project at the new international airport in Hyderabad. At the end of March 2008, this segment’s order backlog stood at Rs 46 bn (95% of consolidated order backlog), more than double the order backlog it had at the end of FY07.

    Segment-wise performance
    (Rs m) FY07 FY08 Change
    Electro-Mechanical Projects & Services (EMPS)      
    Revenue 13,514 16,411 21.4%
    % share 56.2% 53.7%  
    PBIT margin 5.3% 7.4%  
    Engineering Products & Services (EPS)      
    Revenue 4,162 5,535 33.0%
    % share 17.3% 18.1%  
    PBIT margin 24.1% 20.5%  
    Unitary Cooling Products (UCP)      
    Revenue 5,981 8,210 37.3%
    % share 24.9% 26.9%  
    PBIT margin 1.6% 6.6%  
    Others      
    Revenue 402 398 -1.0%
    % share 1.7% 1.3%  
    PBIT margin -25.3% 10.2%  
    Total      
    Revenue* 24,059 30,554 27.0%
    PBIT margin 7.1% 9.6%  
    * Excluding inter-segment adjustments

    As for Voltas’ engineering agency (EAS) business, sales grew 33% YoY during FY08. As indicated by the company, despite slowdown in demand for capital equipment in many industrial sectors, its textile machinery business achieved 20% YoY growth in equipment sales. Materials handling and mining & construction equipment businesses also sustained their upward trend.

    Coming to the company’s unitary cooling products (UCP) business, sales grew by 10% YoY during the fiscal. Within this business, while air conditioner sales grew by 41% YoY, the split air conditioner sales were up 45% YoY. Sales for water coolers and dispensers, where Voltas maintains its market leadership status, grew by 32% YoY.

  • Voltas reported a 2.8% YoY expansion in operating margins during FY08. This was a result of lower raw material and staff costs. Raw materials, which were 50.9% of sales in FY07, declined to 46.8% of sales in FY08. 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 1.6% to 6.6%, improvement was due to higher sales of the company’s energy efficient air-conditioners, which have been well received by the markets.

    Further, 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 US dollar aided margins for the UCP business during FY08. As far as the EAS segment is concerned, EBIT margins declined from 24.1% in FY07 to 20.5% in FY08, largely due to slowdown in off-take of machines from the textile sector during the second and third quarters.

  • Expansion in operating margin led to Voltas growing its standalone net profits by 51% YoY during FY08. However, this is excluding the impact of extraordinary items from both the fiscals. As a matter of fact, the company had earned a one-time income of Rs 781 m from sale of a subsidiary in FY07, which had bloated FY07 net profits. Including the extraordinary items, therefore, lowers Voltas’ FY08 bottomline growth to a mere 12% YoY. A higher tax outgo has also impacted standalone bottomline growth during the fiscal. The effective tax rate of the company increased from 23.7% in FY07 to 35.7% in FY08.

What to expect?
At the current price of Rs 163, the stock is trading at a multiple of 15.7 times our estimated FY10 earnings. Voltas’ consolidated results have been marginally lower than our estimates, as has been mentioned above. While the company has faced execution delays in some of its Middle East projects, and that these have been entirely due to delays from other agencies involved in these projects, the management is confident of making up for it in the coming quarters. The company is also looking at an acquisition, in either of water treatment or industrial MEP (mechanical, electrical and plumbing project) and also as a way to diversify its geographical base. We maintain our positive view on the stock from a 2 to 3 years perspective, though have marginally revised our numbers downwards considering the company’s actual performance in FY08.

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