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Voltas: EMPS continues to languish

May 23, 2011

Voltas has announced the full year results of financial year 2010-2011 (FY11). The company has reported 8.8% YoY growth in sales while its net profits have declined by 6.2% YoY. Here is our analysis of the results.

Performance summary
  • Net sales grow 8.8% YoY in FY11. Growth was aided by a strong performance from unitary cooling products (UCP) and engineering products & services (EPS) businesses.
  • Operating profits fell by nearly 4.1% YoY. The electro-mechanical projects and services (EMPS) business witnessed a sharp contraction in margins. Losses at Rohini Industrial Electricals Ltd (RIEL) impacted the profitability of the EPMS segment.
  • Net profits declined by 6.2% YoY due to fall in operating profits and rising interest cost. The interest cost increased by 68.1% YoY. Further, a substantial increase in extraordinary income resulting from profit on sale of properties reduced the extent of fall in net profit. Adjusting for these exceptional gains the profits declined 10.9% YoY.
  • Order book for the EMPS segment stood at Rs 48.8 bn at the end of the year.
  • The company declared a dividend of Rs 2 per share for FY11.

Consolidated financial snapshot
(Rs m) FY10 FY11 Change
Sales 47,575 51,768 8.8%
Expenditure 42,979 47,360 10.2%
Operating profit (EBDITA) 4,596 4,408 -4.1%
Operating profit margin (%) 9.7% 8.5%  
Other income 785 810 3.2%
Interest 98 165 68.1%
Depreciation 214 210 -1.8%
Profit before tax 5,068 4,843 -4.4%
Extraordinary income/(expense) 250 402 60.6%
Tax 1,472 1,729 17.4%
Profit after tax/(loss) 3,846 3,516 -8.6%
Minority interest (36) 57  
Net profit 3,810 3,572 -6.2%
Net profit margin (%) 8.0% 6.9%  
No. of shares   330.9  
Diluted earnings per share (Rs)*   10.8  
P/E ratio (x)*   15.1  

What has driven performance in 4QFY11?
  • Voltas grew its consolidated sales by 8.8% YoY during FY11. The EMPS business continued its weak performance with a 2.3% YoY decline in sales. This was mainly due to a drop in revenues from international projects and RIEL. Even margins for EMPS segment declined to 7.9% due to cost overruns in some electrical jobs at RIEL. (The loss at RIEL stood at Rs 120 m for the quarter and Rs 310 m for the full year).

  • The sales for EPS segment grew by 20.5% YoY due to strong performance from all the businesses viz; textile machinery, mining & construction equipment and materials handling. On the other hand, even the UCP business recorded a strong performance by registering top line growth of 37.1% YoY due to high temperatures (during late summer) and healthy consumer sentiment.

    Segment-wise performance
    (Rs m) FY10 FY11 Change
    Electro-Mechanical Projects & Services (EMPS)
    Revenue 31,134 30,411 -2.3%
    % share  65.4% 58.7%  
    PBIT margin 9.9% 7.9%  
    Engineering Products & Services (EPS)
    Revenue 4,680 5,638 20.5%
    % share  9.8% 10.9%  
    PBIT margin 16.4% 18.3%  
    Unitary Cooling Products (UCP)
    Revenue 11,387 15,608 37.1%
    % share  23.9% 30.1%  
    PBIT margin 10.6% 10.2%  
    Revenue 391 126 -67.7%
    % share 0.8% 0.2%  
    PBIT margin 18.4% 12.6%  
    Revenue* 47,592 51,783 8.8%
    PBIT margin 10.8% 9.7%  
    * Excluding inter-segment adjustments

  • Overall operating margins contracted by 1.2% during the year. It is the EMPS and UCP business that saw margins decline by nearly 200 bps and 40 bps respectively. However, for the EPS business margins expanded by 190 bps. Higher input costs and cost overruns at RIEL are the reasons for margin erosion.

  • Net profits declined 6.2% YoY. This was mainly due to increase in interest cost and taxes and muted performance at the operating level. Interest cost increased due to increasing debt levels. The debt on the company's books increased from Rs 350 m in FY10 to Rs 1,380 m in FY11 on account of stretched working capital cycle. Even the tax rates were higher in the year and stood at 35.7% in FY11 as compared to 29.1% in FY10 due to reversal of tax provision of earlier years. It may be noted that there were some exceptional gains on sale of properties which restricted the fall in bottom-line during the year. Adjusting for the exceptional gains net profits declined 10.9% YoY.

What to expect?
At the current price of Rs 162, the stock is trading at a multiple of 11.5 times our estimated FY13 earnings. The EMPS business continues to report sluggish performance. Higher costs and continuing losses at RIEL pressurized margins. Going forward, management is positive on the EMPS business as the low margin jobs taken earlier are on the verge of completion and the demand environment also appears to be buoyant in the domestic markets. However, Middle Eastern markets continue to remain a challenge.

The prospects for EPS business remain uncertain. Management has raised concerns over the textile machinery business because of suspension of textile up gradation fund (TUF) and high cotton prices. However, release of a few NHAI road contracts offers some hope in the future.

Voltas' UCP business continues to see strong growth. However, mild summers in April impacted the growth to a certain extent. High commodity prices and rising interest rates are a cause of concern. Even the competitive pressures have increased due to robust growth prospects. Nonetheless, management is working on strategies to improve its market share and has also initiated a few cost optimization measures. At the current price, we maintain our positive view on the stock.

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