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Voltas: Decent end to a bad year - Views on News from Equitymaster

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Voltas: Decent end to a bad year
May 25, 2012

Voltas has announced the fourth quarter and full year results of financial year 2011-2012. The company has reported 5.8% YoY decline in sales. However, net profits have increased by 2.7% YoY. Here is our analysis of the results.

Performance summary
  • Net sales decline 5.8% YoY in 4QFY12. Decline in revenues from all the three segments impacted top-line growth.
  • Operating profits declined 3.4% YoY due to fall in revenues and other operating income.
  • The net profits of the company increased 2.7% YoY. However, after adjusting for the exceptional items relating to gain on sale of properties, provision for diminution in value of investments and charge on VRS the profits increased 8.5% YoY.
  • Consolidated order book for the EMPS segment stood at Rs 42.9 bn at the end of FY12 compared to Rs 48.8 bn at the end of FY11, reflecting a fall of 12.1% YoY.
  • The D/E ratio of the company stood at 0.15x at the end of the year. The company’s cash position is comfortable at Rs 2.7 bn.
  • The board has recommended a dividend of Rs 1.60 per share for FY12.


Consolidated financial snapshot
(Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
Sales 16,709 15,735 -5.8% 51,768 51,750 0.0%
Other operating income 48 10 -79.7% 145 107 -26.3%
Expenditure 15,344 14,378 -6.3% 47,284 48,493 2.6%
Operating profit (EBDITA) 1,413 1,366 -3.4% 4,629 3,365 -27.3%
Operating profit margin (%) 8.4% 8.7%   8.9% 6.5%  
Other income  149 175 17.0%  585 985 68.4%
Interest 56 95 70.0% 165 314 90.0%
Depreciation 53 64 21.0%  210 340 61.6%
Profit before tax 1,454 1,381 -5.0% 4,839 3,696 -23.6%
Exceptional items 77 25 -67.1%  402 1,262 213.9%
Onerous Contract         (2,766)  
Tax 543 360 -33.8% 1,725 571 -66.9%
Profit after tax/(loss) 988 1,047 6.0% 3,515.8 1,620 -53.9%
Minority interest 22 (9) -141.3%  57 1 -98.4%
Share of associates         (1)  
Net profit 1,010 1,038 2.7% 3,572 1,621 -54.6%
Net profit margin (%) 6.0% 6.6%   6.9% 3.1%  
No. of shares         330.9  
Diluted earnings per share (Rs)         4.9  
Reported P/E ratio (x)*         20.0  
* On a trailing 12-months basis

What has driven performance in 4QFY12?
  • Voltas' consolidated sales declined by 5.8% YoY during 4QFY12. The Electro-Mechanical & Project services (EMPS) segment registered a fall of 3.1% YoY in revenues while margins were relatively flat during the quarter. For the full year, however, margins registered a fall of 250 bps. However, this does not take into account the loss on the onerous contract which the company had incurred during the year. Accounting for that, the EMPS division would have been in a loss. It may be noted that EMPS segment's profitability was under significant pressure during the last year due to execution issues arising from design changes and raw material price inflation.

  • The sales for Engineering & Products Services (EPS) segment declined by 38.6% YoY. However, the results are not strictly comparable as the company transferred its material handling business to a JV during the course of the year. Thus, the corresponding revenue growth was lower to that extent. The textiles business has performed well in the current quarter on the strength of its order book. However, the performance of mining and construction business was impacted by the environmental issues being encountered by the company.

  • Sales from the Unitary Cooling Products (UCP) business segment declined 3.2% YoY due to intense competition and unfavorable climatic conditions. Nonetheless, Voltas was successful in maintain its number two position in the AC market.

    Segment-wise performance#
    (Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
    Electro-Mechanical Projects & Services (EMPS)
    Revenue 9,494 9,199 -3.1% 30,411 31,832 4.7%
    % share 56.8% 58.4%   58.7% 61.5%  
    PBIT margin 8.3% 8.3%   7.9% 5.4%  
    Engineering Products & Services (EPS)
    Revenue 1,740 1,069 -38.6% 5,638 4,121 -26.9%
    % share 10.4% 6.8%   10.9% 8.0%  
    PBIT margin 13.9% 16.2%   18.3% 16.7%  
    Unitary Cooling Products (UCP)
    Revenue 5,490 5,315 -3.2% 15,608 15,388 -1.4%
    % share 32.8% 33.8%   30.1% 29.7%  
    PBIT margin 10.6% 8.6%   10.3% 8.4%  
    Others
    Revenue (9) 58   126 427 238.4%
    % share -0.1% 1.0%   0.2% 0.8%  
    PBIT margin -11.0% 24.4%   12.6% 9.7%  
    Total
    Revenue* 16,715 15,741 -5.8% 51,783 51,768 0.0%
    PBIT margin 9.6% 9.1%   9.7% 7.2%  
    # The segment results do not account for the onerous contract and exceptional items
    * Excluding inter-segment adjustments

  • Overall operating margins increased marginally during the quarter. The EPS segment witnessed margin expansion. However, margins from the UCP segment declined 200 bps YoY due to stiff competition and volatility in raw material prices. Margins from the EMPS segment were relatively flat during the quarter.

  • Net profits increased 2.7% YoY during the quarter. However, after adjusting for the exceptional items net profits increased 8.5% YoY. For the full year, profits fell 54.6% YoY. This was mainly due to provisioning amounting to Rs 2.76 bn resulting from cost-overruns in the Sidra project. Adjusting for that one time provisioning and exceptional items profits declined 1.4% YoY.

What to expect?
At the current price of Rs 98, the stock is trading at a multiple of 20 times its trailing twelve month earnings. During the year, upward revision in one onerous contract pertaining to Sidra Medical Research wiped off the entire profitability of the EMPS segment. However, the execution in other international and domestic projects went well during the course of the year. Despite difficult economic conditions the domestic projects business was able to record a higher turnover while maintaining its profitability. As far as the UCP segment is concerned, competition is likely to intensify further due to the entry of Japanese players. Apart from that, rupee depreciation is another concern. However, low penetration of ACs and rising disposable income keeps the long term prospects intact.

Thus, considering the attractive valuations (after adjusting for the losses on onerous contract and exceptional items the trailing twelve month PE stands at 9.4x), evident turnaround prospects in the EMPS business segment and the company's leadership position in the UCP segment, we maintain our positive view on the stock from a 2-3 years perspective.

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