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Voltas: Resilient against headwinds

May 29, 2009

Performance summary
  • Standalone net sales grow 33% YoY in FY09. Growth aided by strong performances from the electro-mechanical projects business, where sales improve 55% YoY.
  • Operating margins contract by 1.6% YoY during the fiscal owing to higher raw materials costs (as percentage of sales).
  • Other income surges by 85% YoY. This adds to the bottomline, which grows by 21% YoY, much higher than the 6% growth recorded in operating profits.
  • Consolidated sales and profits up by 35% and 21% respectively. Reported sales and profit figure higher by 6% and 14% respectively as against our estimates.
  • Recommends dividend of Rs 1.6 per share (dividend yield of 1.6%).

Financial performance snapshot
(Rs m) FY08 FY09 Change
Sales 30,445 40,333 32.5%
Expenditure 27,937 37,669 34.8%
Operating profit (EBDITA) 2,509 2,664 6.2%
Operating profit margin (%) 8.2% 6.6%  
Other income 430 797 85.3%
Interest 27 (79)  
Depreciation 136 186 37.1%
Profit before tax 2,777 3,353 20.8%
Extraordinary income/(expense) 299 320 7.1%
Tax 992 1,147 15.7%
Profit after tax/(loss) 2,084 2,526 21.2%
Net profit margin (%) 6.8% 6.3%  
No. of shares 330.9 330.9  
Diluted earnings per share (Rs)*   7.6  
P/E ratio (x)*   16.4  
* On a trailing 12-months basis

What has driven performance in FY09?
  • Voltas grew its sales by 33% YoY during FY09. This was largely a result of strong performance from its electro-mechanical projects & services (EMPS) business. This business recorded sales growth of 55% YoY during the year on the back of execution of some large projects of which some major ones were the district cooling plant at the Dubai International Financial Centre and Burj Tower projects (Dubai, UAE), Formula 1 Racing Track, Ferrari Experience and Etihad Towers Complex (Abu Dhabi, UAE), Bahrain City Centre (Bahrain), Sidra Medical and Research Centre (Doha, Qatar), and the Sentosa Bay District Cooling Plant (Singapore).

    In the domestic market, the company continued its move towards offering integrated MEP solutions which resulted in an order book higher by 17% YoY at the end FY09. The domestic electro-mechanical business order book included 65% of the stadium projects for the Commonwealth Games 2010 in New Delhi, Godrej Waterside Tech Park, Kolkata and orders in the industrial sector. The segment also saw a substantial increase in water management/water treatment business, which the management sees as having a promising future. However, the management has expressed how the company’s capital engagement in the business has risen significantly due to the higher days of receivables in the domestic market where liquidity tightness continues.

    Segment-wise performance
    (Rs m) FY08 FY09 Change
    Electro-Mechanical Projects & Services (EMPS)      
    Revenue 16,411 25,464 55.2%
    % share 53.7% 63.0%  
    PBIT margin 7.4% 7.6%  
    Engineering Products & Services (EPS)      
    Revenue 5,535 5,422 -2.0%
    % share 18.1% 13.4%  
    PBIT margin 20.5% 11.6%  
    Unitary Cooling Products (UCP)      
    Revenue 8,210 9,138 11.3%
    % share 26.9% 22.6%  
    PBIT margin 6.6% 7.4%  
    Revenue 398 402 1.0%
    % share 1.3% 1.0%  
    PBIT margin 10.2% 8.6%  
    Revenue* 30,554 40,426 32.3%
    PBIT margin 9.6% 8.1%  
    * Excluding inter-segment adjustments

    As for the company’s engineering products and services (EPS) business, sales declined by 2% YoY during the year on the back of a slowdown in the general investment climate in the country. The capital engagement in the EPS business too has risen very substantially due to the blockage of funds in mining equipment. The large inventories in this business have also resulted in higher storage charges which have brought further pressure on the segment’s margins.

    In the third business segment of unitary cooling products (UCP), sales grew by about 11% YoY during the year. In room air conditioners, Voltas' registered sales growth of 8% against the market growth of 6% and increased its overall share to 16.5% on the back of product offerings based on energy efficiency and an expansion in distribution. Commercial refrigeration products which are developed and manufactured at company’s new plant at Pantnagar exhibited growth due to new product offerings and an increased focus on this business. A move away from window air conditioning units to splits and the improvement in commercial cooling product volumes have helped improve the margins of this segment. The management expects the company’s new UCP plant’s operations in Pantnagar to have a higher profitability thus helping the segment’s margins going forward.

  • Voltas has reported a 1.6% YoY decline in operating margins during FY09. This was a result of higher cost of raw materials as also higher employee costs which took away from the company’s margins during the fiscal.

    Based on segments, the better performances were recorded by EMPS and the UCP businesses where EBIT margins expanded by 0.2% YoY and 0.8% YoY respectively. Margins came down significantly for the EPS business amidst the slowdown seen in India during the year.

  • Voltas’ bottomline during FY09 grew 21% YoY, which was a slower pace than the growth in topline due to the contraction in operating margins. The growth in profits would have been lower but for a substantial rise in other income (up 85% YoY).

  • Exceptional items for FY09 include assignment of leasehold rights / profit on sale of property / surrender of tenancy rights of Rs 258 m, a profit on sale of business of Rs 87 m, a charge for VRS expenses of Rs 5 m, a provision for diminution in value of Investment of Rs 14 m, impairment of fixed assets of Rs 7 m.

  • Saudi Ensas Company for Engineering Services WLL (SECL), which was until now a joint venture company in Kingdom of Saudi Arabia (KSA), became a wholly-owned subsidiary of Voltas in January 2009 upon the purchase of a 51% shareholding of SECL from the local partner. SECL is engaged in the execution and operations/maintenance of electro mechanical installations in KSA. On the 31st of March 2009, the company transferred its chemicals trading business to DKSH (India) Private Limited.

What to expect?
At the current price of Rs 125, the stock is trading at a multiple of 12.5 times our estimated FY11 earnings. The company’s overall (domestic and international) order book for the electro-mechanical segment as at the end of FY09 stood at Rs 472 m. In order to increase its presence in the industrial segment, Voltas acquired a 51% stake in Rohini Industrial Electricals Private Limited (RIEPL) in September 2008, consequently widening the company’s scope of electro-mechanical offerings to include electrical and instrumentation contracts for projects in the domains of power, steel, oil & gas, pharma, textile and other industries. The company expects to leverage this in both the domestic and overseas markets going forward. Though business seems to be picking up for this cooling major, the recent surge in its stock price has led to valuations getting on the higher side.

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