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Voltas: Profits soar as one-off cost drops
Jun 2, 2014 | Updated on Jun 11, 2014

Voltas has announced the results for the fourth quarter and the financial year 2013-2014. The company has reported 8.9% YoY decline in sales while net profits have increased substantially. Unadjusted profits for 4QFY14 stands at Rs. 10 bn as compared to just Rs 40 m in the corresponding quarter of last year. Here is our analysis of the results:

Performance summary
  • Net sales decreased by 8.9% YoY in 4QFY14.
  • Operating profit increased sharply by 37.1% YoY during the quarter as operating profit margins expanded from 4.8% in 4QFY13 to 7.2% in 4QFY14.
  • The company reported a net profit of Rs 10 bn as compared to a meagre profit of Rs 40 m in 4QFY13. The profits in corresponding quarter of FY13 were lowered to the extent of a provision of Rs 956 m with regard to Sidra Medical Research centre contract in Qatar. The absence of this provision has led to sharp increase in profits this quarter. There has been a decline of exceptional gains from Rs 322 m in 4QFY13 to Rs 174 m in 4QFY14. This has restricted further growth in net profits.
  • Adjusting for the exceptional gains and provision for onerous contract in FY13 (without adjusting the tax); the 4QFY14 bottomline has seen a substantial increase of 64% YoY.
  • During FY14, net sales declined by 4.9% YoY. The operating profit of the company increased by 11.6% YoY. Profit after tax increased by 18.1% YoY. Adjusting for onerous contract provision and exceptional gains; the profit after tax increased by 18.9% YoY.
  • The order book of electro mechanical projects and services segment stood at Rs 36.1 bn during the quarter (down 2.9% YoY).


Consolidated financial snapshot
(Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
Sales 15,922 14,504 -8.9% 55,141 52,437 -4.9%
Other operating income  49 125 154.1% 169 224 32.4%
Expenditure 15,153 13,574 -10.4% 52,930 50,004 -5.5%
Operating profit (EBDITA) 769 1,054 37.1% 2,380 2,656 11.6%
Operating profit margin (%) 4.8% 7.2%   4.3% 5.0%  
Other income 126 308 144.3% 901 1,002 11.2%
Interest 107 65 -39.7% 326 226 -30.7%
Depreciation 60 69 14.7% 278 248 -10.6%
Onerous contract  -956 0   -956 -  
Exceptional gains/(losses) 322 174 -46.1% 1,076 215 -80.0%
Profit before tax 95 1,402 1383.4% 2,798 3,399 21.5%
Tax 54 392 625.9% 728 941 29.4%
Profit after tax/(loss) 41 1,010 2393.3% 2,071 2,458 18.7%
Minority interest in (profit)/loss -0.7 -6   7 -5  
Share of associates  - -     -  
Net profit 40 1,004 2422.9% 2,078 2,454 18.1%
Net profit margin (%) 0.2% 6.9%   3.8% 4.7%  
No. of shares         331  
Diluted earnings per share (Rs)         7.4  
Reported P/E ratio (x)*         26.1  
*Based on trailing twelve months

What has driven performance in 4QFY14 and FY14?
  • Voltas reported de-growth in its consolidated sales during 4QFY14. In the Electro-mechanical Projects and Services (EMPS) segment which constituted 47% of net sales during the quarter, sales declined by 22.4% YoY. The decline was on account of delay in execution of a few large overseas as well as domestic projects.

  • This quarter the Engineering Products and Services (EPS) segment which constituted 7% of net sales also did not perform well. Its sales de-grew by 4.9% YoY.

  • Unitary Cooling Products (UCP) segment grew by 11.8% YoY. Voltas maintained its no.1 position in the UCP business for entire FY14.

  • As far as operating performance is concerned, the EMPS segment disappointed once again by reporting a loss at the EBIT level. This was due to cost over runs in few projects and few low margin orders.

  • EBIT margins in both the EPS and UCP segments witnessed a sharp increase. In the EPS segment, the EBIT margin increased from 16.2% to 30.6% YoY. The increase in margin, however, was on account of exceptional gains owing to transfer of dealership rights for certain products. Also, few cost provisions which were made earlier have been revised.

  • In the UCP segment, the EBIT margin increased from 12.5% in 4QFY13 to 16.8% in 4QFY14. This is a substantial increase in margin which is led by increase in sales of premium split ACs

    Segment-wise performance#
    (Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
    Electro-Mechanical Projects & Services (EMPS)
    Revenue 8,834 6,857 -22.4% 31,995 26,924 -15.8%
    % share 55% 47%   58% 51%  
    PBIT margin# 0.5% -2.0%   1.6% -1.5%  
    Engineering Products & Services (EPS)
    Revenue 1,039 988 -4.9% 4,311 4,482 4.0%
    % share 7% 7%   8% 9%  
    PBIT margin 16.2% 30.6%   19.4% 27.8%  
    Unitary Cooling Products (UCP)
    Revenue 5,855 6,543 11.8% 18,356 20,524 11.8%
    % share 37% 45%   33% 39%  
    PBIT margin# 12.5% 16.8%   9.0% 12.3%  
    Others
    Revenue 198 125 -37.0% 502 520 3.8%
    % share 1% 1%   1% 1%  
    PBIT margin# 1.8% 0.8%   0.6% 1.1%  
    Total
    Revenues* 15,926 14,512 -8.9% 55,164 52,451 -4.9%
    PBIT margin 5.9% 8.7%   5.5% 6.4%  

  • The company reported exceptional gains of Rs 174 m during the quarter as against Rs 322 m during 4QFY13. Also, in 4QFY13, the company has provided Rs 956 m towards an onerous contract; absence of which increased the net profit to Rs 1bn as compared to just Rs 41 m in the last quarter.

  • During FY14, net sales declined by 4.9% due to poor performance of EMPS segment which reported de-growth of about 16% YoY in FY14. The operating profit of the company increased by 11.6% YoY. Profit after tax increased by 18.1% YoY. Adjusting for onerous contract and exceptional gains; the profit after tax increased by 18.9% YoY.

  • The management provided future outlook for all the three segments in the conference call. In EMPS business segment, the company has stated that certain international low margin and slow moving orders which have been drag on the company's sales and profitability are likely to be completed by FY15. Out of the slow moving projects, Sidra Medical Research centre in Qatar was the largest project which is 95% complete now. This shall lead to improved performance in FY16 onwards.

  • Order inflow in international EMPS segment came in at Rs 12 bn; while the domestic order inflow was about Rs 10.4 bn. The company is in advanced stages of negotiation for Rs 3.5 bn worth of projects in UAE and Saudi Arabia.

  • EPS business segment may not sustain the stupendous growth of FY14. The company has lost its main client Caterpillar as the latter now itself distributes its equipments in India. However pick up in industrial capex in a year or two shall augur well for this segment.

  • In UCP, Voltas is likely to retain its market leadership. The realizations have increased owing to increase in sales of higher rated as well as split ACs as compared to Window ACs.
What to expect?
Voltas has had a remarkable quarter as far as operating performance is concerned. The stupendous growth in net profits, however, was a result of absence of any provision this quarter with respect to the onerous contract in Qatar.

Going forward, Voltas expects gradual improvement in profits as it is accepting only those projects which meet its internal margin criteria of 5%. It is to be noted that the new orders won in the past one year or so comprise almost 65% of the order book and have better margins. Also, the domestic business is likely to grow on sales and profitability front on account of greater likelihood of expedition of reforms by the newly elected government.

At the current price of Rs 218, the stock is trading at 29.4 times its trailing twelve month earnings Since FY14 is over, we shall revisit our estimates and view on Voltas. We shall soon update investors with a revised view and target price based on FY17 earnings. Till then we recommend the investors to Hold on to the stock.

However, we would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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