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Voltas: Getting leaner, and faster!
Jun 21, 2005

Performance summary
Voltas has announced decent results for the fourth quarter and full year ending March 2005. The strong performance of the company’s electro-mechanical projects & services and engineering agency services divisions has led the growth in topline and bottomline during both the quarter and the fiscal. The unitary cooling division, however, continues to be the Achilles heel for the company.

Financial performance: A snapshot…
(Rs m) 4QFY04 4QFY05 Change FY04 FY05 Change
Sales 4,074 4,997 22.7% 13,299 14,414 8.4%
Expenditure 3,930 4,799 22.1% 12,972 13,969 7.7%
Operating profit (EBDITA) 144 198 37.5% 328 445 35.8%
Operating profit margin (%) 3.5% 4.0%   2.5% 3.1%  
Other income 68 48 -29.6% 193 225 16.6%
Interest 6 2 -73.4% 18 39 114.4%
Depreciation 34 25 -27.5% 133 105 -20.9%
Profit before tax 172 220 28.0% 370 526 42.3%
Extraordinary income/(expense) 63 11 -82.3% 99 50 -49.0%
Tax 41 3 -93.9% 78 73 -7.5%
Profit after tax/(loss) 193 228 18.2% 390 504 29.2%
Net profit margin (%) 4.7% 4.6%   2.9% 3.5%  
No. of shares 33.1 33.1   33.1 33.1  
Diluted earnings per share* (Rs) 23.3 27.6   15.7 20.3  
P/E ratio (x)         12.1  
(* annualised)            

What is the company’s business?
Voltas is a major player in the electro-mechanical engineering segment, which involves all aspects of construction of infrastructure like electricals and air conditioning barring the civil structure. The company also has presence in manufacturing of forklifts, textile auxiliary, agro-chemicals and trading of chemicals. On the unitary division front, the company has presence in refrigerators and visi-coolers. Voltas has a joint venture with Fedders of the US for manufacturing of air conditioners. During the period FY00 to FY05, Voltas’ revenues and net profits have grown at compounded rates of 14% and 56% respectively.

What has driven performance in FY05?
EMPS business drives topline growth:  The Electro-Mechanical Projects & Services (EMPS) business segment of Voltas continues to lead the company’s topline growth, as revenues from this segment have risen by 10% YOY during FY05. Considering the level of economic activity and infrastructure development that is expected in India (airport modernisation) and a large part of the East Asian and Middle East regions (shopping malls), we expect this division to remain the chief growth driver for Voltas in the future.

The unitary cooling products division (30% of revenues) witnessed a flat fiscal, as revenues grew by a meagre 1%. The refrigerator industry in the country has been bogged down by excess capacities and low demand growth, resulting in losses or flat growth for many companies, including Voltas. The company has, in fact, recently announced a VRS at its loss-making Hyderabad unit that employs 820 workers. In a recent research meeting with the management, we got an indication that Voltas lost Rs 200 for every refrigerator it made. While the unit has a capacity to manufacture 500,000 refrigerators per annum, the actual production has been less than 200,000 units. The lower dependence on this segment will thus, be a positive for the company’s future growth prospects.

The Engineering Agency Services division (EAS), with revenue contribution of around 7%, witnessed an 18% growth in its revenues during FY05. It is to be noted that since performance of this division is highly correlated to the performance of textile, mining and engineering industries, the huge capex plans that Indian companies have lined up towards capacity expansion shall provide this segment a big opportunity to grow faster going forward.

Segment-wise performance…
  FY04 % of total FY05 % of total Change
Electro-Mechanical Projects & Services (EMPS)
Revenue 7,342 55.2% 8,037 55.7% 9.5%
PBIT 132 16.5% 439 44.2%  
PBIT margin 1.8%   5.5%    
Engineering Agency & Services (EAS)
Revenue 837 6.3% 985 6.8% 17.7%
PBIT 272 34.0% 369 37.2% 36.0%
PBIT margin 32.4%   37.5%    
Unitary Cooling Products (UCP)
Revenue 4,232 31.8% 4,265 29.5% 0.8%
PBIT 11 1.4% (79) -7.9% -823.9%
PBIT margin 0.3%   -1.8%    
Others
Revenue 888 6.7% 1,153 8.0% 29.8%
PBIT 384 48.1% 265 26.6% -31.1%
PBIT margin 43.3%   22.9%    

Lower staff and other costs aid margins:  During FY05, Voltas has benefited from a decline (as % of revenues) in staff and other costs and this has aided the 60 basis points expansion in operating margins. Based on segments, while PBIT margins of the EMPS and EAS segments expanded by 370 bps and 500 bps, the company suffered a loss in the unitary cooling products division. One positive factor working in favour of the company’s margin profile is the rising revenue contribution of the EAS segment. With just a 7% share of revenues, this division’s PBIT was 37% of the total PBIT of Voltas in FY05. In fact, the management has indicated to us that it expects to maintain the segment’s margins at the 35% levels in the future (37.2% PBIT margins in FY05).

It boils down to the bottomline:  Apart from the expansion in operating margins in this fiscal, higher other income and lower depreciation and tax expenses have led to Voltas’ net profit growth outperforming the growth in topline. Also, excluding the effect of a higher extraordinary income in the previous fiscal, the net profits have grown by 56% YoY during FY05. If one were to consider the trend in segmental margins over the last twelve quarters, while EMPS division continues to record improvement, the unitary division that was profitable has been bleeding of late. This is primarily on account of the expiry of manufacturing contract with LG and Samsung. We expect this division to remain in the red, unless the company shuts down the unit at Hyderabad.

What to expect?
At the current price of Rs 246, the stock is trading at a price to earnings multiple of 12.1 times FY05 earnings. The board of the company has recommended a dividend of Rs 5 per share (dividend yield of 2%), including a special golden jubilee dividend of Rs 1.5 per share.

Investors have to bear in mind, despite poor operating margins, we expect the company to benefit from higher investments in infrastructure and opportunities in Middle East and select South East Asian markets. In this context, the EMPS division will remain the topline growth driver whilst adequately supported by the EAS division on the margin front. At the end of FY05, the EMPS division has an order backlog of nearly Rs 10 bn, which is 1.2 time the segment’s FY05 revenues. This provides the company with the much-needed visibility into the future. Also, the internal restructuring process, which includes sale of non-core businesses, better capacity utilisation and balance sheet clean up is likely to improve cash flows.

We had last recommended Voltas in January 2004, at Rs 123 with a target price of Rs 200. The stock has nearly doubled since then. We remain positive about the long-term prospects of the company.

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