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Voltas: EMPS packs the punch - Views on News from Equitymaster

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Voltas: EMPS packs the punch
Jul 20, 2007

  • Topline grows 42% YoY in 1QFY08, led by strong performances from EMPS (52% YoY growth in sales) and EPS (43% YoY) divisions.
  • Peak season helps sales and profitability performance of the UCP business, which the management expects to slow down in the next two quarters.

  • Operating margins expand on the back of lower raw material and staff costs (both as percentage of sales).

  • Lower other income takes off some steam from the bottomline, which has still managed a 140% YoY growth.

Financial performance snapshot
(Rs m) 1QFY07 1QFY08 Change
Sales 5,804 8,249 42.1%
Expenditure 5,540 7,514 35.6%
Operating profit (EBDITA) 264 735 178.6%
Operating profit margin (%) 4.5% 8.9%  
Other income 103 85 -17.6%
Interest 3 7 157.7%
Depreciation 36 32 -12.3%
Profit before tax 328 782 138.3%
Extraordinary income/(expense) 1 8  
Tax 111 268 141.3%
Profit after tax/(loss) 218 522 139.8%
Net profit margin (%) 3.7% 6.3%  
No. of shares   330.9  
Diluted earnings per share (Rs)*   6.5  
P/E ratio (x)*   22.8  
* On a trailing 12 months basis

What has driven performance in 1QFY08?
All round growth: If one were to recount what Voltas’ management had indicated in July 2006 after the ‘not so good’ show from the EMPS division, the strong performance of this quarter needs no reasoning. That time, since some large-value international projects were in their initial phase of execution, and that their revenues were not realised as less than 10% of the work was executed across these projects (that is the limit when Voltas recognises revenues from a project), the performance of the EMPS business was sedate, with the segment sales growing by a mere 15% YoY in 1QFY07. In the next few quarters, as also in 1QFY08, the company has been in an execution phase and consequently larger revenues have been recognised from these contracts. The same seems to have been the case in 1QFY08 as well, when revenues of the EMPS business grew at a robust rate of 52% YoY, thus benefiting the Voltas overall performance (EMPS formed 45% of total revenues in 1QFY08).

At the end of the quarter, the order backlog of this segment stood at Rs 20 bn, almost 1.5 times the segment’s FY07 sales. In the EMPS segment, Voltas is currently involved into some large-scale projects in the Middle East region. The company’s domestic air-conditioning business is also doing well.

Segment-wise performance
  1QFY07 1QFY08 Change
Electro-Mechanical Projects & Services (EMPS)
Revenue 2,488 3,783 52.0%
% share 41.4% 45.2%  
PBIT margin 5.5% 9.2%  
Engineering Products & Services (EPS)
Revenue 806 1,152 42.9%
% share 13.4% 13.8%  
PBIT margin 24.0% 22.0%  
Unitary Cooling Products (UCP)
Revenue 2,578 3,334 29.3%
% share 42.9% 39.9%  
PBIT margin 1.4% 6.7%  
Others
Revenue 133 94 -29.6%
% share 2.2% 1.1%  
PBIT margin 6.7% 15.9%  
Total
Revenue* 6,005 8,362 39.3%
PBIT margin 6.3% 10.0%  
* Excluding inter-segment adjustments

As for the company’s EPS business, which is dependent on the performance of mining, textile and engineering sectors in India, sales grew by 43% YoY in 1QFY08. As reported by the management, it was the mining & construction sub-segment, which grew by 73% YoY, which aided the overall performance of this segment during this quarter. Also, while the materials handling business achieved 29% YoY growth in sales, the textile machinery segment grew by 23% YoY during the quarter.

Coming to the company’s UCP business, Voltas reported sales growth of 29% YoY during 1QFY08, contributed both by higher volume sales and price increases. This growth of the UCP business was on the back of 46% YoY higher volumes sold of air conditioners. The water coolers and dispensers segment grew by 31% YoY. As reported by the management, the first quarter being the peak season, helped the segment’s growth, which it expects to slow down in the next two quarters.

Lower input and staff costs aid margins: Voltas reported a near doubling of operating margins during 1QFY08 to 8.9%. This superlative performance on the margins front was brought about by lower raw material and staff costs (both as percentage of sales). Based on segments, the EMPS was again the outperformer. The segment’s PBIT margins expanded from 5.5% in 1QFY07 to 9.2% in 1QFY08.

All falls to the bottomline: The strong growth in topline combined with sharp expansion in operating margins helped Voltas record a 140% YoY growth in its net profits during 1QFY08. This growth would have been higher but for a drop in other income and higher tax expenses.

What to expect?
At the current price of Rs 149, the stock is trading at a multiple of 17.3 times our estimated FY10 earnings, which make it fairly valued for a 2-year perspective. We maintain out strong outlook for Voltas’ EMPS business, as revenues and profits start flowing in from the large contracts that the company has started executing in the Middle East. We had recommended Voltas in November 2006 at Rs 103 with a 2-year target of Rs 140, which has been breached. At this point, while we stand by our positive view on the stock from a 2-3 years’ perspective, we would advise investors to tread with caution considering the fair valuations that the stock currently trades at.

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