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Voltas: ‘Extraordinary’ boost to profits - Views on News from Equitymaster

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Voltas: ‘Extraordinary’ boost to profits
Jul 22, 2008

Performance summary
  • Sales grow 22% YoY in 1QFY09. Growth aided by strong performances from the electro-mechanical projects and cooling products businesses.

  • Operating margins contract by 1.2% YoY owing to higher cost of traded goods (as percentage of sales).

  • Other income surges by 242% YoY during the quarter. The company also records a large extraordinary income on account of assignment of leasehold rights. These two factors lead to a bottomline growth of 63% YoY during 1QFY09. Excluding extraordinary items, net profits have grown by 21% YoY.



Financial performance snapshot
(Rs m) 1QFY08 1QFY09 Change
Sales 8,249 10,067 22.0%
Expenditure 7,514 9,291 23.6%
Operating profit (EBDITA) 735 776 5.6%
Operating profit margin (%) 8.9% 7.7%  
Other income 85 289 241.5%
Interest 7 (5)  
Depreciation 32 41 29.2%
Profit before tax 782 1,030 31.7%
Extraordinary income/(expense) 8 232 2875.6%
Tax 268 411 53.3%
Profit after tax/(loss) 522 851 63.2%
Net profit margin (%) 6.3% 8.5%  
No. of shares   330.9  
Diluted earnings per share (Rs)*   7.3  
P/E ratio (x)*   17.0  
* On a trailing 12-months basis

What has driven performance in 1QFY09?
  • The 22% YoY growth in Voltas’ sales during 1QFY09 was led by 24% YoY growth in its electro-mechanical projects & services (EMPS) business. In the international part of this business (25% of segment sales in 1QFY09), Voltas has been executing certain large projects in the Middle East where it sees revenue booking during the third and fourth quarters of this fiscal. At the end of June 2008, this EMPS segment’s order backlog stood at Rs 59 bn (up 165% YoY), almost 2 times the company’s total revenues in the whole of last fiscal.

    Segment-wise performance
    (Rs m) 1QFY08 1QFY09 Change
    Electro-Mechanical Projects & Services (EMPS)      
    Revenue 3,735 4,632 24.0%
    % share 45.1% 45.8%  
    PBIT margin 9.3% 8.1%  
    Engineering Products & Services (EPS)      
    Revenue 1,112 1,364 22.7%
    % share 13.4% 13.5%  
    PBIT margin 22.8% 15.7%  
    Unitary Cooling Products (UCP)      
    Revenue 3,334 4,008 20.2%
    % share 40.3% 39.6%  
    PBIT margin 6.7% 9.2%  
    Others      
    Revenue 94 105 12.5%
    % share 1.1% 1.0%  
    PBIT margin 15.9% 9.3%  
    Total      
    Revenue* 8,275 10,109 22.2%
    PBIT margin 10.1% 9.6%  
    * Excluding inter-segment adjustments

    As for the company’s engineering agency (EAS) business, sales grew 23% YoY during 1QFY09. Within this segment, the mining & construction equipment business recorded significant traction and grew its sales by 39% YoY. The management has indicated of some slowdown in sales of textile machinery on the back of a general slowdown in capex from domestic textile companies. However it has indicated of waiting for one more quarter before taking a more concrete view on the nature of this slowdown.

    The third business segment of unitary cooling products (UCP), sales grew by 20% YoY during the quarter. The growth however reflects the peak season nature of the first quarter, and the demand tends to slow down in the second and third quarters.

  • Voltas reported a 1.2% YoY decline in operating margins during 1QFY09. This was a result of higher cost on purchase of traded goods. Raw material costs, on the other hand, declined from 45.9% of sales in 1QFY08 to 40.6% in 1QFY09, thereby paring some pressure off the operating margins. Based on segments, the best performance was recorded by UCP, where EBIT margins expanded from 6.7% to 9.2% owing to higher sales of energy efficient air-conditioners. The management however believes that such high profitability is not really sustainable and has targeted margins to be maintained around 6% to 6.5% in the long run.

  • Led by a decent growth in topline and a substantially higher other income (up 252% YoY), Voltas recorded a 32% YoY growth in its profit before tax. The rise in other income is mainly attributable to higher rental and dividend income. Further, a sizeable one time income of Rs 232 m on account of assignment of leasehold rights perked up the company’s net profits, which grew by 63% YoY. Excluding this extraordinary income, Voltas’ bottomline has grown by 21% YoY during the first quarter.

    What to expect?
    At the current price of Rs 120, the stock is trading at a multiple of 11.6 times our estimated FY10 earnings. While Voltas has reported a decent performance during 1QFY09, the management has indicated of some kind of slowdown in orders in both the EMPS and EPS segments (mainly in the textile machinery business for EPS). While the company is facing some execution delays in a few of its domestic projects, the management is confident of making up for it in the coming quarters. We maintain our positive view on the stock from a 2 to 3 years perspective.

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