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Voltas: Poised for growth

Jul 29, 2004

Introduction to results
Tata Group engineering arm, Voltas, has declared good results for the year ended 1QFY05. Despite the topline of the company having declined by around 9% during the quarter, the bottomline of the company has improved significantly (up 42% YoY). The operating margins have improved marginally as compared to the same quarter last year.

(Rs m) 1QFY04 1QFY05 Change
Net sales 3,800 3,458 -9.0%
Other income 52 65 24.2%
Expenditure 3,704 3,350 -9.6%
Operating profit (EBDITA) 96 108 12.6%
Operating profit margin (%) 2.5% 3.1%  
Interest 7 10 42.0%
Depreciation 33 24 -26.8%
Profit before tax 108 139 28.2%
Extraordinary items 23 31 33.9%
Tax 30 26 -13.0%
Profit after tax/(loss) 102 144 41.7%
Net profit margin (%) 2.7% 4.2%  
No. of shares (m) 33.1 33.1  
Diluted earnings per share (Rs)* 12.3 17.4  
P/E ratio (x)   6.6  
(* annualised)      

Company Profile
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 air conditioners and refrigerators etc. Voltas has a joint venture with Fedders of USA for manufacturing of A/Cs. The company's turnaround started with the merger of Voltas International to strengthen its presence in electro-mechanical segment and the spin off of its air conditioning facility to a JV.

What has driven performance in 1QFY05?
The topline of the company has declined due to lower revenue from its electro-mechanical projects and services division as some of its projects are in the preliminary stage of execution, resulting in lower revenue in the current quarter. In electro-mechanical segment, Voltas is engaged in heating, ventilation and air conditioning and all kind of electrical works and the revenues start accruing only after the structure is ready. The company has built up a track record of executing prestigious projects in the domestic as well as international market. Despite the subdued topline performance in 1QFY05, we continue to believe that the company has potential to deliver over the medium to long-term horizon.

As can be seen in the table below, the engineering agency business and unitary cooling businesses of the company grew by 20% and 7% respectively. The company's unitary cooling business is seasonal (dealing with refrigerators, air conditions etc), the performance of which is enhanced during summers. With both the textile and the engineering sectors showing buoyancy and signs of sustainable growth, the company's engineering agency division should continue to clock strong double-digit growth going forward.

Segmental break-up 1QFY04 1QFY05 Change
Electro-mechanical 1,896 1,342 -29.2%
PBIT margins (%) 3.6% 5.6%  
Engineering agency 165 198 20.3%
PBIT margins (%) 23.8% 33.5%  
Unitary cooling products 1,558 1,668 7.1%
PBIT margins (%) 4.0% 2.9%  
Others 182 249 36.7%
PBIT margins (%) 8.4% 10.7%  

Operating margins:  The operating margins of the company improved by 60 basis points led by growth in company's electro-mechanical and engineering agency margins. As expected, the margins from the company's electro-mechanical division improved by around 200 basis points. We believe the margins should sustain at the current levels because of higher infrastructure projects expected from Asian countries. Margins from the company's engineering agency division improved significantly (up 970 basis points), which beat our estimates.

Net profit:  Led by higher other income (profit on sale of property), extraordinary income and improvement in operating margins, the bottomline of the company increased by 42% YoY. Generally first quarter is the least contributor to the engineering companies net profit because the projects are in the nascent stage. As the projects near completion in the later half of the year, the company may witness a higher growth.

What to expect?
The stock currently trades at Rs 115 implying a P/E multiple of 6.6 x annualised 1QFY05 earnings, which seems attractive compared to other engineering peers. However, the valuation has to be viewed on the context of a diversified business mix and volatility in earnings owing to the seasonality of the unitary division. Considering the strong track record of company's projects in international arena and higher expected infrastructure projects, the company is likely to have a good growth in the topline going forward. We also believe that margins would sustain at the current levels. On an over all basis, the company seems poised for good growth.

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