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Voltas: Battling the slowdown - Views on News from Equitymaster
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Voltas: Battling the slowdown
Jul 30, 2009

Performance summary
  • Sales grow 16% YoY in 1QFY10. Growth aided by strong performance from the electro-mechanical projects business.
  • Operating margins expand by 0.2% YoY owing to lower cost of traded goods (as percentage of sales).
  • Other income lower by 30% YoY during the quarter. The company also recorded an extraordinary income on account of assignment of leasehold rights and sale of property. Excluding the effect of extraordinary income, bottomline grows by 15% YoY during 1QFY10.


Financial performance snapshot
(Rs m) 1QFY09 1QFY10 Change
Sales 10,067 11,704 16.3%
Expenditure 9,291 10,782 16.1%
Operating profit (EBDITA) 776 922 18.7%
Operating profit margin (%) 7.7% 7.9%  
Other income 289 202 -29.9%
Interest (5) 2  
Depreciation 41 39 -4.7%
Profit before tax 1,030 1,083 5.2%
Extraordinary income/(expense) 232 28 -87.9%
Tax 411 374 -8.9%
Profit after tax/(loss) 851 737 -13.4%
Net profit margin (%) 8.5% 6.3%  
No. of shares 330.9 330.9  
Diluted earnings per share (Rs)*   7.3  
P/E ratio (x)*   18.8  
* On a trailing 12-months basis

What has driven performance in 1QFY10?
  • The 16% YoY growth in Voltas’ sales during 1QFY10 was led by robust 35% YoY growth in its electro-mechanical projects & services (EMPS) business. About 74% of this segment’s revenues and about 39% of the company’s total revenues came from international operations during the quarter. The segment’s order book at the end of June 2009 stood at Rs 46 bn. Though the order book in the domestic business has grown satisfactorily, the execution has not kept pace as a result of various difficulties faced by the company’s customers.

    Segment-wise performance
    (Rs m) 1QFY09 1QFY10 Change
    Electro-Mechanical Projects & Services (EMPS)      
    Revenue 4,632 6,272 35.4%
    % share 45.8% 53.6%  
    PBIT margin 8.1% 8.9%  
    Engineering Products & Services (EPS)      
    Revenue 1,364 1,139 -16.5%
    % share 13.5% 9.7%  
    PBIT margin 15.7% 13.8%  
    Unitary Cooling Products (UCP)      
    Revenue 4,008 4,295 7.2%
    % share 39.6% 36.7%  
    PBIT margin 9.2% 8.3%  
    Others      
    Revenue 105 - -100.0%
    % share 1.0% 0.0%  
    PBIT margin 9.3% NA  
    Total      
    Revenue* 10,109 11,707 15.8%
    PBIT margin 9.6% 9.2%  
    * Excluding inter-segment adjustments

  • As for the company’s engineering agency (EAS) business, sales fell by 17% YoY during 1QFY10. Capital engagement in this business has risen very substantially due to the blockage of funds in mining equipment part of the segment which is seeing a sluggish business environment currently. The third business segment of unitary cooling products (UCP) recorded sales growth of 7% 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 0.2% YoY expansion in operating margins during 1QFY10. This was a result of higher cost on purchase of traded goods. Raw material costs, on the other hand, saw an increase as a percentage of sales thereby putting some pressure on the operating margins. Based on segments, the best performance was recorded by EMPS, where EBIT margins expanded from by 0.8% YoY. The large inventories in mining equipment (part of the EPS segment) business resulted in higher storage and related costs, which brought some pressure on the segment’s margins.

  • Led by a decent growth in topline, the expansion in operating margins, lower depreciation charges and a lower effective tax rate, Voltas recorded a 15% YoY growth in its net profits. This though, is excluding the effect of extraordinary items in both comparable quarters. Extraordinary income for both 1QFY09 and 1QFY10 includes assignment of leasehold rights, profit on sales of property, surrender of tenancy rights and a charge for VRS expenses.

What to expect?
At the current price of Rs 137, the stock is trading at a multiple of 12 times our estimated FY12 earnings. As per the management, the domestic market conditions with respect to the EMPS business are positive, including the MEP (mechanical, electrical and plumbing) and water businesses. As far as the overseas EMPS business is concerned, the current order book covers the entire FY10 and also another six months of FY11, thus lending comfortable revenue visibility. With oil prices coming off their lows, the company expects further investments its lucrative Middle East markets.

With the company’s EPS segment, the slowdown in the textiles machinery business is continuing. However, according to Voltas’ management, the trend of order booking has indicated a slow turnaround, and the overall situation in textile machinery is expected to turn the corner post 1HFY10, but at the same time is likely to be a slow recovery. The mining and construction equipment business’ order book has improved significantly on the back of the order received from Hindustan Zinc of over Rs 2 bn which includes maintenance service for a period of 5 years. While third party financing is starting to show signs of revival once again, faster investment in roads and highway construction will also provide a fillip to these segments going forward.

The prolonged summer and delayed monsoons were positives for the company’s room air conditioners business, which saw stockouts (less saleable units as compared to demand) during the quarter due to higher than expected demand. Overall, the company’s performance has been protected by the projects businesses, and the management expects to offset a substantial part of the negative impact of current economic conditions in the domestic market by growth in the projects business.

Also, due to the continued good performance and the management’s favorable view of its future potential, Voltas has decided to purchase a further 16% stake in Rohini Electricals at a cost of Rs 230 m, which will take the company’s holding in Rohini to 67%. We maintain our view on the stock.

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