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Voltas: EMPS woes magnify

Aug 3, 2011

Voltas has announced the first quarter results of financial year 2011-2012 (1QFY12). The company has reported 4.1% YoY decline in sales while its net profits have increased by 41.3% YoY. Here is our analysis of the results.

Performance summary
  • Net sales decline 4.1% YoY in 1QFY12. Disappointing performances across all the three business segments led to the decline in revenues during the quarter.
  • Operating profits fell by nearly 13.2% YoY.
  • Net profits increased by 41.3% YoY despite fall in operating profits and rising interest and depreciation cost. The interest cost increased by 85.9% YoY due to increase in debt levels while depreciation expenses increased due to change in depreciation policy. Net profit growth was aided by extraordinary income arising from sale of property (Rs 21.2 m) and transfer of material handling business (Rs 793.5 m) to a JV. Adjusting for these exceptional gains the profits declined 46.5% YoY.
  • Order book for the EMPS segment stood at Rs 45.5 bn at the end of the quarter.
  • The D/E ratio of the company increased to 0.14x during the quarter. The company’s cash position is comfortable at Rs 3.4 bn.

Consolidated performance snapshot
(Rs m) 1QFY11 1QFY12 Change
Sales 14,031 13,458 -4.1%
Expenditure 12,807 12,395 -3.2%
Operating profit (EBDITA) 1,223 1,062 -13.2%
Operating profit margin (%) 8.7% 7.9%  
Other income 246 215 -12.6%
Interest 46 85 85.9%
Depreciation 50 103 105.8%
Profit before tax 1,374 1,089 -20.7%
Extraordinary income/(expense) (7) 815  
Tax 429 582 35.5%
Profit after tax/(loss) 937 1,323 41.1%
Minority interest (5) (4)  
Share of associates    (1)  
Net profit 932 1,318 41.3%
Net profit margin (%) 6.6% 9.8%  
No. of shares   330.9  
Diluted earnings per share (Rs)*   12.0  
P/E ratio (x)*   10.8  
* On a trailing 12-months basis

What has driven performance in 1QFY12?
  • Voltas' consolidated sales declined by 4.1% YoY during 1QFY12. The EMPS business continued its weak performance with a 2.3% YoY decline in sales. This was mainly due to a drop in revenues from international projects and Rohini Industrial Electricals Ltd (RIEL). Even margins for EMPS segment declined to 4.6% due to cost overruns and losses at RIEL. Capital employed of the EMPS segment has increased disproportionately due to inventory build-up, lower advances and slower collection from debtors.

  • The sales for EPS segment declined by 19.2% YoY. However, the results are not strictly comparable as the company transferred its material handling business to a JV. Thus, the corresponding revenue growth was lower to that extent. However, the textile machinery business posted a strong performance. Re-introduction of Technology Up-gradation Fund (TUF) will reduce negative sentiments and encourage investments. Nonetheless, performance at the mining & construction business was disappointing due to impending delays in obtaining environment and forest clearances.

  • Sales from the UCP business segment declined 4.1% YoY due to drop in AC volumes arising from unfavorable weather conditions. Despite intense competition, it is worthwhile to note that the company has added 380 bps to its market share at the expense of other competitors. Even the margins for the segment increased due to cost reduction measures initiated by the company.

    Segment-wise performance
    (Rs m) 1QFY11 1QFY12 Change
    Electro-Mechanical Projects & Services (EMPS)
    Revenue 6,926 6,769 -2.3%
    % share  49.3% 50.3%  
    PBIT margin 8.5% 4.6%  
    Engineering Products & Services (EPS)
    Revenue 1,203     973 -19.2%
    % share  8.6% 7.2%  
    PBIT margin 22.9% 17.5%  
    Unitary Cooling Products (UCP)
    Revenue 5,868 5,625 -4.1%
    % share  41.8% 41.8%  
    PBIT margin 9.3% 11.3%  
    Revenue 38 98 159.8%
    % share  0.3% 0.7%  
    PBIT margin 2.7% 19.3%  
    Revenue* 14,034 13,464 -4.1%
    PBIT margin 10.0% 8.4%  
    * Excluding inter-segment adjustments

  • Overall operating margins contracted by 0.8% during the quarter. On a segmental basis, EMPS and EPS business saw margins decline by nearly 390 bps and 540 bps respectively. However, for the UCP business, margins expanded by 200 bps. Higher input costs and cost overruns at RIEL are the reasons for margin erosion at EMPS segment.

  • Net profits increased 41.3% YoY. This was mainly due to an exceptional gain of Rs 793.5 m arising from the transfer of material handling business to a JV. Adjusting for the exceptional gains, net profits declined 46.5% YoY. Increase in interest and depreciation cost dented profitability growth which declined on an adjusted basis.

What to expect?
At the current price of Rs 132, the stock is trading at a multiple of 10.1 times our estimated FY14 earnings. The EMPS business continues to report sluggish performance. Higher costs and continuing losses at RIEL pressurized margins. While the award of projects in international markets has been delayed, strategy to enter into JVs with local players to bid for projects should be beneficial for the company in the long run. It not only increases the bid capacity but also enables the exchange of technological know-how.

The prospects for EPS business continue to remain challenging. While the re-introduction of TUF will boost investment sentiments, the mining & construction segment would continue to suffer on account of policy inaction. In the short term, volatility in raw material prices and higher interest rates will impact the performance of the UCP segment. However, on a longer term, the prospects remain bright on account of higher consumer incomes. In light of these factors, we maintain our positive view on the stock.

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