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Voltas: AC volumes drive growth
Aug 9, 2012

Voltas has announced the first quarter results of financial year 2012-2013 (1QFY13). The company has reported 19.8% YoY growth in sales. However, net profits have declined by 40.0% YoY. Here is our analysis of the results.

Performance summary
  • Net sales increase 19.8% YoY in 1QFY13. Strong performance from all the three segments boosted the top-line growth.
  • Operating profits declined 15.2% YoY due to 23.0% YoY growth in expenditure.
  • The net profits of the company declined 40.0% YoY. However, after adjusting for the exceptional items relating to gain on sale of properties and transfer of material handling business net profits increased 55% YoY.
  • Consolidated order book for the EMPS segment stood at Rs 45.7 bn at the end of the quarter compared to Rs 45.5 bn at the end 1QFY12.


Consolidated performance snapshot
(Rs m) 1QFY12 1QFY13 Change
Sales 13,458 16,116 19.8%
Other operating income  27 53 96.6%
Expenditure 12,377 15,229 23.0%
Operating profit (EBDITA) 1,108 939 -15.2%
Operating profit margin (%) 8.2% 5.8%  
Other income 168 349 107.5%
Interest 85 121 42.9%
Depreciation 103 73 -29.2%
Profit before tax 1,088 1,095 0.6%
Exceptional items  815 11 -98.6%
Tax 581 316 -45.6%
Profit after tax/(loss) 1,323 790 -40.3%
Minority interest (4) 2  
Share of associates  (1) - -100.0%
Net profit 1,318 791 -40.0%
Net profit margin (%) 9.8% 4.9%  
No. of shares   330.9  
Diluted earnings per share (Rs)   2.4  
Reported P/E ratio (x)*   32.3  
* On a trailing 12-months basis

What has driven performance in 1QFY13?
  • Voltas' consolidated sales increased by 19.8% YoY during 1QFY13. Revenues from the Electro-Mechanical & Project services (EMPS) segment increased 9.5% YoY while margins were relatively flat during the quarter. The order book for the segment was relatively flat at Rs 45.7 bn as the international project business is facing slowdown. For instance, many projects in Abu Dhabi, Saudi Arabia and Muscat are witnessing delays in finalization. It may be noted that the Sidra Medical Project which witnessed significant cost escalations during last year is 77% complete.

  • The sales for Engineering & Products Services (EPS) segment increased by 9.6% YoY. Despite challenging environment, the textiles business has performed well in the current quarter by executing the pending orders. The performance of mining and construction business was also encouraging as revenues increased marginally despite slowdown in the IIP numbers.

  • Sales from the Unitary Cooling Products (UCP) business segment increased 34.1% YoY. The topline growth has come on the back of 15% growth in volumes and strong sales from commercial refrigeration products. However, margins were down from 11.3% in 1QFY12 to 8.4% in 1QFY13 mainly due to higher brand building costs and depreciating rupee.

    Segment-wise performance
    (Rs m) 1QFY12 1QFY13 Change
    Electro-Mechanical Projects & Services (EMPS)
    Revenue 6,769 7,413 9.5%
    % share  50.3% 46.0%  
    PBIT margin 4.6% 4.5%  
    Engineering Products & Services (EPS)
    Revenue 973 1,066 9.6%
    % share  7.2% 6.6%  
    PBIT margin 17.5% 18.2%  
    Unitary Cooling Products (UCP)
    Revenue 5,625 7,544 34.1%
    % share  41.8% 46.8%  
    PBIT margin 11.3% 8.4%  
    Others
    Revenue 98 104 6.0%
    % share  0.7% 0.6%  
    PBIT margin 19.3% 2.8%  
    Total
    Revenue* 13,464 16,126 19.8%
    PBIT margin 8.4% 7.2%  
    * Excluding inter-segment adjustments

  • Overall operating margins declined to 5.8% during the quarter. This was mainly due to increase in material cost to 74.8% in 1QFY13 from 72.0% in 1QFY12 (all as a percentage of sales).

  • Net profits declined 40.0% YoY during the quarter. However, after adjusting for the exceptional items, net profits increased 55.0% YoY. It may be noted that in 1QFY12, Voltas recorded an exceptional gain of Rs 793.5 m arising from the transfer of material handling business which boosted profits.

What to expect?
At the current price of Rs 107, the stock is trading at a multiple of 32.3 times its trailing twelve month earnings. Going forward, the international projects business is likely to face challenges due to delays in decision making in the Middle East. However, numerous projects are likely to emanate from Qatar during third quarter due to the upcoming FIFA 2022. Nonetheless, rising competition in these regions means that the company will have to bid aggressively to get new orders. As far as the domestic situation is concerned, the overall environment is sedate as well. However, continued focus on urban infrastructure enabled the company to bag orders worth Rs 4.2 bn during the quarter. With respect to the water management business, it may be noted that substantial number of projects in the Eastern India, where the company has strong presence, have been impacted due to poor financial health of the state governments.

As far as the UCP segment is concerned, higher brand building cost has escalated Voltas to the number one position in room air conditioner segment. The company has a market share of 19.1% in multi brand outlets. Nonetheless, the future volume growth and margins will depend on competitive factors and exchange rate fluctuations. However, we believe that most of the negatives are already priced in and thus we maintain our positive view on the stock from a 2-3 years perspective.

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