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Voltas: Profits take a dip

Aug 14, 2013 | Updated on Oct 30, 2019

Voltas has announced the first quarter (1QFY14) results for FY14. The company has reported flat sales while net profits have declined by 48.5% YoY during the quarter. Here is our analysis of the results.

Performance summary
  • Net sales decreased by 0.6% YoY in 1QFY14.
  • Operating profits fell 34.6% YoY during the quarter. Total material cost as a percentage of sales increased from 74.8% in 1QFY13 to 76.4% in 1QFY14. Staff cost and other expenditure as a percentage of sales remained almost the same as previous year's corresponding quarter. As a result, operating margin declined by 2% YoY to 3.8%.
  • The company reported net profit decline of 48.5% YoY. Poor performance at operating level as well as decline in other income and increase in interest cost weighed on net profit growth.
  • The order book of Electro-Mechanical & Project services (EMPS) segment stood at Rs 38.1 bn (down 16.7% YoY) at the end of 1QFY14.

Consolidated performance snapshot
(Rs m) 1QFY13 1QFY14 Change
Sales 16,116 16,018 -0.6%
Other operating income  53 15 -71.0%
Expenditure 15,229 15,419 1.2%
Operating profit (EBITDA) 939 614 -34.6%
Operating profit margin (%) 5.8% 3.8%  
Other income 349 221 -36.7%
Interest 121 179 48.4%
Depreciation 73 61 -17.1%
Profit before tax 1,095 595.6 -45.6%
Onerous contract  - -  
Exceptional items  11 (1) NA
Tax 316 190 -40.0%
Profit after tax/(loss) 790 405 -48.7%
Minority interest 2 2 46.7%
Share of associates  - -  
Net profit 791 407 -48.5%
Net profit margin (%) 4.9% 2.5%  
No. of shares   331  
Diluted earnings per share (Rs)   1.2  
Reported P/E ratio (x)*   13.7  
What has driven performance in 1QFY14?
  • Voltas' sales have remained flat Y-o-Y. The sales for the quarter have been impacted by de-growth in revenues in Electro-Mechanical Projects and Services (EMPS) segment. The company started the quarter with lower order book (down 16.7% YoY) which led to muted sales. The EMPS sales were also impacted due to poor booking in International projects business which is facing delays in project execution, as well as settlement of dues. The company also faced cost overruns on few projects including Sidra medical research project.

  • In Engineering Products & Services (EPS) Segment, the company managed single digit growth of 4.3% YoY. Both its textile machinery and mining & construction businesses delivered good results despite uncertainty plaguing both the sectors.

  • In Unitary Cooling Products (UCP) segment, sales were up by 4.3% YoY. As per GFK Nielsen Retail Study, Voltas has grown ahead of the industry. Voltas has registered 5% volume growth in terms of primary sales (i.e. sales to dealers, stockists, retailers and other agents); while there is a sharp 34% jump (vs industry's sales of 24% YoY) in Secondary sales (Sales by Dealers to end consumers). In June, Voltas' market share in the AC segment stood at 20.9%. The company stated that heavy rains also impacted the sales to a certain extent otherwise the performance could have been better YoY.

  • At EBIT level, EMPS segment reported negative margins. Lower margin orders, cost overruns and threshold level for profit booking were the major reasons for loss at EBIT level. The company has said that it has started executing projects with higher margins (at 4-5%) but many of the projects have not reached a threshold level. Therefore, company cannot book profits on those projects till they complete a certain milestone.

  • EPS business registered better margins at 27.8% in 1QFY14 as compared to 18.2% in 1QFY13.

  • Voltas managed to improve its margins in UCP segment from 8.4% in 1QFY13 to 10% in 1QFY14. This was despite rupee depreciation which tends to increase cost of compressors which are largely imported.

  • Voltas' order book at the quarter end stands at Rs 38.1 bn. The domestic and international segments constitute 63% and 37% of the total order book respectively. In the domestic segment, Voltas has bagged Rs 2.5 bn order for Delhi's Mass Rapid Transport System. The scope of the project involves environmental control and tunnel ventilation of eight underground stations and electrical and mechanical works.

    Segment-wise performance#
    (Rs m) 1QFY13 1QFY14 Change
    Electro-Mechanical Projects & Services (EMPS)
    Revenue 7,413 6,930 -6.5%
    % share 45.9% 43.3%  
    PBIT margin 4.5% -3.8%  
    Engineering Products & Services (EPS)
    Revenue 1,066  1,112 4.3%
    % share  6.6% 6.9%  
    PBIT margin 18.2% 27.8%  
    Unitary Cooling Products (UCP)
    Revenue 7,544 7,867 4.3%
    % share  46.8% 49.1%  
    PBIT margin 8.4% 10.0%  
    Revenue 112 104 -7.2%
    % share  0.7% 0.6%  
    PBIT margin 2.6% -2.5%  
    Revenue* 16,134 16,012 -0.8%
    PBIT margin 7.2% 5.2%  
    * Excluding inter-segment adjustments
    # The segmental results are before onerous contract & exceptional items

What to expect?
Voltas has delivered disappointing results at operating and net level largely impacted by its EMPS segment. Recovery in near term is unlikely as construction industry in the Middle East is struggling with execution delays and payment issues. However, company has stated that new projects are being finalized after due diligence and it will ensure that the projects are with at least decent margins or have more certainty regarding cash flows.

On a positive note, Voltas is seeing some traction in orders in overseas and domestic market. In August 2013, the company received order for MEP works in Qatar for a stadium worth Rs 2.8 bn. The Company may also receive an LOI for projects worth Rs 5.3 bn in Qatar and Oman.

At current price of Rs 70, the stock is trading at 9.4 times our estimated FY16 earnings. We maintain our Buy view on the stock. However, we would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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Jun 18, 2021 (Close)