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Voltas: Margins rise even as revenues fall - Views on News from Equitymaster

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Voltas: Margins rise even as revenues fall
Aug 18, 2015

Voltas has announced the first quarter (1QFY16) results for FY16. The company has reported a 9% YoY fall in sales while net profits grew by 1.4% YoY during the quarter. Here is our analysis of the results.

Performance summary
  • Net sales decreased by 9% YoY in 1QFY16.
  • Operating profits came in almost the same as the previous year's quarter.
  • The company reported net profit increase of 1.4% YoY.
  • The order book of Electro-Mechanical & Project services (EMPS) segment stood at Rs 40.4 bn (up 6.6% YoY) at the end of 1QFY16.

Standalone Financial Performance Snapshot
(Rs m) 1QFY15 1QFY16 Change
Sales 17,523 15,952 -9.0%
Other operating income  50 31 -38.4%
Expenditure 16,255 14,673 -9.7%
Operating profit (EBITDA) 1,319 1,310 -0.7%
Operating profit margin (%) 7.5% 8.2%  
Other income 292 213 -27.3%
Interest 87 25 -71.7%
Depreciation 61 62 2.1%
Profit before tax 1,463 1,436.3 -1.9%
Onerous contract - -  
Exceptional items  5 106  
Tax 365 435 18.9%
Profit after tax/(loss) 1,103 1,108 0.4%
Minority interest (13) (5)  
Share of associates  - 3  
Net profit 1,090 1,105 1.4%
Net profit margin (%) 6.2% 6.9%  
No. of shares   331  
Diluted earnings per share (Rs)*   11.7  
P/E ratio (x)*   26.9  
*On trailing twelve months basis

What has driven performance in 1QFY16?
  • The sales for the quarter have been dragged down by a fall in revenues in the Electro-Mechanical Projects and Services (EMPS) segment and Engineering Products & Services (EPS) segment. Unitary Cooling Products segment managed to see a lower fall in its topline. The slow pace of execution of projects amidst a sluggish business environment continued to take a toll on the company's projects oriented EMPS segment. However, as mentioned earlier, the company segment end with a higher order book. As for the UCP segment, the management has highlighted that despite intense competition and unfavorable weather conditions during the period, the company has sustained its No. 1 position in this business.

  • EBIT margins came in higher this quarter for all the 3 major business segments of the company.

  • On an overall basis, operating margins grew, which alleviated the effect of the fall in topline on net profits to an extent.

  • Exceptional items for the quarter comprise of profits from the sale of investments.

    Segment-wise performance#
    (Rs m) 1QFY15 1QFY16 Change
    Electro-Mechanical Projects & Services (EMPS)
    Revenue 6,222 5,559 -10.7%
    % share  35.5% 34.8%  
    PBIT margin 0.7% 1.3%  
    Engineering Products & Services (EPS)
    Revenue 1,109 700 -36.9%
    % share  6.3% 4.4%  
    PBIT margin 21.6% 34.2%  
    Unitary Cooling Products (UCP)
    Revenue 10,014 9,490 -5.2%
    % share  57.1% 59.5%  
    PBIT margin 11.6% 11.9%  
    Others
    Revenue 181 205 13.4%
    % share  1.0% 1.3%  
    PBIT margin 17.0% 7.7%  
    Total
    Revenue* 17,526 15,954 -9.0%
    PBIT margin 8.4% 9.2%  
    * Excluding inter-segment adjustments
    # The segmental results are after exceptional items
What to expect?

The company's performance during this quarter has been constrained given the general environment as well as various other external factors more relevant to its businesses, such as the excessive rains impacting AC sales, especially in the month of June.

The company's management has observed that while there have been improvements in activity levels in segments like roads, defense, railways, etc., the recovery is yet to be seen in the company's relevant segments. Liquidity constraints are creating a situation where orders are few and far between. Further, these limited orders are being increasingly met with illogical competition and pricing pressures. Additionally, in-sourcing of MEP (mechanical, electrical and plumbing) work by main contractors and advent of smaller regional players has been a further source of pressure for its core business.

At current price of Rs 314, the stock is trading at 26.9 times its reported trailing twelve month earnings. We are in the process of updating our FY18 estimates for the stock and shall soon update investors with a revised view, if any, and target price on the stock.

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