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Voltas: Profitability takes a hit
Oct 23, 2008

Performance summary
  • Net sales grow 29% YoY in 2QFY09, 25% YoY in 1HFY09. Growth aided by strong performances from the electro-mechanical projects business, which grows by 40% YoY during the quarter.

  • Operating margins contract by 1.2% YoY owing to higher cost on purchase of traded goods (as percentage of sales).

  • Other income surges by 107% YoY during the quarter. This adds to the bottomline, which has grown by 16% YoY and 39% YoY during 2QFY09 and 1HFY09 respectively.



Financial performance snapshot

(Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Sales 7,127 9,180 28.8% 15,377 19,248 25.2%
Expenditure 6,494 8,477 30.5% 14,008 17,768 26.8%
Operating profit (EBDITA) 634 704 11.1% 1,369 1,480 8.1%
Operating profit margin (%) 8.9% 7.7%   8.9% 7.7%  
Other income 101 210 107.4% 186 498 168.5%
Interest 10 (22)   17 (27)  
Depreciation 32 50 57.0% 63 90 43.1%
Profit before tax 693 886 27.8% 1,474 1,915 29.9%
Extraordinary income/(expense) 108 31 -71.5% 116 263 127.1%
Tax 265 295 11.2% 533 705 32.3%
Profit after tax/(loss) 536 622 16.1% 1,057 1,473 39.3%
Net profit margin (%) 7.5% 6.8%   6.9% 7.7%  
No. of shares       332.0 330.9  
Diluted earnings per share (Rs)*         7.6  
P/E ratio (x)*         9.7  
* On a trailing 12-months basis

What has driven performance in 2QFY09?
  • Voltas grew its 2QFY09 sales by 29% YoY during 2QFY09. This was largely a result of strong performance from its electro-mechanical projects & services (EMPS) business. This business recorded sales growth of 40% YoY during the quarter on the back of execution of some large orders that Voltas is in process of completing.

    At the end of September 2008, the EMPS segment’s order backlog stood at Rs 56 bn, almost 2 times the company’s total revenues during the whole of last fiscal. Around 80% of this backlog is made up of international orders that have an average execution timeframe of 30 months.

    The management has indicated of some slowdown in the Dubai construction market on account of companies facing liquidity constraints. As for the other markets in the Middle East – Abu Dhabi and Qatar – the company expects growth to remain strong going forward as well.

    As for the company’s engineering products and services (EPS) business, sales grew by 21% YoY during the quarter. Within this segment, the mining & construction equipment business recorded significant traction and grew its sales by 40% YoY. The management has indicated of continued slowdown in sales of textile machinery on the back of a general slowdown in capex from domestic textile companies.

    In the third business segment of unitary cooling products (UCP), sales grew by a marginal 7% YoY during the quarter. The management has indicated slackened demand as a result of slowdown in growth of this segment. The concerning part is that the company has seen a rise in inventories from this segment.

  • Voltas has reported a 1.2% YoY decline in operating margins during 2QFY09 (similar decline was reported in 1QFY09 as well). This was a result of higher cost on purchase of traded goods. Raw material costs, on the other hand, declined from 51.7% of sales in 2QFY08 to 47.9% in 2QFY09, thereby paring some pressure off the operating margins.

    Based on segments, the best performance was recorded by EMPS, where EBIT margins expanded from 7.6% to 9.9%. Margins came down significantly for the other two segments (see table above) on the back of higher raw material costs, slowdown in demand and competitive pressures.

  • Voltas’ bottomline during 2QFY09 grew at a slower pace than the growth in topline. This was on the back of contraction in operating margins. The growth in profits would have been lower but for a substantial rise in other income (up 107% YoY).

    Segment-wise performance

    (Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
    Electro-Mechanical Projects & Services (EMPS)            
    Revenue 4,208 5,874 39.6% 7,944 10,505 32.2%
    % share 58.8% 63.8%   51.5% 54.4%  
    PBIT margin 7.6% 9.9%   8.4% 9.1%  
    Engineering Products & Services (EPS)            
    Revenue 1,341 1,617 20.6% 2,453 2,981 21.5%
    % share 18.8% 17.6%   15.9% 15.4%  
    PBIT margin 21.4% 16.4%   22.1% 15.1%  
    Unitary Cooling Products (UCP)            
    Revenue 1,497 1,607 7.4% 4,831 5,615 16.2%
    % share 20.9% 17.5%   31.3% 29.1%  
    PBIT margin 7.2% 4.2%   6.9% 7.8%  
    Others            
    Revenue 105 101 -3.4% 199 207 4.1%
    % share 1.5% 1.1%   1.3% 1.1%  
    PBIT margin 10.5% 12.0%   13.0% 10.6%  
    Total            
    Revenue* 7,151 9,199 28.6% 15,426 19,308 25.2%
    PBIT margin 10.1% 9.7%   10.1% 9.6%  
    * Excluding inter-segment adjustments

What to expect?
At the current price of Rs 73, the stock is trading at a multiple of 6.3 times our estimated FY11 earnings. While Voltas has reported a decent performance during 2QFY09, the management has indicated of some kind of slowdown in orders in both the EMPS and EPS segments in the domestic market. It has also indicated of some execution delays in the future due to its clients facing liquidity constraints. The results for the first half are fairly in line with our full year estimates. While we might have to marginally lower our estimates for sales of the EPS and UCP segments, we shall maintain our profit estimates. Overall, we maintain our positive view on the stock from a 2 to 3 years perspective.

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