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Voltas: Surging profitability
Oct 26, 2007

Performance summary
  • Topline grows 35% YoY during 2QFY08, 39% YoY during 1HFY08. Growth led by strong performances from all the three business segments.
  • Operating margins more than double during the quarter and half year – lower staff and other costs aid this expansion. Unitary cooling products division leads the way in margin improvement.

  • Lower other income takes some steam off the bottomline, which has still surged by 114% YoY during the second quarter and 126% YoY during the first half.

  • Revenue performance in line with our full year estimates though profitability might need some upward revision.

Financial performance snapshot
(Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Sales 5,299 7,127 34.5% 11,103 15,377 38.5%
Expenditure 5,098 6,491 27.3% 10,638 14,005 31.7%
Operating profit (EBDITA) 201 637 216.2% 465 1,372 194.9%
Operating profit margin (%) 3.8% 8.9%   4.2% 8.9%  
Other income 153 101 -33.8% 255 186 -27.3%
Interest 16 10 -34.0% 18 17 -6.6%
Depreciation 28 32 11.7% 64 63 -1.7%
Profit before tax 310 696 124.3% 638 1,477 131.5%
Extraordinary income/(expense) 9 105   10 113  
Tax 69 265 282.8% 180 533 195.6%
Profit after tax/(loss) 250 536 114.3% 468 1,057 126.2%
Net profit margin (%) 4.7% 7.5%   4.2% 6.9%  
No. of shares         330.9  
Diluted earnings per share (Rs)*         7.4  
P/E ratio (x)*         25.9  
* On a trailing 12 months basis

What is the company’s business?
Voltas, a Tata Group Company, is a major player in the electro-mechanical engineering segment, which involves all aspects of construction of infrastructure like electricals and air conditioning barring the civil structure. The electro-mechanical division accounted for 52% of revenues in 1HFY08. The company also has presence in manufacture of forklifts, textile auxiliary, agro-chemicals and trading of chemicals. On the unitary division front, the company has presence in air conditioners, commercial refrigerators and visi-coolers. The unitary division contributed to 31% of revenues in 1HFY08. Voltas also trades in textile and mining machinery and, interestingly, this is the most profitable business segments for the company. The company has emerged from being a consumer appliance company operating in a highly competitive arena to one that has expertise in the niche engineering area of electro-mechanical projects and services.

What has driven performance in 2QFY08?
All round growth: Carrying on from the benefits that accrued to Voltas during the previous quarter owing to execution of two large contracts in the Middle East (Burj Tower in Dubai and Bahrain City Centre), this quarter also saw the company recording strong growth in its EMPS segment. This business recorded a growth of 34% YoY in sales during 2QFY08. The management expects this kind of growth momentum to sustain in the future as well considering that the company continues to win large orders in the cash-flushed Middle East region. As a matter of fact, 2QFY08 saw Voltas winning 2 more large deals in Qatar. At the end of September 2007, its order backlog stood at Rs 27 bn, a growth of 50% YoY. International orders form nearly 75% of this backlog.

Segment-wise performance
(Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Electro-Mechanical Projects & Services (EMPS)            
Revenue 3,138 4,208 34.1% 5,576 7,944 42.5%
% share 59.2% 58.8%   50.1% 51.5%  
PBIT margin 3.9% 7.6%   4.7% 8.4%  
Engineering Products & Services (EPS)            
Revenue 996 1,341 34.6% 1,770 2,453 38.6%
% share 18.8% 18.8%   15.9% 15.9%  
PBIT margin 26.4% 21.4%   25.8% 22.1%  
Unitary Cooling Products (UCP)            
Revenue 1,069 1,497 40.0% 3,541 4,831 36.4%
% share 20.2% 20.9%   31.8% 31.3%  
PBIT margin 0.3% 7.2%   1.1% 6.9%  
Others            
Revenue 100 105 5.5% 232 199 -14.5%
% share 1.9% 1.5%   2.1% 1.3%  
PBIT margin -33.4% 10.5%   -10.5% 13.0%  
Total            
Revenue* 5,303 7,151 34.9% 11,119 15,426 38.7%
PBIT margin 6.7% 10.1%   6.6% 10.1%  
* Excluding inter-segment adjustments

As for its EPS business, which is dependent on the performance of mining, textile and engineering sectors in India, sales grew by 35% YoY during 2QFY08. While mining & construction sub-segment continued to perform strongly, the management indicated of some weakness in off-take of textile equipments considering the currency pressure that the Indian textile industry is currently facing. Coming to Voltas’ UCP business, the company reported sales growth of 40% YoY during 2QFY08, contributed both by higher volume sales and price increases.

UCP leads profitability expansion: Voltas’ UCP division recorded a strong expansion in its profitability during 2QFY08, with its EBIT margins improving to 7.2%, from 0.3% in 2QFY07. The management has indicated that the company’s energy efficient air-conditioners have been well received by the markets. Further, due to the closure of Hyderabad plants and shifting of operations to low cost Uttaranchal have also helped matters on the segment’s profitability front. Further, the fact that the company imports some of the components, the rupee’s appreciation against the UD dollar has also aided margins for the UCP business.

As far as profitability of the EMPS segment is concerned, it has benefited from operating leverage considering that the company has been booking profits on its large contracts currently being executed in the Middle East. The EPS segment margins have, however suffered due to slowdown in off-take of machines from the textile sector.

Margin expansion, extraordinary income aids bottomline: Voltas recorded a 114% YoY growth in its 2QFY08 bottomline. While this was lower than the 216% YoY growth recorded in operating profits, it was still very substantial. Factors like the lower other income and higher tax rate created this difference between the two profit items. The net profit performance was still higher considering our estimates for the full year. As such, we shall be revising upwards our numbers for the company.

What to expect?
At the current price of Rs 192, the stock is trading at a multiple of 22.3 times our estimated FY10 earnings. We maintain out strong outlook for Voltas’ EMPS business, as revenues and profits start flowing in bigger numbers from the large contracts that the company is executing in the Middle East. We shall soon update our research report on the company.

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