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Voltas: 'Cool' show

Nov 5, 2004

Performance summary
Diversified Tata group major, Voltas, posted mixed results for the second quarter ended September 2004. While revenue growth was slower at 1.9% as compared to the past, there has been a notable improvement in operating margins during the quarter. However, the company's businesses are seasonal in nature and bulk of the electro-mechanical division's (EMD) turnover is accounted for in the second half of the fiscal.

(Rs m)2QFY042QFY05Change1HFY041HFY05Change
Net sales 2,811 2,864 1.9% 6,426 6,105 -5.0%
Expenditure 2,758 2,791 1.2% 6,278 5,925 -5.6%
Operating profit (EBDITA) 53 72 36.8% 149 180 21.1%
EBDITA margin (%)1.9%2.5%2.3%3.0%
Other income 40 65 61.0% 92 130 40.3%
Interest (net) 4 13 233.3% 11 23 111.1%
Depreciation 33 23 -30.2% 66 47 -28.5%
Profit before tax 56 101 80.2% 165 240 45.8%
Extraordinary income/(expense) 8 (9) - 31 22 -
Tax 21 37 73.0% 51 63 22.5%
Profit after tax/(loss) 43 56 29.3% 145 200 37.9%
Net profit margin (%)1.5%1.9%2.3%3.3%
No. of shares (m) 33.1 33.1 33.1 33.1
Diluted earnings per share (Rs)* 5.2 6.7 8.8 12.1
Price to earnings ratio (x) 12.3
(* annualised)

What is the company's business?
Voltas 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 company also has presence in manufacturing of forklifts, textile auxiliary, agro-chemicals and trading of chemicals. On the unitary division front, the company has presence in air conditioners and refrigerators etc. Voltas has a joint venture with Fedders of USA for manufacturing of A/Cs. The company's turnaround started with the merger of Voltas International to strengthen its presence in electro-mechanical segment and the spin off of its air conditioning facility to a JV.

What has driven performance in 2QFY05?
Mixed segmental performance: Voltas's segmental performance in 2QFY05 has been mixed with electro-mechanical division (EMD), the key growth driver, actually posting a decline in revenues. However, typical of any engineering company, the contribution to total turnover is higher in the second half of the fiscal as and when the contract is completed. The order book of the company continues to remain strong at an estimated 1 time sales of FY04. However, other divisions have posted higher growth in revenues in 2QFY05. The prospects of the Engineering Agency Division (EAD) is closely linked to revenue growth of the EMD. Overall, the company's performance in 1HFY05 has to be viewed keeping in mind the seasonality of businesses in mind.

Divisional performance...
(Rs m)2QFY042QFY05Change1HFY041HFY05Change
Electro-mechanical revenues 1,769 1,738 -1.7% 3,665 3,080 -16.0%
PBIT margin4.2%5.2%3.9%5.4%
Engineering agency revenues 214 240 11.9% 379 438 15.5%
PBIT margin31.3%36.0%28.0%34.9%
Unitary revenues 683 747 9.5% 2,241 2,416 7.8%
PBIT margin-2.8%-2.7%1.9%1.2%
Others revenues 222 261 17.1% 405 510 26.0%
PBIT margin11.5%17.4%10.1%14.1%

Unitary remains a drag on margins: While the company has managed to improve PBIT margins (profit before interest and tax) of all the divisions, the unitary segment continues to remain a drag on the overall profitability. Cooling appliances, refrigerators and air conditioners form a part of this division. There are two key reasons for the same. One, the agreement with one of the Korean majors for supply of refrigerators came to an end last year and this has impacted capacity utilisation levels. Secondly, the consumer durable market is commoditised in nature and therefore, prices continue to remain under pressure.

The 2QFY05 mix...
Segment% revenues% PBIT
EMD58.2%44.6%
Unitary25.0%-10.0%
EAD8.0%42.9%
Others8.7%22.5%

Net profit growth at 85% in 2QFY05: Significant margin expansion and higher other income has resulted in the bottomline outpacing the topline by a significant margin. Excluding the impact of extraordinary items from both the quarters, the net profit growth is actually 85% in 2QFY05, which is a commendable show. As the PBIT margin trend shows, while the EAD and others (textile auxiliaries, chemicals) have seen significant improvement in margins, the EMD's margins are more or less at the same band. We expected this to improve to around 6% to 6.5% levels, which has not happened. But as we mentioned earlier, this business is seasonal in nature.

What to expect?
The stock currently trades at Rs 149 implying a price to earnings multiple of 12.3 times annualised 1HFY05 earnings. While the long-term growth prospects of the EMD division is promising, we believe that the unitary business is likely to keep the overall margins depressed.

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