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Voltas: Adjusted profit rises

Nov 7, 2013

Voltas has announced the second quarter (2QFY14) results for FY14. The company has reported 7.2% YoY decline in sales; while net profits have declined by 1.5% YoY during the quarter. Here is our analysis of the results.

Performance summary
  • Net sales for the company decreased by 7.2% YoY in 2QFY14. Revenue in the Electro-Mechanical Projects & Services (EMPS) segment declined by 13.7% YoY. Engineering Products & Services' (EPS) sales improved by 11% YoY. Unitary Cooling Products (UCP) segment suffered due to seasonality and recorded a muted sales growth of 2.9% YoY.
  • Operating profits fell 1.7% YoY during the quarter. The company's other expenditure increased by 4.1% on an absolute basis. The staff cost as a proportion of sales remained the same as previous year's corresponding quarter. However, total material cost as a percentage of sales declined from 72.9% in 2QFY13 to 71.4% in 2QFY14. As a result, operating margins have improved slightly by 0.2% to 4% YoY.
  • Other income for the company has increased by 65.7% YoY. There has been a sharp decline in interest and depreciation by 35% YoY and 21.6% YoY respectively. Profit before tax has therefore improved by 34.5% YoY.
  • Profit after tax, however, declined by 1.5% YoY as there had been an exceptional gain of Rs 145m in last year's corresponding quarter. Adjusting for the exceptional gain, the profits are higher by 49% YoY (without adjusting the tax for exceptional gains).

Consolidated performance snapshot
(Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Sales 11,601 10,765 -7.2% 27,717 26,783 -3.4%
Other operating income 44 40 -8.9% 96 55 -42.7%
Expenditure 11,205 10,373 -7.4% 26,434 25,792 -2.4%
Operating profit (EBITDA) 440 432 -1.7% 1,379 1,047 -24.1%
Operating profit margin (%) 3.8% 4.0%   5.0% 3.9%  
Other income 183 303 65.7% 532 524 -1.6%
Interest 85 55 -35.2% 206 235 13.8%
Depreciation 76 60 -21.6% 149 120 -19.4%
Profit before tax 461 620.1 34.5% 1,556 1,216 -21.9%
Onerous contract - -   - -  
Exceptional items 145 - NA 157 (1) NA
Tax 177 196 11.0% 493 386 -21.7%
Profit after tax/(loss) 430 424 -1.4% 1,219 829 -32.0%
Minority interest (0) (1) NA 1 1 9.1%
Share of associates - -   - -  
Net profit 429 423 -1.5% 1,221 830 -32.0%
Net profit margin (%) 3.7% 3.9%   4.4% 3.1%  
No. of shares         332  
Diluted earnings per share (Rs)         2.5  
Reported P/E ratio (x)*         17.3  
* On a trailing 12-months basis

What has driven performance in 2QFY14 and 1HFY14?
  • Voltas reported sales de-growth of 7.2% YoY during 2QFY14. In EMPS segment; sales decline was a result of delay in execution of few large projects. UCP segment grew by meager 2.9% YoY. Extended monsoon led to muted growth in YoY sales. However, the company retained its market leadership with 20.5% market share. Only respite came from EPS segment, which grew by 11% YoY on account of strong traction in both the Textile Machinery and Mining & Construction Equipment business. However, EPS segment comprises only 12% of the total sales.

  • As far as operating performance is concerned, EBIT margins in both the EPS and UCP segments surged substantially. In EPS, the EBIT margin increased from 9.8% to 11.7% YoY. Also, UCP segment had an increase of 3.6% YoY in margins to 11.3% during the quarter. However, in UCP, the company availed of onetime benefit of savings in logistics costs. There was also a write back of warranty related cost provisions. According to the company, sustainable margin in the UCP segment is expected to be around 8%.

  • EMPS business on the other hand reported minuscule margin of just 0.8% in the quarter. EMPS business has been suffering from cost over run on few large projects. This has pushed EMPS' EBIT level margin in the lower range of 1%-2%.

  • Voltas' order book at the quarter end stands at Rs 43.5 bn (up 5.1% YoY). The domestic and international segments constitute 52% and 48% of the total order book respectively. Order inflow during the quarter was about Rs 6 bn. The orders secured were primarily from international markets.

  • In 1HFY14, its sales declined by 3.4% largely due to poor performance of EMPS segment. Operating profit of the company declined by 24% YoY; while the operating margin declined to 3.9% during 1HFY14 from 5%. Profit after tax declined by 32% YoY

    Segment-wise performance#
    (Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
    Electro-Mechanical Projects & Services (EMPS)
    Revenue 7,776 6,709 -13.7% 15,189 13,638 -10.2%
    % share 67.0% 62.3%   54.8% 50.9%  
    PBIT margin 1.0% 0.8%   2.7% -1.6%  
    Engineering Products & Services (EPS)
    Revenue  1,139 1,265 11.0%  2,205 2,376 7.8%
    % share 9.8% 11.7%   7.9% 8.9%  
    PBIT margin 18.6% 21.8%   18.4% 24.6%  
    Unitary Cooling Products (UCP)
    Revenue 2,570 2,643 2.9% 10,114 10,511 3.9%
    % share 22.1% 24.5%   36.5% 39.2%  
    PBIT margin 7.8% 11.3%   8.2% 10.3%  
    Revenue 123 151 22.2% 227 262 15.6%
    % share 1.1% 1.4%   0.8% 1.0%  
    PBIT margin 6.8% 3.9%   5.0% 1.3%  
    Revenue* 11,608 10,767 -7.2% 27,734 26,787 -3.4%
    PBIT margin 4.3% 5.9%   6.0% 5.5%  
    * Excluding inter-segment adjustments
    # The segmental results are before onerous contract & exceptional items
What to expect?
Voltas' profitability has been improving over a few quarters amongst a tough macro environment. Voltas has devised a strategy to remain selective in choice of projects given the risk based parameters. Also, the company will take only those projects which satisfy its internal margin threshold level of about 5%. Apart from maintaining its leadership position in ACs, the company has gained significant market share in West and East zones as well; which have not been the key regions for the company for its cooling products. Voltas also boasts of a stronger balance sheet as compared to its industry peers. This can help the company face the downturn and emerge stronger in the long term.

At the current price of Rs 88, the stock is trading at 11.8 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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