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Voltas: Margins go for a toss
Nov 18, 2011

Voltas has announced the second quarter results of financial year 2011-2012 (2QFY12). The company has reported 3.6% YoY growth in sales. However, net profits have declined by 54.7% YoY. Here is our analysis of the results.

Performance summary
  • Net sales increase 3.6% YoY in 2QFY12. Disappointing performances from Engineering & Project services (EPS) and Unitary Cooling Products (UCP) restricted top-line growth to single digit.
  • Operating profits fell by nearly 74.6% YoY due to increase in raw material expenses and staff costs.
  • Net profits declined by 54.7% YoY due to poor performance at the operating level and increase in interest and depreciation expenses. Further, in 2QFY12 net profits were aided by extraordinary income arising from sale of property (Rs 249.8 m). Adjusting for the exceptional items, profits declined 77.4% YoY during 2QFY12.
  • Order book for the EMPS segment stood at Rs 44.6 bn at the end of the quarter.
  • The D/E ratio of the company increased to 0.19x during the quarter. The company's cash position is comfortable at Rs 3.3 bn.

Consolidated financial snapshot
(Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Sales 10,636 11,019 3.6% 24,666 24,477 -0.8%
Other operating income 15 197 1177.9% 68 224 227.7%
Expenditure 9,576 10,943 14.3% 22,383 23,339 4.3%
Operating profit (EBDITA) 1,075 273 -74.6% 2,352 1,362 -42.1%
Operating profit margin (%) 10.1% 2.4%   9.5% 5.5%  
Other income 186 224 20.7% 379 412 8.8%
Interest 30 71 137.1% 75 156 106.2%
Depreciation 53 89 66.5% 104 192 85.5%
Profit before tax 1,178 337 -71.4% 2,552 1,427 -44.1%
Exceptional items 178 250 40.7% 170 1,065 525.4%
Tax 453 177 -61.0% 882 758 -14.1%
Profit after tax/(loss) 902 410 -54.5% 1,839 1,733 -5.8%
Minority interest 22 8 -61.6% 17 4 -74.9%
Share of associates         (1)  
Net profit 924 419 -54.7% 1,857 1,737 -6.5%
Net profit margin (%) 8.7% 3.7%   7.5% 7.0%  
No. of shares         330.9  
Diluted earnings per share (Rs)         5.2  
P/E ratio (x)*         8.3  
* On a trailing 12-months basis

What has driven performance in 2QFY12?
  • Voltas' consolidated sales increased by 3.6% YoY during 2QFY12. The Electro-Mechanical & Project services (EMPS) business showed some signs of improvement with a 7.9% YoY growth in sales. However, profitability continues to remain under pressure. Raw material price inflation and changes in design for a few projects resulted in cost overruns. Profitability at Rohini Industrial Electricals Ltd (RIEL) was also below expectation due to slowdown in execution pace.

  • The sales for EPS segment declined by 5.1% YoY. However, the results are not strictly comparable as the company transferred its material handling business to a JV. Thus, the corresponding revenue growth was lower to that extent. Both textiles and mining & construction business have performed well in the current quarter. Nonetheless, margins continue to remain under pressure.

  • Sales from the UCP business segment declined 7.5% YoY due to drop in AC volumes arising from unfavorable weather conditions and rising inflation (leads to deferment of purchases). However, the company was able to maintain its price levels and retained its number two position in the AC market with a market share of 17.6%.

    Segment-wise performance
    (Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
    Electro-Mechanical Projects & Services (EMPS)
    Revenue 7,066 7,623 7.9% 13,991 14,392 2.9%
    % share 66.4% 69.2%   56.7% 58.8%  
    PBIT margin 8.2% 0.7%   8.3% 2.5%  
    Engineering Products & Services (EPS)
    Revenue 1,267 1,202 -5.1% 2,470 2,175 -12.0%
    % share 11.9% 10.9%   10.0% 8.9%  
    PBIT margin 20.9% 14.8%   21.9% 16.0%  
    Unitary Cooling Products (UCP)
    Revenue 2,281 2,110 -7.5% 8,149 7,735 -5.1%
    % share 21.4% 19.1%   33.0% 31.6%  
    PBIT margin 12.3% 2.9%   10.2% 9.0%  
    Others
    Revenue 26 87 236.0% 63 184 190.9%
    % share 0.2% 0.8%   0.3% 0.8%  
    PBIT margin 21.7% -8.3%   10.4% 6.3%  
    Total
    Revenue* 10,639 11,022 3.6% 24,674 24,487 -0.8%
    PBIT margin 10.6% 2.6%   10.3% 5.8%  
    * Excluding inter-segment adjustments

  • Overall operating margins fell to 2.4% during the quarter. All the three segments witnessed margin erosion due to slower execution, higher input prices and cost overruns in the ongoing projects.

  • Net profits declined 54.7% YoY due to poor performance at the operating level. Adjusting for the exceptional gains net profits declined at an even faster pace of 77.4% YoY. Increase in interest and depreciation cost also weighed in on profits.

What to expect?
At the current price of Rs 87, the stock is trading at a multiple of 6.7 times our estimated FY14 earnings. The EMPS business continues to suffer on the profitability front. Higher costs and slower execution at RIEL pressurized margins. However, the real challenge lies in the international markets. Rising competition is compressing margins and the order intake has also slowed down due to delays in decision making.

As far as the UCP segment is concerned, volatility in raw material prices and higher interest rates will impact the performance in the short term. However, from a longer term, the prospects remain bright on account of higher consumer incomes. In light of these factors, we maintain our positive view on the stock.

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