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Results below estimate on account of de‐growth in MEP segment: Voltas reported
sales of Rs10.6bn, a de‐growth of 2.7% YoY for Q2FY11. Electro‐mechanical projects
& services (MEP) segment was subdued, with 8% de‐growth in sales, due to delay in
execution of large projects in India, including two airport projects (Chennai &
Kolkata) and few projects in Qatar. The delay was on account of design changes and
delay from main contractors.
EBITDA margins contracted by 90bps to 9% YoY: Margins were down YoY on
account of higher input cost (RM % sales increased by 210bps YoY to 68.3%) and
higher base of last year. Margins were also impacted by the writedown the company
has taken pertaining to review on accounting policy in one of the subsidiary.
Adjusted PAT during the quarter was down by 11.5% YoY to Rs799m. Reported PAT
was up 2.3% to Rs924m due to a gain of Rs177m on account of profit on sale of
property (apartments in Mumbai). Order book for the MEP segment stood at
Rs49.5bn and order inflow stood at Rs6.5bn.
UCP and Engineering products segment continues to perform: Unitary Cooling
products (UCP) and Engineering products & services (EPS) segment continues to
grow at a healthy pace of 16% YoY and 8% YoY, respectively. Profitability for both
these segments improved significantly. EBIT margins for EPS & UCP improves by
250bps and 280bps to 20.9% and 12.3%, respectively. Higher contribution of the
agency business in EPS and strong volume in the UCP segment is likely to have aided
margins.
Valuation: The stock trades at 20.5x FY11E and 17.1x FY12E earnings. We believe
FY11 to be a year of consolidation and growth to pick up in FY12, driven by better
execution and uptick in order inflow in the MEP segment. Continued growth in UCP
and EPS segment will support growth trajectory. We maintain ‘Accumulate’ rating
on the stock.
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