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Earnings disappoint; margins continue to decline
Voltas (VOLT) reported disappointing Q3FY11 numbers, which were below our
and consensus estimate. The company’s revenue grew a mere 5% Y-o-Y as it
faced slower execution in the electro-mechanical project & services (EMPS)
business, especially in international geographies. The EMPS division declined 3%
Y-o-Y to INR 6.9 bn. The engineering products & services (EPS) and unitary
cooling products (UCP) divisions continued their growth momentum at 22% and
31%, respectively. The company reported 12% Y-o-Y decline in EBTIDA to INR
793 mn led by a 144bps Y-o-Y dip in margin to 7.6%. The weaker operating
performance coupled with higher interest cost on the back of increased working
capital borrowing led to a 20% Y-o-Y decline in PAT to INR 534 mn. The earnings
are adjusted for one-offs, i.e., sale of property (INR 155 mn) during the quarter.
Earnings during the quarter disappointed due to decline in the EMPS division due
to: (a) slower than our estimate execution, especially in Qatar; and (b) higher
costs leading to loss (INR 90 mn) at Rohini Electricals (RE).
Visibility a concern; revising down estimates
At INR 47 bn, the order backlog in EMPS declined 6% Y-o-Y; international orders
were INR 31 bn, while domestic orders made up the balance INR 16 bn. Order
accretion for VOLT stood at INR 5 bn during Q3FY11, a growth of 20% Y-o-Y, led
by rise in orders from the domestic market (INR 4 bn). Orders from RE stood at
INR 2 bn. With this, the company has bagged new orders worth INR 21.6 bn
during 9mFY11, thus leaving a high asking rate in Q4FY11. Due to slower-thanexpected
order inflow, we are revising down our order inflow estimate and EMPS
revenue estimate in FY11 and FY12, thus revising down our EPS estimates
15.4% and 14.2%, respectively.
Outlook and valuations: Challenging; downgrade to ‘HOLD’
We believe, with slower order flow, going forward growth is likely to remain
subdued. At our revised EPS of INR 9.9 and INR 12.6, the stock is currently
trading at 18.4x and 14.4x its consolidated earnings for FY11E and FY12E,
respectively. Upside risks to our estimates could emanate from finalisation of
large-ticket orders. Given the challenges on the growth front in the medium
term, we are downgrading our recommendation on the stock to ‘HOLD’ from
‘BUY’. On a relative return basis, we also downgrade our rating on the stock to
‘Sector Performer’.
Segmental performance: UCP continues to shine
The UCP segment’s revenues (~19% of total revenues) grew 31% Y-o-Y to INR 1,969
mn whereas EPS (~14% of total revenues) delivered 22% Y-o-Y growth to INR 1,428 mn
during the quarter. For 9mFY11, UCP and EPS segments recorded growth of 36% and
12%, respectively. The EMPS segment’s revenue (~67% of total revenues) continued to
decline for the third consecutive quarter. It dropped 3% Y-o-Y to INR 6,926 mn during
the quarter whereas for 9mFY11, the revenue declined 4% Y-o-Y. On the operational
front, EBIT margin for EMPS, EPS, and UCP divisions stood at 6.4%, 17.5%, and 9.7%
against 8.9%, 13.5%, and 12.6%, respectively, during Q3FY10.
Company Description
VOLT, a part of the TATA group which holds 30.5% stake, is a leading air conditioning
and engineering services provider. It offers engineering solutions through its four
business segments in areas such as heating, ventilation and air conditioning,
refrigeration, climate control, electro-mechanical projects, textile machinery, machine
tools, mining and construction, material handling, water management, building
management systems, pollution control and chemicals.
Investment Theme
VOLT’s strong presence in the West-Asian region (particularly Middle East) and Far East
(Hong Kong & Singapore) specializing in EMPS contracts has made it a preferred EPCHVAC
contractor. The flagship EMPS division contributes 65% plus to the topline, driven
by contracts in domestic as well as international markets. We believe VOLT may gain
from international experience and tap opportunities from the ongoing infrastructure
boom in India. Further, with capital goods industry continuing its growth trend, we
expect VOLT’ EPS division to capitalize on the opportunity, which can lead to
improvement in overall margins.
Key Risks
Any slowdown in capex spend in Middle East and in economic activity with respect to
infrastructure creation in India is likely to dry incremental order intakes for its EMPS
division.
Further, margins and lead time for delivery for its EMPS segment can come under
pressure with local players strengthening their operations and entry of more global
players.
The profitability of its UCP division is vulnerable to rise in input costs, increase in Chinese
imports, and excess capacity.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Earnings disappoint; margins continue to decline
Voltas (VOLT) reported disappointing Q3FY11 numbers, which were below our
and consensus estimate. The company’s revenue grew a mere 5% Y-o-Y as it
faced slower execution in the electro-mechanical project & services (EMPS)
business, especially in international geographies. The EMPS division declined 3%
Y-o-Y to INR 6.9 bn. The engineering products & services (EPS) and unitary
cooling products (UCP) divisions continued their growth momentum at 22% and
31%, respectively. The company reported 12% Y-o-Y decline in EBTIDA to INR
793 mn led by a 144bps Y-o-Y dip in margin to 7.6%. The weaker operating
performance coupled with higher interest cost on the back of increased working
capital borrowing led to a 20% Y-o-Y decline in PAT to INR 534 mn. The earnings
are adjusted for one-offs, i.e., sale of property (INR 155 mn) during the quarter.
Earnings during the quarter disappointed due to decline in the EMPS division due
to: (a) slower than our estimate execution, especially in Qatar; and (b) higher
costs leading to loss (INR 90 mn) at Rohini Electricals (RE).
Visibility a concern; revising down estimates
At INR 47 bn, the order backlog in EMPS declined 6% Y-o-Y; international orders
were INR 31 bn, while domestic orders made up the balance INR 16 bn. Order
accretion for VOLT stood at INR 5 bn during Q3FY11, a growth of 20% Y-o-Y, led
by rise in orders from the domestic market (INR 4 bn). Orders from RE stood at
INR 2 bn. With this, the company has bagged new orders worth INR 21.6 bn
during 9mFY11, thus leaving a high asking rate in Q4FY11. Due to slower-thanexpected
order inflow, we are revising down our order inflow estimate and EMPS
revenue estimate in FY11 and FY12, thus revising down our EPS estimates
15.4% and 14.2%, respectively.
Outlook and valuations: Challenging; downgrade to ‘HOLD’
We believe, with slower order flow, going forward growth is likely to remain
subdued. At our revised EPS of INR 9.9 and INR 12.6, the stock is currently
trading at 18.4x and 14.4x its consolidated earnings for FY11E and FY12E,
respectively. Upside risks to our estimates could emanate from finalisation of
large-ticket orders. Given the challenges on the growth front in the medium
term, we are downgrading our recommendation on the stock to ‘HOLD’ from
‘BUY’. On a relative return basis, we also downgrade our rating on the stock to
‘Sector Performer’.
Segmental performance: UCP continues to shine
The UCP segment’s revenues (~19% of total revenues) grew 31% Y-o-Y to INR 1,969
mn whereas EPS (~14% of total revenues) delivered 22% Y-o-Y growth to INR 1,428 mn
during the quarter. For 9mFY11, UCP and EPS segments recorded growth of 36% and
12%, respectively. The EMPS segment’s revenue (~67% of total revenues) continued to
decline for the third consecutive quarter. It dropped 3% Y-o-Y to INR 6,926 mn during
the quarter whereas for 9mFY11, the revenue declined 4% Y-o-Y. On the operational
front, EBIT margin for EMPS, EPS, and UCP divisions stood at 6.4%, 17.5%, and 9.7%
against 8.9%, 13.5%, and 12.6%, respectively, during Q3FY10.
Company Description
VOLT, a part of the TATA group which holds 30.5% stake, is a leading air conditioning
and engineering services provider. It offers engineering solutions through its four
business segments in areas such as heating, ventilation and air conditioning,
refrigeration, climate control, electro-mechanical projects, textile machinery, machine
tools, mining and construction, material handling, water management, building
management systems, pollution control and chemicals.
Investment Theme
VOLT’s strong presence in the West-Asian region (particularly Middle East) and Far East
(Hong Kong & Singapore) specializing in EMPS contracts has made it a preferred EPCHVAC
contractor. The flagship EMPS division contributes 65% plus to the topline, driven
by contracts in domestic as well as international markets. We believe VOLT may gain
from international experience and tap opportunities from the ongoing infrastructure
boom in India. Further, with capital goods industry continuing its growth trend, we
expect VOLT’ EPS division to capitalize on the opportunity, which can lead to
improvement in overall margins.
Key Risks
Any slowdown in capex spend in Middle East and in economic activity with respect to
infrastructure creation in India is likely to dry incremental order intakes for its EMPS
division.
Further, margins and lead time for delivery for its EMPS segment can come under
pressure with local players strengthening their operations and entry of more global
players.
The profitability of its UCP division is vulnerable to rise in input costs, increase in Chinese
imports, and excess capacity.
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