Voltas: Low profitability across segments as PAT led by other income and exceptionals :: Kotak Sec

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Voltas (VOLT)
Industrials
Low profitability across segments as PAT led by other income and exceptionals.
In-line sales of Rs11 bn though EBITDA was only Rs76 mn (0.7%, excluding other
income). PAT of Rs210 mn (ex-tax adjusted exceptional) was led by higher other income
(Rs421 mn). Decline in sales and margin was across projects (cost overruns in Qatar,
India did better) and products segments. Working capital and debt increased (higher
debtors and lower liabilities). Downgrade to REDUCE (TP: Rs110 vs. Rs135 earlier).

Consol sales on track but margins almost vanish on higher raw material and employee cost

Voltas’ sales grew 4% yoy to Rs11 bn versus our estimate of Rs10.4 bn. EBITDA margin dropped

to 70 bps (10% in 2QFY11) as profitability was hit across segments. PAT of Rs210 mn (ex- Rs250

mn exceptional gain) was led by high other income of Rs421 mn (other operating income of Rs195

mn versus last 10 quarter average of Rs40 mn). Backlog declined sequentially to Rs44.6 bn.

Segmental: Electromechanical Projects and Unitary cooling products report very low margins

􀁠 Electromechanical projects margins fall led by overseas projects: Sales at Rs7.6 bn grew by

8% yoy. EBIT margin at 70 bps was negligible compared to 8.2% last year on cost overruns in

Qatar projects. Company maintains that domestic business has performed better on a yoy basis.

􀁠 Sharp margin decline in Engg products and services: Sales at Rs1.2 bn declined by 5% yoy.

Margin at 14.8% declined 600 bps yoy despite sell off of low margin material handling business.

􀁠 Unitary cooling products (UCP) sales decline however margins go down sharply: Sales at

Rs2.1 bn declined by 7.5% yoy. EBIT margin at 2.9% was much lower versus 12.3% last year

Balance sheet quality worsens on higher working capital;

Net working capital increased to Rs8.9 bn (63 days of sales) from Rs4.1 bn (29 days of sales) at

FY2011-end on higher debtors (up Rs1.3 bn) and lower liabilities (down Rs3.1 bn).

Revise estimates on lower backlog and margin assumptions; Downgrade to REDUCE

We revise estimates to Rs6.6 and Rs8.6 from Rs8.8 and Rs9.5 for FY2012-13E on lower sales and

margin assumption. We revise our TP to Rs110 (13X FY2013E) from Rs135 (14XFY13E) earlier. We

downgrade Voltas to REDUCE from BUY on earnings headwinds from (1) declining profitability in

projects segment and lack of new order inflows visibility, (2) significantly lower margin in engg

products segment (may lose major principal in mining construction business), (3) likely lower

margins and sedate revenue growth in UCP segment, (4) deterioration in balance sheet quality and

(5) poor business commentary from direct peers (Bluestar) as well as broader capital goods.