Voltas Limited (VOLT IN) Margin led surprise; consumer durables foray a positive

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1 INSTITUTIONAL EQUITY RESEARCH Voltas Limited (VOLT IN) Margin led surprise; consumer durables foray a positive INDIA CAPITAL GOODS Quarterly Update 26 May 2017 Top takeaways from 4QFY17 Recurring PAT (Rs 2bn, 50% yoy) was 14% / 40% above our / consensus estimates due to higher than expected EBITDA margins in Unitary Cooling Products (UCP) and Projects (MEP). Maintained leadership position with 21.4% market share in room ACs. Announced its entry into the consumer durables segment in joint venture with Arcelik, Turkey. Key highlights: Revenues (Rs 20.3bn) grew 10% yoy, driven by UCP (54% of sales, +28% yoy) and Engineered Products segment (5% of sales, +15% yoy), while MEP (41% of sales) fell 9% on slower order execution. EBITDA margins expanded 116bps to 10.6% (PC: 10.5%) aided by lower employee costs. Gross margins contracted 70bps to 27%. Segmentally, margin expansion was aided by MEP margins (+250bps yoy to 5.7%). UCP margins remained stable at 16.4%, which was a positive surprise as we expected margins to decline on high raw material costs and competitive intensity. Earnings also benefited from tax refunds leading to a lower tax rate of 20% against the usual 34%. Net working capital reduced to 9.7% of sales against 11.2% yoy and 12.4% in September Conference call takeaways Voltas targets to launch some consumer products in the festive season (4QCY17). It will initially outsource manufacturing, and subsequently build domestic factories. Voltas is adopting the JV route, against a standalone entry, as it cuts time to market. It also expects to benefit from a overlap of distribution channel of its AC business. It expects MEP segment margins in FY18 to reach ~6% vs. 3.7% in FY17. Entry into the consumer durables segment: We see this foray as a long term positive. Voltas has demonstrated its ability to achieve strong brand leadership and develop a robust supply chain over a prolonged period. Additionally, it will allocate low return yielding cash into a potentially high ROE/ROIC (25%/40%) business. We currently do not incorporate the financials of the JV into our estimates due to limited details. However, based on our initial estimates, we expect the JV to achieve breakeven by FY21. Outlook and valuation Voltas has surpassed our and investor expectations on its ability to hold on to market leadership and margins in its AC business and gradually improve profitability in projects. We expect its AC segment revenues to grow faster than industry, albeit at a lower margin due to higher competition. Its project business should benefit by further margin expansion on execution of projects with higher margins. Consequently, we raise our FY18/19 earnings estimates by 8%/9%. We revise our SOTP based target price to Rs 440 (earlier Rs 345) as we factor in: (1) revised earnings, (2) rolled forward valuations to March 2019 (September 2018 earlier), (3) rerated UCP segment to 28x from 25x and MEP to 15x from 12x. However, we maintain our Neutral rating as we believe that recent stock price appreciation (15% in three days) factors in the positives of growth in ACs and higher MEP margins and is ahead of the curve for ascribing value to the consumer durable business. Voltas currently trades at 24x FY19 PE, which is above its two year forward +1SD and looks fairly valued for 16% CAGR in FY17 19 earnings. Neutral (Maintain) CMP RS 475/ TARGET RS 440 ( 7%) COMPANY DATA O/S SHARES (MN) : 331 MARKET CAP (RSBN) : 138 MARKET CAP (USDBN) : WK HI/LO (RS) : 446 / 287 LIQUIDITY 3M (USDMN) : 10.8 PAR VALUE (RS) : 1 SHARE HOLDING PATTERN, % Mar 17 Dec 16 Sep 16 PROMOTERS : FII / NRI : FI / MF : NON PRO : PUBLIC & OTHERS : KEY FINANCIALS Rs mn FY17 FY18E FY19E Net Sales 60,328 71,129 84,472 EBIDTA 5,791 7,396 8,922 Net Profit 5,079 5,811 6,684 EPS, Rs PER, x EV/EBIDTA, x P/BV, x ROE, % Total debt/equity (%) CHANGE IN ESTIMATES Revised Est. % Revision Rs bn FY17E FY18E FY17E FY18E Revenue 71,129 84, % 2.6% EBITDA 7,396 8, % 9.2% Core PAT 5,811 6, % 9.4% EPS (Rs) % 9.4% Jonas Bhutta ( ) jbhutta@phillipcapital.in Vikram Rawat ( ) vrawat@phillipcapital.in (Rs bn) Q4FY17 Q4FY16 Change yoy vs. expectations Comments Orderbook 43,210 39,140 10% 17% Orderinflow 9,540 9,600 1% 17% Revenue 20,351 18,554 10% 5% Due to lower projects revenue EBITDA 2,219 1,808 23% 1% EBITDA margin (%) 10.9% 9.7% 116 bps 40 bps On higher than expected margin in project and AC segments PAT (Recurring) 1,989 1,327 50% 14% Tax refunds leading to lower tax rate of 20% vs 32% Page 1 PHILLIPCAPITAL INDIA RESEARCH

2 Voltas: Consolidated quarterly result (Rs mn) Q4FY17 Q4FY16 Change yoy Net Sales 20,351 18,554 10% Cost of material & stock in trade 14,852 13,408 11% Gross Profit 5,499 5,146 7% Gross margin (%) 27% 28% 71 bps Employee cost 1,485 1,740 15% % of sales 7% 9% 208 bps Other Expenses 1,795 1,597 12% % of sales 9% 9% 21 bps EBITDA 2,219 1,808 23% EBITDA margin (%) 10.9% 9.7% 116 bps Depreciation % EBIT 2,163 1,733 25% EBIT margin (%) 10.6% 9.3% 129 bps Interest % Other Income % PBT 2,491 2,072 20% Tax % Tax rate (%) 19.9% 32.4% 1248 bps Recurring PAT pre Minority 1,996 1,401 42% Share in associates profit & minority interest (7) (74) 91% Recurring PAT post Minority 1,989 1,327 50% Reported PAT 1,991 1,595 25% Source: Company, PhillipCapital India Research Voltas: Consolidated segment results (Rs mn) Q4FY17 Q4FY16 Change yoy Segment Revenue Electro mechanical Projects & Services (MEP) 8,290 9,063 9% Engineering Products & Services (EPS) 1, % Unitary Cooling Products (UCP) 10,860 8,504 28% Segment Revenue 20,218 18,496 9% Less: Intersegment (3) (1) 136% Other operating income % Excise duty (232) (80) 190% Net Operating Revenue 20,351 18,554 10% Segment EBIT Electro mechanical Projects & Services (MEP) % Engineering Products & Services (EPS) % Unitary Cooling Products (UCP) 1,781 1,398 27% Segment EBIT 2,516 1,991 26% Unallocated expenses, net (353) (258) 37% EBIT as per P&L 2,163 1,733 25% Segment EBIT margin (%) Electro mechanical Projects & Services (MEP) 5.7% 3.2% 254 bps Engineering Products & Services (EPS) 24.2% 32.5% 827 bps Unitary Cooling Products (UCP) 16.4% 16.4% 4 bps Segment EBIT margin (%) 12.4% 10.8% 168 bps Unallocated expenses % of Sales 1.7% 1.4% 35 bps EBIT Margin (%) 10.6% 9.3% 129 bps Source: Company, PhillipCapital India Research Page 2 PHILLIPCAPITAL INDIA RESEARCH

3 Voltas SoTP valuation (Rs) March'19 EPS Multiple (Rs share) Unitary Cooling Products (UCP) Engineering Products & Services (EPS) Electro Mechanical Products SOTP Value 441 Target Price 440 Implied PE multiple FY19E (x) 22 Source: Company, PhillipCapital India Research Voltas two year forward PE: Trading at above +1SD of historical average PE 45 Voltas 2yr fwd PE Avg PE +1SD 1SD Apr/02 Apr/03 Apr/04 Apr/05 Apr/06 Apr/07 Apr/08 Apr/09 Apr/10 Apr/11 Apr/12 Apr/13 Apr/14 Apr/15 Apr/16 Apr/17 Source: Company, PhillipCapital India Research Page 3 PHILLIPCAPITAL INDIA RESEARCH

4 Financials Income Statement Y/E Mar, Rs mn FY16 FY17 FY18e FY19e Net sales 57,198 60,328 71,129 84,472 Growth, % Raw material expenses 40,871 42,359 49,435 63,618 Employee expenses 6,351 6,184 6,622 7,429 Other Operating expenses 5,646 5,994 7,677 4,503 EBITDA (Core) 4,330 5,791 7,396 8,922 Growth, % Margin, % Depreciation EBIT 4,066 5,546 7,102 8,605 Growth, % Margin, % Interest paid Other Non Operating Income 1,367 1,998 1,804 1,605 Pre tax profit 5,275 7,384 8,804 10,129 Tax provided 1,696 2,089 2,817 3,342 Profit after tax 3,580 5,296 5,987 6,786 Net Profit 3,582 5,079 5,811 6,684 Growth, % Net Profit (adjusted) 3,582 5,079 5,811 6,684 Unadj. shares (m) Wtdavg shares (m) Balance Sheet Y/E Mar, Rs mn FY16 FY17e FY18e FY19e Cash & bank 1,855 3,314 3,285 5,881 Debtors 13,672 14,541 16,170 19,204 Inventory 7,247 9,070 10,585 13,623 Loans & advances 1, ,043 Other current assets 11,793 10,891 12,511 14,513 Total current assets 35,863 38,808 43,546 54,263 Investments 19,748 23,135 23,533 24,004 Gross fixed assets 5,655 5,681 6,081 6,481 Less: Depreciation 2,894 3,138 3,432 3,749 Add: Capital WIP Net fixed assets 2,774 2,548 2,654 2,737 Non current assets Total assets 58,791 64,796 70,038 81,309 Current liabilities 24,719 26,468 27,483 33,423 Provisions 2,891 3,160 3,234 3,728 Total current liabilities 27,610 29,628 30,717 37,151 Non current liabilities 2,804 1,817 1,467 1,117 Total liabilities 30,413 31,444 32,184 38,267 Minority Interest Paid up capital Reserves & surplus 27,780 32,735 37,213 42,373 Shareholders equity 28,378 33,351 37,855 43,042 Total equity & liabilities 58,791 64,796 70,038 81,309 Cash Flow Y/E Mar, Rs mn FY16 FY17 FY18e FY19e Pre tax profit 5,275 7,384 8,804 10,129 Depreciation Chg in working capital ,679 1,686 Total tax paid 1,658 1,976 2,867 3,392 Cash flow from operating activities 2,139 4, ,843 Capital expenditure Chg in investments 8,809 3, Cash flow from investing activities 7,395 1, Free cash flow 5,256 2,758 1,705 4,503 Debt raised/(repaid) 1, Dividend (incl. tax) 1,021 1,333 1,524 1,997 Other financing activities 4,020 1, Cash flow from financing activities 4,594 1,299 1,735 1,906 Net chg in cash 662 1, ,597 Valuation Ratios FY16 FY17e FY18e FY19e Per Share data EPS (INR) Growth, % Book NAV/share (INR) FDEPS (INR) CEPS (INR) CFPS (INR) DPS (INR) Return ratios Return on assets (%) Return on equity (%) Return on capital employed (%) Turnover ratios Asset turnover (x) Sales/Total assets (x) Sales/Net FA (x) Working capital/sales (x) Working capital days Liquidity ratios Current ratio (x) Quick ratio (x) Interest cover (x) Dividend cover (x) Total debt/equity (%) Net debt/equity (%) 3.0 (4.9) (5.0) (11.2) Valuation PER (x) Price/Book (x) Yield (%) EV/Net sales (x) EV/EBITDA (x) EV/EBIT (x) Source: Company, PhillipCapital India Research Estimates Page 4 PHILLIPCAPITAL INDIA RESEARCH

5 Stock Price, Price Target and Rating History N (TP 110) N (TP 200) N (TP 270) N (TP 265) N (TP 320) N (TP 300) N (TP 290) N (TP 245) N (TP 335) N (TP 345) N (TP 310) N (TP 310) M 14 J 14 A 14 S 14 N 14 D 14 F 15 M 15 M 15 J 15 J 15 S 15 O 15 D 15 J 16 M 16 A 16 J 16 J 16 S 16 O 16 D 16 J 17 M 17 A 17 Rating Methodology We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year. Rating Criteria Definition BUY >= +15% Target price is equal to or more than 15% of current market price NEUTRAL 15% > to < +15% Target price is less than +15% but more than 15% SELL <= 15% Target price is less than or equal to 15%. Page 5 PHILLIPCAPITAL INDIA RESEARCH

6 Management Vineet Bhatnagar (Managing Director) (91 22) Kinshuk Bharti Tiwari (Head Institutional Equity) (91 22) Jignesh Shah (Head Equity Derivatives) (91 22) Research Automobiles IT Services Pharma & Specialty Chem Dhawal Doshi (9122) Vibhor Singhal (9122) Surya Patra (9122) Nitesh Sharma, CFA (9122) Shyamal Dhruve (9122) Mehul Sheth (9122) Banking, NBFCs Infrastructure Strategy Manish Agarwalla (9122) Vibhor Singhal (9122) Naveen Kulkarni, CFA, FRM (9122) Pradeep Agrawal (9122) Paresh Jain (9122) Logistics, Transportation & Midcap Telecom Consumer & Retail Vikram Suryavanshi (9122) Naveen Kulkarni, CFA, FRM (9122) Naveen Kulkarni, CFA, FRM (9122) Media Manoj Behera (9122) Jubil Jain (9122) Manoj Behera (9122) Technicals Preeyam Tolia (9122) Metals Subodh Gupta, CMT (9122) Cement Dhawal Doshi (9122) Production Manager Vaibhav Agarwal (9122) Yash Doshi (9122) Ganesh Deorukhkar (9122) Economics Mid-Caps & Database Manager Editor Anjali Verma (9122) Deepak Agarwal (9122) Roshan Sony Shruti Bajpai (9122) Oil & Gas Sr. Manager Equities Support Engineering, Capital Goods Sabri Hazarika (9122) Rosie Ferns (9122) Jonas Bhutta (9122) Vikram Rawat (9122) Sales & Distribution Corporate Communications Ashvin Patil (9122) Sales Trader Zarine Damania (9122) Shubhangi Agrawal (9122) Dilesh Doshi (9122) Kishor Binwal (9122) Suniil Pandit (9122) Bhavin Shah (9122) Ashka Mehta Gulati (9122) Execution Archan Vyas (9122) Mayur Shah (9122) SINGAPORE: Phillip Securities Pte Ltd 250 North Bridge Road, #06 00 RafflesCityTower, Singapore Tel : (65) Fax: (65) JAPAN: Phillip Securities Japan, Ltd 4 2 Nihonbashi Kabutocho, Chuo ku Tokyo Tel: (81) Fax: (81) THAILAND: Phillip Securities (Thailand) Public Co. Ltd. 15th Floor, VorawatBuilding, 849 Silom Road, Silom, Bangrak, Bangkok Thailand Tel (66) Fax: (66) UNITED STATES: Phillip Futures Inc. 141 W Jackson Blvd Ste 3050 The Chicago Board of TradeBuilding Chicago, IL USA Tel (1) Fax: (1) Contact Information (Regional Member Companies) MALAYSIA: Phillip Capital Management Sdn Bhd B 3 6 Block B Level 3, Megan Avenue II, No. 12, Jalan Yap Kwan Seng, Kuala Lumpur Tel (60) Fax (60) INDONESIA: PT Phillip Securities Indonesia ANZTower Level 23B, Jl Jend Sudirman Kav 33A, Jakarta 10220, Indonesia Tel (62) Fax: (62) FRANCE: King & Shaxson Capital Ltd. 3rd Floor, 35 Rue de la Bienfaisance Paris France Tel (33) Fax : (33) AUSTRALIA: PhillipCapital Australia Level 10, 330 Collins Street Melbourne, VIC 3000, Australia Tel: (61) Fax: (61) HONG KONG: Phillip Securities (HK) Ltd 11/F United Centre 95 Queensway Hong Kong Tel (852) Fax: (852) CHINA: Phillip Financial Advisory (Shanghai) Co. Ltd. No 550 Yan An East Road, OceanTower Unit 2318 Shanghai Tel (86) Fax: (86) UNITED KINGDOM: King & Shaxson Ltd. 6th Floor, Candlewick House, 120 Cannon Street London, EC4N 6AS Tel (44) Fax: (44) SRI LANKA: Asha Phillip Securities Limited Level 4, Millennium House, 46/58 Navam Mawatha, Colombo 2, Sri Lanka Tel: (94) Fax: (94) INDIA PhillipCapital (India) Private Limited No. 1, 18th Floor, Urmi Estate, 95 Ganpatrao Kadam Marg, Lower Parel West, Mumbai Tel: (9122) Fax: (9122) Page 6 PHILLIPCAPITAL INDIA RESEARCH

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