INSTITUTIONAL EQUITY Voltas Limited (VOLT IN) Strong project execution made up for a weak AC business INDIA CAPITAL GOODS Quarterly Update 7 vember 2018 Top takeaways from 2QFY19 Recurring PAT (Rs 1bn, + yoy) was 7%/10% above our/consensus estimates on higher h than expected execution in the project segment and lower tax rate (23.2% vs. 26.6% %). Robust execution and margin in MEP (Project) segment led to a 25% yoy growth in DA (3%/ above our/consensus estimates). However, UCP segment profitability declined 45% yoy ass margin shrunk 615bps too 6.3% (lowest since 3QFY13) on highh inventory levels on weak demand and inability to pass on the impact of INR depreciation and increasee in raw material prices. MEP order inflows (Rs 10.8bn) grew 61% yoy y on a weakk base. Order book (Rs 48.8bn, 2%) stood at 1.4x TTM sales. Key highlights: Revenues (Rs 14.2bn, +37% yoy) were driven by the MEP segment (64% of sales, +62% yoy); while UCP (31% of sales, +8% %) and Engineering Products (5% of sales, ) had a modest growth. DA margins (7.6% vs. 8.4%) contracted 75bps yoy despite operating leverage benefits as gross margins shrunk 455 bps (27.5% vs. 32.1%) on account of higher raw material costs and change in sales mix to project business. Segmentally, MEP segment margin expanded 300bps to 8.4% on operating leveragee and positive impact of INR depreciation on overseas projects. However, UCP segment margin m (6.3% vs. 12.4%) was impacted by rising material cost whichh could not be passed on due d to weak end market for room AC s and higher inventory level inn channels. Conference call takeaways Inverter AC accounted 40% of Voltas split AC sales in 1HFY19 (as in FY18). Voltas market m share in the room AC s furtherr expanded to 25.6% in 2QFY19 vs. 23.5% in 1Q. Increased material cost due to rise in commodity prices, INR depreciation and custom duty continue to put pressuree on UCP margins as the price hike in short term would be difficult because of higher competition and inventory levels in channel. UCP segment assets increased by 60% yoyy due to higher inventory level (2 2.5 months vs. 1 1.5 months normally), which is expected to be liquidated by March 2019. Management maintained its MEP segment margin target at 7 8% for medium term despite achieving 9.3% in 1HFY19. Outlook and valuation 2Q was cyclically the worst performance by Voltas AC business wherein it chose market share over margins. Though we don t expect this margin m contraction to be structural but we do believe that in the long term Voltas margins will w be capped on rising competition. Current valuations at 24x PE still look expensive in vieww of a 14% CAGR in FY18 20 earnings and start up losses in the Voltbek JV, which will have to find its footing in the consumer appliances segment. In the near term we expect concerns on o the performance of the AC business to be reflected in valuations between now and 3Q results and we would look at an opportune time to review r our rating. For now we maintain our Neutral rating with a modestly revised SOTP based target price of Rs 510 ( Rs 515 earlier). We ascribe a 30x PE for VOLT s UCP segment valuing it at Rs 369/ /share, MEP and EPS segment at 15x valuing them at Rs 108 and Rs 41 respectively, and deducted Rs 7/share for unallocated expenses. We have cut our FY19/20 estimates by 8%/2% to factor in a weaker AC business. Q2FY19 Q2FY18 Change yoy vs. expectations Comments Order book MEP Order inflow MEP Revenue Gross margin (%) DA DA margin (%) PAT (Recurring) Neutral (Maintain) CMPP RS 523/ TARGET RS 510 ( 3%) COMPANY DATA O/S SHARES (MN) : MARKET CAP (RSBN) : MARKET CAP (USDBN) : 52 WK HI/LO (RS) : LIQUIDITY 3M (USDMN) : PAR VALUE (RS) : SHARE HOLDING PATTERN, % Sep 18 Jun 18 Mar 18 PROMOTERS : FII / NRI : FI / MF : NON PRO : PUBLIC & OTHERS : 30.3 16.9 31.3 3.4 18.1 30.33 16.4 31.7 3.33 18.3 30.3 20.5 28.7 3.1 17.4 KEY FINANCIALS Rs mnn Sales EBIDTA Profit EPS, Rs PER, x EV/EBIDTA, x P/BV, x ROE, % Total l debt/equity (%) CHANGE IN ESTIMATES _Revised Est. % Revision Rs bnn Revenue DA Core PAT EPS ( Rs) FY19E 75.21 7.84 5.99 18.1 FY20E 87.20 9.49 7.13 21.6 FY19E 1.2%% 6.5%% 8.0%% 8.0%% FY20E 2.3% 0.3% 2.3% 2.3% Jonass Bhutta (+ 9122 6246 4119) jbhutta@phillipcapital.in Vikram Rawat (+ 91222 6246 4120) vrawat@phillipcapital.in 182 2.5 675 / 471 11.9 1 FY18 FY19E FY20E 64.04 75.21 87.20 6.74 7.84 9.49 5.54 5.99 7.13 16.7 18.1 21.6 31.2 28.9 24.3 25.5 21.8 17.7 4.4 4.0 3.5 15.4 14.5 15.5 3.6 5.6 2.9 48,830 50,000 2%% 15% 10,800 6,700 61% 222% Due to weak base last year 14,214 10,367 37% 16% Driven by strong growth in project business 27.5% 32. 1% 454 bpss 246 bps Impacted by higher raw material prices and change in sales mix to project segment 1,085 870 25% 3% Driven by operating leverage benefits in the e project business; while margins were drag 7.6% 8.4% 75 bpss 100 bps by weak margins in UCP segment 1,035 946 7% Aided by lower tax rate Page 1 PHILLIPCAPITAL INDIA
Voltas: Consolidated quarterly result Sales Cost of material & stock in trade Gross Profit Gross margin (%) Employee cost % of sales Other Expenses % of sales DA DA margin (%) Depreciation margin (%) Interest Other Income PBT Tax Tax rate (%) Recurring PAT pre Minority Share in associates profit & minority interest Recurring PAT post Minority PAT Reported Q2FY199 14,2144 10,3000 3,9144 27.5% % 1,7233 12% % 1,1055 8% % 1,0855 7.6% % 600 1,0266 7.2% % 644 4611 1,4233 1 23.2% % 1,0922 (58)) 1,0355 1,0355 Q2FY18 10,367 7,042 3,325 32.1% 1,453 14% 1,003 10% 870 8.4% 61 809 7.8% 22 499 1,287 343 26.6% 944 2 946 946 Change yoy 37% 46% 18% 4544 bps 1 1899 bps 10% 1900 bps 25% 755 bps 2% 27% 588 bps 197% 1 8% 11% 3% 3399 bps 16% 2496% Voltas: Consolidated segment results Segment Revenue Electro mechanicall Projects & Services (MEP) Segment Revenue Less: Intersegment Other operating income Operating Revenue Segment Electro mechanicall Projects & Services (MEP) Segment Unallocated expenses, net as per P&L Segment margin (%) Electro mechanicall Projects & Services (MEP) Segment margin (%) Unallocated expenses % of Sales Margin (%) Q2FY199 Q2FY18 Change yoy 4,4100 9,0155 7299 14,1544 (7)) 677 14,2144 4,078 5,575 666 10,319 (2) 51 10,367 8% 62% 37% 225% 2 32% 37% 2788 7599 2900 1,3277 (301)) 1,0266 508 303 275 1,086 (277) 809 45% 151% 1 5% 22% 27% 6.3% % 8.4% % 39.8% % 9.4% % 2.1% % 7.2% % 12.4% 5.4% 41.3% 10.5% 2.7% 7.8% 6166 bps 2999 bps 1511 bps 1155 bps 566 bps 588 bps Page 2 PHILLIPCAPITAL INDIA
Voltas: MEP order inflows and order book MEP Order book Domestic order book International order book MEP Order book MEP Order inflows Domestic order inflows International order inflows MEP Order inflows Q2FY199 Q2FY18 Change yoy 28,4800 32,000 11% 20,3500 18,000 13% 48,8300 50,000 2% 6,3000 6,000 5% 4,5000 700 543% 5 10,8000 6,700 61% Voltas SoTP valuation (Rs) Electro Mechanical Products Unallocated Income/(expenses), net SOTP Value Target Price Implied PE multiple FY20E (x) March'20 EPS Multiple (x) 12.3 30 7.2 15 2.88 15 (0.7) 10 (Rs share) 369 108 41 (7) 511 510 23.7 Voltas two year forward PE: Trading at +1SD of historical average PE 45 40 35 30 25 20 15 10 5 0 Voltas 2yr fwd PE Avg A PE + +1SD 1SD Apr/02 Apr/03 Apr/04 Apr/05 Apr/06 Apr/07 Apr/08 Apr/09 Apr/10 p/ Apr/11 Apr/12 Apr/13 Apr/14 Apr/15 Apr/16 Apr/17 Apr/18 Page 3 PHILLIPCAPITAL INDIA
Financials Income Statement Y/E Mar, Rs mn sales Raw material expenses Employee expenses Other Operating expenses DA (Core) Margin, % Depreciation Margin, % Interest paid Other n Operating Income Pre tax profit Tax provided Profit after tax Profit Profit (adjusted) Unadj. shares (m) Wtdavg shares (m) FY17 60,328 5 42,359 6,184 5,994 5,791 33.8 9.6 245 5,546 36.4 9.2 160 1,961 7,347 2,144 5,203 4,986 51.2 4,986 FY188 64,0444 6 45,6755 5,8677 5,7666 6,7366 16.33 10.55 2444 6,4922 17.00 10.11 1199 1,4544 7,8277 2,2700 5,5577 5,5400 11.11 5,5400 1 1 FY19e 75,214 17 54,367 6,512 6,494 7,840 16.4 10.4 257 7,583 16.8 10.1 203 1,399 8,779 2,590 6,189 5,988 8.1 5,988 Balance Sheet Y/E Mar, Rs mn Cash & bank Debtors Inventory Other current assetss Total current assets Investments Gross fixed assets Less: Depreciation Add: Capital WIP fixed assets n current assets Total assets Current liabilities Provisions Total current liabilities n current liabilities Total liabilities Minority Interest Paid up capital Reserves & surplus Shareholders equity Total equity & liabilities Estimatess FY20e 87,202 16 63,349 7,307 7,057 9,490 21.0 10.9 278 9,212 21.5 10.6 184 1,553 10,580 3,174 7,406 7,132 19.1 7,132 FY17 FY18 FY19e FY20e 3,314 2,837 4,518 6,460 14,541 15,703 18,134 21,024 9,070 8,130 10,427 12,149 11,882 15,700 18,437 20,442 38,807 42,370 51,515 60,075 23,135 27,983 26,336 29,463 5,327 5,423 5,823 6,223 2,784 2,899 3,156 3,435 6 414 41 41 2,548 2,565 2,708 2,830 305 178 678 678 64,796 73,097 81,237 93,045 26,468 29,348 31,709 38,678 3,160 2,824 3,141 3,594 29,628 32,172 34,850 42,273 1,817 1,555 2,505 1,455 31,444 33,727 37,355 43,728 285 317 437 545 32,735 38,721 43,114 48,441 33,351 39,369 43,882 49,317 64,796 73,096 81,237 93,045 Cash Flow Y/E Mar, Rs mn Pre tax profit Depreciation Chg in working capital Total tax paid Cash flow from operating activities Capital expendituree Chg in investments Cash flow from investing activities Free cash flow Debt raised/(repaid) Dividend (incl. tax) Other financing activities Cash flow from financing activities chg in cash Valuation Ratios Per Share data EPS (INR) 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/ 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 (%) debt/equity (%) Valuation PER (x) Price/Book (x) Yield (%) EV/ / sales (x) EV/ /DA (x) EV/ / (x) FY17 7,347 FY18 7,8277 FY19e 8,779 245 533 244 1,496 257 4,786 2,032 2,118 3,140 4,281 3,2533 1,128 19 3,387 261 4,848 400 1,647 733 1,992 1,351 3,548 1,2611 2,479 998 1,394 287 1,595 1,000 1,805 473 2,117 53 1,814 87 798 1,431 553 1,681 FY17 15.1 51.2 100.0 15.1 15.8 12.5 3.5 8.6 16.3 16.2 6.9 1.0 22.7 0.1 35.5 1.3 1.0 34.6 4.3 5.2 (4.9) 34.7 5.2 0.7 2.8 29.6 30.9 FY18 FY19e 16.7 18.1 11.1 8.1 118.1 131.4 16.7 18.1 17.5 18.9 9.1 (0.9) 4.0 4.5 8.2 8.2 15.4 14.5 14.9 14.6 7.0 6.1 0.9 1.0 25.1 28.5 0.1 0.2 42.0 59.0 1.3 1.5 1.1 1.2 54.5 37.3 4.2 4.0 3.6 5.6 (3.6) (4.8) 31.2 28.9 4.4 4.0 0.8 0.9 2.7 2.3 25.5 21.8 26.4 22.6 FY20e 10,580 278 806 3,224 8,405 400 3,127 3,474 4,931 1,000 1,892 69 2,989 1,943 FY20e 21.6 19.1 147.5 21.6 22.4 20.8 4.7 8.6 15.5 15.7 6.0 1.0 31.5 0.1 47.5 1.4 1.1 50.1 4.5 2.9 (10.3) 24.3 3.5 0.9 1.9 17.7 18.2 Page 4 PHILLIPCAPITAL INDIA
Stock Price, Price Target and Rating History 800 700 600 500 N (TPP 515) N (TP 530) ) N (TP 515) N (TP 510) N (TP N 495) (TP 495) N (TP 510) 400 N (TP 440) 300 200 N (TP 290) N (TP 245) N (TP 335) N (TP 345) N (TP 310) N (TP 310) 100 0 N 15 D 15 F 16 M 16 M 16 J 16 J 16 S 16 O 166 D 16 J 17 M 17 A 17 J 17 J 17 S 17 O 17 N 17 J 18 F 18 A 18 M 188 J 18 A 18 O 188 Rating Methodology We rate stock on absolute return basis. Our target price p for the stocks has an investment horizon off one year. Rating BUY NEUTRAL SELL Criteria >= +15% 15% > to < +15% <= 15% Definition Target price is equal to or more than 15% of current market price Target price is less than +15% butt more than 15%% Target price is less than or equal to 15%. Page 5 PHILLIPCAPITAL INDIA
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