Q3FY18 RESULT UPDATE RETAIL EQUITY RESEARCH Voltas Ltd Capital Goods BSE CODE: 500575 NSE CODE: VOLTAS Bloomberg CODE: VOLT:IN SENSEX: 34,346 HOLD Rating as per Midcap 12months investment period CMP Rs. 607 TARGET Rs. 634 RETURN 5% 28 th February 2018 Strong show in a seasonally weak quarter Voltas is India s leading air conditioning and engineering services company. In FY17, Voltas derived ~44% & 51% of its turnover from Electro-mechanical Projects (EMP) & Unitary Cooling Products (UCP) segment respectively. Consolidated sales grew by 16.5% in Q3FY18 backed by robust 31.9% growth in the UCP segment. UCP segment witnessed pre-buying in anticipation of price hikes post implementation of new energy efficiency norms from Jan-2018. EBITDA margin increased by 109 bps to 8.6% aided by margin expansion across segments. We increase our margin estimate for FY18E by ~60 bps to factor in the margin beat and build 10.4% margin for FY19/20E. Given strong growth in the UCP segment coupled with recovery in the EMP segment, we factor revenue/pat CAGR of 12.8/14.9% over FY17-20E. However, the stock is currently trading close to its fair valuation and hence, we maintain our HOLD rating on the stock with revised rolled over TP of Rs. 634 based on 27x FY20E PE. Revenue growth driven by UCP segment Consolidated revenues witnessed strong 16.5% growth in Q3FY18 despite being a seasonally weak quarter driven by UCP segment which grew by 31.9%. Strong performance of the UCP segment can be attributed to two factors a) pre-buying from dealers in anticipation of price hikes post implementation of new energy efficiency norms from Jan- 2018 and b) channel restocking post GST. The company continues to maintain its leadership position in Room Air Conditioners with market share of 23.7%. While Electro-mechanical projects and services (EMP) segment grew by 7.2% on strong execution of projects, Engineering Products and Services (EPS) reported 14% decline in revenue impacted by slowdown in textile industry. The order backlog for EMP segment stood at Rs 4,850 cr (1.7x TTM revenue) with order inflow of Rs 555 cr in Q3FY18 (Rs 2,471 cr in 9MFY18). Margin expansion across segments Consolidated EBIDTA margin expanded by 109bps to 8.6% driven by margin improvement across segments. EBIT Margin in UCP segment increased by 243 bps to 13% led by operating leverage and higher volumes. EMP and EPS also posted sharply higher margins at 7.1% and 30.3% respectively, an improvement of 321 bps and 550 bps, respectively. Better project selection, efficient execution, cost management and closure of legacy orders led to improved performance of EMP segment. However, Voltas has an exposure of Rs 177 crores in Oman where it is a subcontractor (along with a JV partner) and one of the main contractors Carillion PLC has filed for compulsory liquidation. The management stated that it does not see any material impact of this on its outstanding dues. Reported PAT stood flat despite strong operating performance due to lower other income owing to MTM losses on investment. We increase our margin estimate for FY18E by ~60 bps to factor in the margin beat. We build EBITDA margin of 10.4% for FY19/20E. Voltas Arcelik JV to launch products in 2HCY18 Voltas Arcelik JV (50:50 JV) will launch products beginning 2HCY18 on pan India basis. Most of the products will be imported from Arcelik factories and the JV is targeting 10% market share in consumer durables market over the next 10 years. Outlook & Valuation Given strong growth in the UCP segment coupled with recovery in the EMP segment, we factor revenue/pat CAGR of 12.8/14.9% over FY17-20E. We are positive on the stock given its leadership position in the AC market, improving outlook of EMPS segment and foray into the consumer durables space, however, the stock is currently trading close to its fair valuation. Hence, we maintain our HOLD rating on the stock with revised rolled over TP of Rs. 634 based on 27x FY20E PE. Company Data Market Cap (Rs cr) 20,085 Enterprise Value (Rs cr) 19,404 Outstanding Shares (cr) 33.1 Free Float 70% Dividend Yield 0.6% 52 week high Rs. 675 52 week low Rs. 364 6m average volume (cr) 0.1 Beta 1.0 Face value Rs. 1 Shareholding % Q1FY18 Q2FY18 Q3FY18 Promoters 30.3 30.3 30.3 FII s 19.2 20.1 20.0 MFs/Insti 27.8 28.6 28.8 Public 15.7 15.5 15.0 Others 7.0 5.5 5.9 Total 100.0 100.0 100.0 Price Performance 3mth 6mth 1 Year Absolute Return (4%) 14% 65% Absolute Sensex 2% 8% 19% Relative Return* (6%) 6% 46% *over or under performance to benchmark index Consolidated (Rs.cr) FY18E FY19E FY20E Sales 6,606 7,586 8,688 (%) 9.5% 14.8% 14.5% EBITDA 703 792 907 Margin(%) 10.6 10.4 10.4 PAT Adj 594 670 777 (%) 13.3% 12.8% 16.0% Adj.EPS 17.9 20.2 23.5 (%) 13.2% 12.8% 16.0% P/E 33.8 30.0 25.8 P/B 5.4 4.7 4.2 EV/EBITDA 28.3 25.1 21.8 RoE (%) 16.8 16.8 17.1 D/E 0.1 0.0 0.0
Quarterly Financials (Consolidated) Profit & Loss Account (Rs cr) Q3FY18 Q3FY17 % Q2FY18 QoQ % 9MFY18 9MFY17 % Sales 1,375 1,180 16.5 1,037 32.6 4,356 3,998 9.0 EBITDA 119 89 33.3 86 38.4 417 357 16.6 EBITDA Margin (%) 8.6 7.5 109bps 8.3 36bps 9.6 8.9 63bps Depreciation 6 6 1.8 6 (0.3) 18 19 (2.9) EBIT 113 83 35.6 80 41.4 398 338 17.7 Interest 2 2 (12.9) 2 (12.1) 8 10 (26.2) Other Income 17 60 (71.4) 51 (66.7) 123 161 (23.6) Exceptional Items - - - - - 2 1 - PBT 128 140 (9.1) 129 (0.7) 516 490 5.2 Tax 30 44 (31.1) 34 (12.1) 137 151 (9.2) PAT 98 97 0.8 94 3.4 379 339 11.7 Minority Interest/P&L from associates 2 (17) - 0-1 (21) - Reported PAT 99 80 24.1 95 5.1 380 318 19.3 Adjustment - - - - - (2) (1) - Adj PAT 99 80 24.1 95 5.1 378 317 19.0 No. of shares (cr) 33.1 33.1-33.1-33.1 33.1 - EPS (Rs) 3.0 2.4 24.1 2.9 5.1 11.4 9.6 19.0 Segmental Revenue (Rs cr) Q3FY18 Q3FY17 % Q2FY18 QoQ % 9MFY18 9MFY17 % Electro Mechanical Projects & Services (EMP) 753 703 7.1 557 35.2 1,972 1,826 8.0 Engineering Products & Services (EPS) 70 81-13.6 67 4.5 226 225 0.4 Unitary Cooling Products for Comfort & Commercial Use (UCP) 542 411 31.9 408 32.8 2,162 1,961 10.2 Source: Company, Geojit Research Change in estimates Old estimates New estimates Change % Year / Rs cr FY18E FY19E FY18E FY19E FY18E FY19E Revenue 6,866 7,744 6,606 7,586 3.8 (2.0) EBITDA 692 811 703 792 1.6 (2.3) Margins (%) 10.1 10.5 10.6 10.4 50 bps (10 bps) PAT 576 667 594 670 3.1 0.4 EPS 17.4 20.2 17.9 20.2 2.9 -
Consolidated Financials Profit & Loss Account Sales 5,720 6,033 6,606 7,586 8,688 % change 10.4% 5.5% 9.5% 14.8% 14.5% EBITDA 433 579 703 792 907 % change 5.6% 33.7% 21.4% 12.7% 14.5% Depreciation 26 24 25 28 30 EBIT 407 555 677 764 877 Interest 16 16 12 12 12 Other Income 137 200 160 192 230 PBT 528 738 825 944 1,095 % change 12.9% 40.0% 11.7% 14.4% 16.0% Tax 170 195 231 274 318 Tax Rate (%) 32.1% 26.4% 28.0% 29.0% 29.0% Reported PAT 393 525 594 670 777 Adj* 29 1 - - - Adj PAT 364 524 594 670 777 % change 7.7% 44.0% 13.3% 12.8% 16.0% No. of shares (cr) 33.1 33.1 33.1 33.1 33.1 Adj EPS (Rs) 11.0 15.9 17.9 20.2 23.5 % change 7.7% 44.0% 13.2% 12.8% 16.0% DPS (Rs) 2.6 3.5 3.8 4.3 5.0 Cash flow Pre-tax profit 563 720 830 949 1,100 Depreciation 26 24 25 28 30 Changes in W.C (79) 50 (103) (102) (37) Others (127) (185) (148) (180) (218) Tax paid (164) (182) (231) (274) (318) C.F.O 219 428 373 421 557 Capital exp. (50) (26) (50) (50) (50) Change in inv. (372) (129) (250) (350) (450) Other invest.cf 108 80 160 192 230 C.F - investing (315) (74) (140) (208) (269) Issue of equity 0 0 0 - - Issue/repay debt 142 (100) - - - Dividends paid (79) (94) (151) (171) (199) Other finance.cf (15) (17) (12) (12) (12) C.F - Financing 48 (211) (163) (183) (211) Chg. in cash (47) 143 71 30 77 Closing cash 185 331 402 432 509 Balance Sheet Cash 185 331 402 432 509 Accounts Receivable 1,367 1,454 1,592 1,828 2,094 Inventories 725 907 994 1,140 1,306 Other Cur. Assets 1,181 1,097 1,131 1,165 1,200 Investments 1,946 2,268 2,518 2,868 3,318 Gross Fixed Assets 522 516 566 616 665 Net Fixed Assets 233 228 252 274 293 CWIP 1 1 1 1 1 Intangible Assets 72 72 72 72 72 Def. Tax (Net) 31 20 20 20 20 Other Assets 128 91 91 91 91 Total Assets 5,869 6,469 7,072 7,890 8,904 Current Liabilities 2,679 2,871 3,026 3,340 3,770 Provisions - - - - - Debt Funds 271 171 171 171 171 Other Liabilities 82 92 92 92 92 Equity Capital 33 33 33 33 33 Reserves & Surplus 2,778 3,274 3,717 4,216 4,795 Shareholder s Fund 2,811 3,307 3,750 4,249 4,828 Minority Interest 27 29 34 39 44 Total Liabilities 5,869 6,469 7,072 7,890 8,904 BVPS (Rs) 85.0 100.0 113.3 128.4 145.9 Ratios Y.E March FY16 FY17 FY18E FY19E FY20E Profitab. & Return EBITDA margin (%) 7.6 9.6 10.6 10.4 10.4 EBIT margin (%) 7.1 9.2 10.3 10.1 10.1 Net profit mgn.(%) 6.4 8.7 9.0 8.8 8.9 ROE (%) 14.8 17.1 16.8 16.8 17.1 ROCE (%) 20.3 22.8 22.4 22.7 23.3 W.C & Liquidity Receivables (days) 87 88 88 88 88 Inventory (days) 65 78 78 78 78 Payables (days) 121 133 128 123 123 Current ratio (x) 1.3 1.3 1.4 1.4 1.4 Quick ratio (x) 1.0 1.0 1.0 1.0 1.0 Turnover &Levg. Gross asset T.O (x) 11.7 11.5 12.2 12.8 13.6 Total asset T.O (x) 1.1 1.0 1.0 1.0 1.0 Int. covge. ratio (x) 25.7 34.6 54.6 61.6 70.6 Adj. debt/equity (x) 0.1 0.1 0.0 0.0 0.0 Valuation ratios EV/Sales (x) 3.5 3.3 3.0 2.6 2.3 EV/EBITDA (x) 46.6 34.4 28.3 25.1 21.8 P/E (x) 55.1 38.3 33.8 30.0 25.8 P/BV (x) 7.1 6.1 5.4 4.7 4.2
Recommendation Summary (last 3 years) Dates Rating Target 08-Dec-16 ACCUMULATE 353 09-Mar-17 HOLD 399 05-June-17 HOLD 524 28-Feb-18 HOLD 634 Source: Bloomberg, Geojit Research Investment Rating Criteria Large Cap Stocks; Buy - Upside is above 10%. Hold - Upside is between 0% - 10%. Reduce - Downside is more than 0%. Neutral - Not Applicable. Mid Cap and Small Cap; Buy - Upside is above 15%. Accumulate - Upside is between 10% - 15%. Hold - Upside is between 0% - 10%. Reduce/Sell - Downside is more than 0%. Neutral - Not Applicable. To satisfy regulatory requirements, we attribute Accumulate as Buy and Reduce as Sell. The recommendations are based on 12 month horizon, unless otherwise specified. The investment ratings are on absolute positive/negative return basis. It is possible that due to volatile price fluctuation in the near to medium term, there could be a temporary mismatch to rating. For reasons of valuations/return/lack of clarity/event we may revisit rating at appropriate time. Please note that the stock always carries the risk of being upgraded to BUY or downgraded to a HOLD, REDUCE or SELL. Neutral - The analyst has no investment opinion on the stock under review. Geojit Financial Services Limited has outsourced the preparation of this research report to DION Global Solutions Limited whose relevant disclosures are available hereunder. However, Geojit's research desk has reviewed this report for any untrue statement of material fact or any false or misleading information. General Disclosures and Disclaimers CERTIFICATION I, Abhijit Kumar Das, employee of Dion Global Solutions Limited (Dion) is engaged in preparation of this report and hereby certify that all the views expressed in this research report (report) reflect my personal views about any or all of the subject issuer or securities. Disclaimer This report has been prepared by Dion and the report & its contents are the exclusive property of the Dion and the client cannot tamper with the report or its contents in any manner and the said report, shall in no case, be further distributed to any third party for commercial use, with or without consideration. Geojit Financial Services Limited has outsourced the assignment of preparation of this report to Dion. Recipient shall not further distribute the report to a third party for a commercial consideration as this report is being furnished to the recipient solely for the purpose of information. Dion has taken steps to ensure that facts in this report are based on reliable information but cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this report. It is hereby confirmed that wherever Dion has employed a rating system in this report, the rating system has been clearly defined including the time horizon and benchmarks on which the rating is based. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this report is not, and should not be construed as an offer or solicitation of an offer, to buy or sell any securities or other financial instruments. Dion has not taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. This report is not to be relied upon in substitution for the exercise of independent judgment. Opinions or estimates expressed are current opinions as of the original publication date appearing on this report and the information, including the opinions and estimates contained herein, are subject to change without notice. Dion is under no duty to update this report from time to time. Dion or its associates including employees engaged in preparation of this report and its directors do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of this report, including but not restricted to, fluctuation in the prices of securities, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc. The investments or services contained or referred to in this report may not be suitable for all equally and it is recommended that an independent investment advisor be consulted. In addition, nothing in this report constitutes investment, legal, accounting or tax advice or a representation that any investment or strategy is suitable or appropriate to individual circumstances or otherwise constitutes a personal recommendation of Dion.
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