Voltas Limited (VOLT IN) Higher margins offset weak revenues

INSTITUTIONAL EQUITY RESEARCH Voltas Limited (VOLT IN) Higher margins offset weak revenues INDIA CAPITAL GOODS Quarterly Update 17 May 2018 Top takeaways from 4QFY18 Recurring PAT (Rs 1.94bn, 2% yoy) was in line with consensus estimates, as strong operating profitability offset lower than expected revenues. Improved profitability in MEP segments aided 15% yoy growth in EBITDA, in line with estimates, as revenues remained flat yoy (9% below estimates). MEP order inflows (Rs 12.3bn, +29% yoy) were driven by strong overseas orders (Rs 6bn, 130% yoy) while domestic (Rs 6bn) declined 10%. Order book (Rs 50.6bn, +17%) stood at 1.8x TTM sales. Key highlights: Revenues (Rs 20.5bn, flat yoy) were impacted by UCP revenues (53% of sales) remaining flat due to pre buying in 3QFY18 ahead of energy efficiency rating changes. MEP revenues (43% of sales) grew by a modest 5% yoy despite a healthy orderbook while Engineered Products (4% of sales) declined 22%. EBITDA margins expanded 150bps yoy to 12.4%, driven by controlled costs and benefits of lower cost inventory in its AC segment. As a result, gross margins at 26.7% were flat yoy. All segments saw margin expansion MEP (+190bps yoy), UCP (+80bps) and EPS (+560bps). Working capital intensity increased marginally to 11.5% of sales (9.7% in FY17). However, free cash flow of Rs 4bn in FY18 continued to bolster its net cash position which is now at Rs 29bn. Conference call takeaways Voltas primary room AC sales grew by 6 7% yoy in 4Q, higher than the industry s growth of 5.2%. In 4Q, it ceded some market share to 22% from 23.7% in 3Q. Inverter AC sales accounted for 20% of VOLT s total AC sales in FY18 and were in fact 30% of sales in 4Q versus the industry average of 40%. Management highlighted that AC sales so far in 1QFY19 have been sluggish due to inclement weather in northern India, leading to a pile up in dealer level inventory. The consumer durable products JV with Arcelik (Voltbek) targets the launch of products in 2HCY18. Its subsidiary, Rohini Industrial Electricals (RIEL), which undertakes rural electrification projects turned profitable in FY18 versus a Rs 120mn loss in FY17. This was one reason for improved profitability in the MEP segment in FY18, in addition to improved margins in international projects. Outlook and valuation Even as there are no changes in the long term demand drivers for AC sales, in the near term (1QFY19), the AC industry and Voltas would both be impacted by subdued demand due to erratic weather conditions. Voltas MEP business should be a beneficiary of building and metro capex in the domestic market and infrastructure capex in the Middle East, as oil prices rebound. However, current valuations at 27x FY20 PE are rich for 13% earnings CAGR over FY18 20. We cut our FY19/20 earnings by 6%/5% to factor in lower UCP revenues vs. earlier. We maintain our neutral rating with revised SOTP based target price of Rs 510 (vs. 530 earlier). We ascribe a 30x PE for its UCP segment valuing it at Rs 370/share, MEP and EPS segment at 15x valuing them at Rs 89/share and Rs 39/share respectively, and add another Rs 10/share for unallocated income. (Rs bn) Q4FY18 Q4FY17 Change yoy vs. expectations Comments MEP Order book 50,620 43,210 17% 1% MEP Order inflow 12,300 9,540 29% 0% Driven by strong growth in overseas orders Revenue 20,484 20,351 1% 15% Due to weak muted/weak revenue across segments Gross margin (%) 26.7% 27.0% 31 bps 34 bps EBITDA 2,532 2,212 14% 8% Led by lower employee and other expenses EBITDA margin (%) 12.4% 10.9% 149 bps 88 bps PAT (Recurring) 1,940 1,989 2% 13% Neutral (Maintain) CMP RS 583/ TARGET RS 510 ( 13%) COMPANY DATA O/S SHARES (MN) : 331 MARKET CAP (RSBN) : 197 MARKET CAP (USDBN) : 2.9 52 WK HI/LO (RS) : 675 / 404 LIQUIDITY 3M (USDMN) : 14.4 PAR VALUE (RS) : 1 SHARE HOLDING PATTERN, % Mar 18 Dec 17 Sep 17 PROMOTERS : 30.3 30.3 30.3 FII / NRI : 20.5 20.8 20.8 FI / MF : 28.7 28.3 28.0 NON PRO : 3.1 3.2 2.7 PUBLIC & OTHERS : 17.4 17.4 18.3 KEY FINANCIALS Rs mn FY18 FY19E FY20E Net Sales 64,044 75,855 88,817 EBIDTA 6,626 7,800 9,102 Net Profit 5,718 6,283 7,246 EPS, Rs 17.3 19.0 21.9 PER, x 33.7 30.7 26.6 EV/EBIDTA, x 28.7 24.4 20.6 P/BV, x 4.9 4.4 3.9 ROE, % 15.9 15.2 15.6 Total debt/equity (%) 3.6 2.6 2.3 CHANGE IN ESTIMATES Revised Est. % Revision Rs bn FY19E FY20E FY19E FY20E Revenue 75.85 88.82 8.7% 7.0% EBITDA 7.80 9.10 7.1% 6.0% Core PAT 6.28 7.25 6.4% 5.2% EPS (Rs) 19.0 21.9 6.4% 5.2% Jonas Bhutta (+ 9122 6246 4119) jbhutta@phillipcapital.in Vikram Rawat (+ 9122 6246 4120) vrawat@phillipcapital.in Page 1 PHILLIPCAPITAL INDIA RESEARCH

Voltas: Consolidated quarterly result (Rs mn) Q4FY18 Q4FY17 Change yoy Net Sales 20,484 20,351 1% Cost of material & stock in trade 15,011 14,852 1% Gross Profit 5,472 5,499 0% Gross margin (%) 26.7% 27.0% 31 bps Employee cost 1,434 1,485 3% % of sales 7% 7% 29 bps Other Expenses 1,507 1,803 16% % of sales 7% 9% 150 bps EBITDA 2,532 2,212 14% EBITDA margin (%) 12.4% 10.9% 149 bps Depreciation 61 56 8% EBIT 2,471 2,156 15% EBIT margin (%) 12.1% 10.6% 147 bps Interest 43 58 25% Other Income 438 394 11% PBT 2,865 2,491 15% Tax 900 496 82% Tax rate (%) 31.4% 19.9% 1151 bps Recurring PAT pre Minority 1,966 1,996 2% Share in associates profit & minority interest (25) (7) 283% Recurring PAT post Minority 1,940 1,989 2% Reported PAT 1,927 1,991 3% Voltas: Consolidated segment results (Rs mn) Q4FY18 Q4FY17 Change yoy Segment Revenue Electro mechanical Projects & Services (MEP) 8,735 8,290 5% Engineering Products & Services (EPS) 834 1,068 22% Unitary Cooling Products (UCP) 10,645 10,860 2% Segment Revenue 20,215 20,218 0% Less: Intersegment (2) (3) 48% Other operating income 271 368 26% Excise duty (232) 100% Net Operating Revenue 20,484 20,351 1% Segment EBIT Electro mechanical Projects & Services (MEP) 665 477 40% Engineering Products & Services (EPS) 249 259 4% Unitary Cooling Products (UCP) 1,830 1,781 3% Segment EBIT 2,744 2,516 9% Unallocated expenses, net (273) (361) 24% EBIT as per P&L 2,471 2,156 15% Segment EBIT margin (%) Electro mechanical Projects & Services (MEP) 7.6% 5.7% 186 bps Engineering Products & Services (EPS) 29.8% 24.2% 562 bps Unitary Cooling Products (UCP) 17.2% 16.4% 79 bps Segment EBIT margin (%) 13.6% 12.4% 113 bps Unallocated expenses % of Sales 1.3% 1.8% 44 bps EBIT Margin (%) 12.1% 10.6% 147 bps Page 2 PHILLIPCAPITAL INDIA RESEARCH

Voltas: MEP order inflows and order book (Rs mn) Q4FY18 Q4FY17 Change yoy MEP Order book Domestic order book 30,580 25,580 20% International order book 20,040 17,630 14% MEP Order book 50,620 43,210 17% MEP Order inflows Domestic order inflows 6,160 6,860 10% International order inflows 6,140 2,680 129% MEP Order inflows 12,300 9,540 29% Voltas SoTP valuation (Rs) March'20 EPS Multiple (Rs share) Unitary Cooling Products (UCP) 12.8 30.0 383 Engineering Products & Services (EPS) 2.7 15.0 41 Electro Mechanical Products 6.2 15.0 93 Unallocated Income, net 1.0 10.0 10 SOTP Value 528 Target Price 530 Implied PE multiple FY19E (x) 23.3 Voltas two year forward PE: Trading at above +1SD of historical average PE 45 Voltas 2yr fwd PE Avg PE +1SD 1SD 40 35 30 25 20 15 10 5 0 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 Apr/18 Page 3 PHILLIPCAPITAL INDIA RESEARCH

Financials Income Statement Y/E Mar, Rs mn FY17 FY18 FY19e FY20e Net sales 60,328 64,044 75,855 88,817 Growth, % 5 6 18 17 Raw material expenses 42,359 45,675 54,830 64,522 Employee expenses 6,184 5,867 6,583 7,386 Other Operating expenses 6,116 5,875 6,641 7,807 EBITDA (Core) 5,669 6,626 7,800 9,102 Growth, % 30.9 16.9 17.7 16.7 Margin, % 9.4 10.3 10.3 10.2 Depreciation 245 244 287 309 EBIT 5,424 6,383 7,514 8,793 Growth, % 33.4 17.7 17.7 17.0 Margin, % 9.0 10.0 9.9 9.9 Interest paid 160 119 112 102 Other Non Operating Income 2,083 1,741 1,923 2,141 Pre tax profit 7,347 8,005 9,325 10,831 Tax provided 2,144 2,270 3,031 3,574 Profit after tax 5,203 5,735 6,295 7,257 Net Profit 4,986 5,718 6,283 7,246 Growth, % 51.2 14.7 9.9 15.3 Net Profit (adjusted) 4,986 5,718 6,283 7,246 Unadj. shares (m) 331 331 331 331 Wtdavg shares (m) 331 331 331 331 Balance Sheet Y/E Mar, Rs mn FY17 FY18 FY19e FY20e Cash & bank 3,314 4,395 3,683 6,073 Debtors 14,541 15,703 18,288 21,413 Inventory 9,070 8,130 10,515 12,374 Loans & advances 11,882 15,700 16,303 19,073 Other current assets 0 0 0 0 Total current assets 38,807 43,928 48,789 58,933 Investments 23,135 26,425 28,895 31,856 Gross fixed assets 5,327 5,552 5,952 6,352 Less: Depreciation 2,784 3,028 3,314 3,624 Add: Capital WIP 6 41 41 41 Net fixed assets 2,548 2,565 2,679 2,769 Non current assets 305 178 178 178 Total assets 64,796 73,096 80,541 93,737 Current liabilities 26,468 29,348 31,939 39,280 Provisions 3,160 2,824 3,272 3,757 Total current liabilities 29,628 32,172 35,211 43,037 Non current liabilities 1,817 1,555 1,205 1,155 Total liabilities 31,444 33,727 36,417 44,192 Minority Interest 285 317 367 417 Paid up capital 331 331 331 331 Reserves & surplus 32,735 38,721 43,427 48,797 Shareholders equity 33,351 39,369 44,125 49,545 Total equity & liabilities 64,796 73,096 80,541 93,737 Cash Flow Y/E Mar, Rs mn FY17 FY18 FY19e FY20e Pre tax profit 7,347 8,005 9,325 10,831 Depreciation 245 244 287 309 Chg in working capital 533 1,496 2,534 71 Total tax paid 2,032 2,118 3,081 3,624 Cash flow from operating activities 4,281 4,335 3,641 7,166 Capital expenditure 19 261 400 400 Chg in investments 3,387 3,289 2,471 2,961 Cash flow from investing activities 738 3,087 2,363 2,798 Free cash flow 3,543 1,248 1,278 4,368 Debt raised/(repaid) 998 287 300 0 Dividend (incl. tax) 1,379 1,578 1,876 1,904 Other financing activities 464 1,683 147 114 Cash flow from financing activities 2,112 167 1,990 1,978 Net chg in cash 1,431 1,081 712 2,390 Valuation Ratios FY17 FY18 FY19e FY20e Per Share data EPS (INR) 15.1 17.3 19.0 21.9 Growth, % 51.2 14.7 9.9 15.3 Book NAV/share (INR) 100.0 118.1 132.3 148.5 FDEPS (INR) 15.1 17.3 19.0 21.9 CEPS (INR) 15.8 18.0 19.9 22.8 CFPS (INR) 12.1 8.7 6.3 16.5 DPS (INR) 3.5 4.0 4.7 4.8 Return ratios Return on assets (%) 8.6 8.4 8.3 8.4 Return on equity (%) 16.3 15.9 15.2 15.6 Return on capital employed (%) 16.1 15.3 14.8 15.3 Turnover ratios Asset turnover (x) 6.9 7.0 6.7 7.1 Sales/Total assets (x) 1.0 0.9 1.0 1.0 Sales/Net FA (x) 22.7 25.1 28.9 32.6 Working capital/sales (x) 0.1 0.1 0.1 0.1 Working capital days 35.5 42.0 47.6 40.4 Liquidity ratios Current ratio (x) 1.3 1.4 1.4 1.4 Quick ratio (x) 1.0 1.1 1.1 1.1 Interest cover (x) 33.8 53.5 67.2 86.1 Dividend cover (x) 4.3 4.3 4.0 4.5 Total debt/equity (%) 5.2 3.6 2.6 2.3 Net debt/equity (%) (4.9) (7.6) (5.9) (10.1) Valuation PER (x) 38.7 33.7 30.7 26.6 Price/Book (x) 5.8 4.9 4.4 3.9 Yield (%) 0.6 0.7 0.8 0.8 EV/Net sales (x) 3.2 3.0 2.5 2.1 EV/EBITDA (x) 33.7 28.7 24.4 20.6 EV/EBIT (x) 35.3 29.8 25.3 21.4 Estimates Page 4 PHILLIPCAPITAL INDIA RESEARCH

Stock Price, Price Target and Rating History 800 700 600 500 N (TP 530) N (TP 515) N (TP N 495) (TP 495) 400 N (TP 440) 300 200 N (TP 320) N (TP 300) N (TP 290) N (TP 245) N (TP 335) N (TP 345) N (TP 310) N (TP 310) 100 0 M 15 J 15 A 15 S 15 N 15 D 15 J 16 M 16 M 16 J 16 J 16 S 16 O 16 D 16 J 17 M 17 A 17 J 17 J 17 A 17 O 17 N 17 J 18 F 18 A 18 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

RESEARCH Automobiles Dhawal Doshi Nitesh Sharma, CFA Agro Chemicals Varun Vijayan Banking, NBFCs Manish Agarwalla Pradeep Agrawal, Sujal Kumar Consumer Naveen Kulkarni, CFA, FRM Preeyam Tolia, Vishal Gutka Cement Vaibhav Agarwal Engineering, Capital Goods Jonas Bhutta Vikram Rawat Economics Anjali Verma Raag Haria IT Services Vibhor Singhal Shyamal Dhruve Infrastructure Vibhor Singhal Logistics, Transportation & Midcap Vikram Suryavanshi Media Naveen Kulkarni, CFA, FRM Vishal Gutka Metals Dhawal Doshi Vipul Agrawal Midcaps Deepak Agarwal Akshay Mokashe MANAGEMENT Vineet Bhatnagar (Managing Director) Kinshuk Bharti Tiwari (Head Institutional Equity) Jignesh Shah (Head Equity Derivatives) Pharma & Specialty Chem Surya Patra Mehul Sheth, Rishita Raja Retail & Real Estate Vishal Gutka Dhaval Somaiya Strategy Naveen Kulkarni, CFA, FRM Neeraj Chadawar Telecom Naveen Kulkarni, CFA, FRM Technicals Subodh Gupta, CMT Production Manager Ganesh Deorukhkar Editor Roshan Sony Sr. Manager Equities Support Rosie Ferns SALES & DISTRIBUTION Kishor Binwal Ashvin Patil Bhavin Shah Ashka Gulati Archan Vyas Asia Sales Dhawal Shah Sales Trader Dilesh Doshi Suniil Pandit Execution Mayur Shah CORPORATE COMMUNICATIONS Zarine Damania REGIONAL MEMBER COMPANIES INDIA PhillipCapital (India) Private Limited www.phillipcapital.in SINGAPORE Phillip Securities Pte Ltd www.phillip.com.sg JAPAN Phillip Securities Japan, Ltd www.phillip.co.jp THAILAND Phillip Securities (Thailand) Public Co. Ltd. www.phillip.co.th UNITED STATES Phillip Futures Inc. MALAYSIA Phillip Capital Management Sdn Bhd www.poems.com.my INDONESIA PT Phillip Securities Indonesia www.phillip.co.id FRANCE King & Shaxson Capital Ltd. www.kingandshaxson.com AUSTRALIA PhillipCapital Australia www.phillipcapital.com.au HONG KONG Phillip Securities (HK) Ltd www.phillip.com.hk CHINA Phillip Financial Advisory (Shanghai) Co. Ltd. www.phillip.com.cn UNITED KINGDOM King & Shaxson Ltd. www.kingandshaxson.com SRI LANKA Asha Phillip Securities Limited www.ashaphillip.net/home.htm Page 6 PHILLIPCAPITAL INDIA RESEARCH

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