Management Meet Update Institutional Equities Voltas Reuters: VOLT.BO; Bloomberg: VOLT IN We had a meeting with the management of Voltas recently to get the latest business update. While the management expects 3QFY17 sales of the UCP segment to be weak owing to the off-season and high base effect, it believes that demonetisation has happened at an opportune time for AC industry in the non-peak winter season. Healthy margins and RoCE are its long-term priorities in AC business over maintaining market share. In the EMPS segment, the margin is expected to revive gradually from FY18 as a few overseas projects are likely to conclude their certification and settlement with clients in 2HFY17. We have retained Accumulate rating on Voltas with a target price of Rs325 based on 22x September 218E (1HFY19) earnings. Following are the key takeaways from the meeting: Unitary cooling products (UCP) segment outlook 3QFY17 to be soft, but demonetisation at an opportune time: The management believes that demonetisation has happened at a favourable time for AC (air-conditioner) industry as November to February is a lean period for AC sales because of the winter season. While sales at the retail level could be impacted post demonetisation, the inventory in supply chain (with Voltas as well as with its dealers and retailers) is minimal because of strong sales in the summer season and the ongoing off-season currently. 3QFY17 sales could be weak (because of the current off-season) and down on YoY basis (owing to high base effect). In FY16, the summer season was not intense and hence 1HFY16 sales were weak leading to inventory build-up in the system which was liquidated in 3QFY16. However, overall in 9MFY17, Voltas does not expect to register revenue decline. The management believes that the impact of demonetisation is higher in Tier 2 & Tier 3 cities compared to metros and Tier 1 cities. However, 7%-75% of AC sales are accounted for by top 2-22 cities in India. As Voltas is light in inventory and currently passing through the off-season, it has not announced any discount or promotional offers post demonetisation. Also, the despatches for next year s summer season will start from the last week of February 217 and hence the company has two more months to ascertain the demonetisation impact. Healthy margins and RoCE is a priority over market share: Currently, Voltas is industry leader in ACs with 22% market share, having a lead of 7bps over LG, the No. 2 player (which has around 15% market share). However, Voltas gives top priority to margins and RoCE compared to market share and is even okay if its market share declines as long as its profitability is sustained. Y/E March (Rsmn) (consolidated) FY15 FY16 FY17E FY18E FY19E Net revenues 51,831 58,574 56,71 64,665 74,44 EBITDA 4,1 4,369 4,126 5,155 6,477 Adjusted net profit 3,349 3,44 3,614 4,413 5,426 Adjusted EPS (Rs) 1.1 1.3 1.9 13.3 16.4 EPS growth (%) 49.6 1.6 6.2 22.1 23. EBITDA margin (%) 7.9 7.5 7.3 8. 8.7 P/E (x) 3.5 3. 28.3 23.2 18.8 P/BV (x) 4.9 4.3 3.9 3.5 3.1 EV/EBITDA (x) 24.6 23.5 24.7 19.4 15.3 Dividend yield (%).7.8.9 1.1 1.5 RoCE (%) 17.6 16.6 13.8 16.2 18.8 RoIC (%) 38.7 44.2 36.8 41.2 45.5 23 December 216 ACCUMULATE Sector: Capital Goods CMP: Rs39 Target Price: Rs325 Upside: 5% Chirag Muchhala chirag.muchhala@nirmalbang.com +91-22-3926 892 Key Data Current Shares O/S (mn) 33.9 Mkt Cap (Rsbn/US$bn) 12.8/1.5 52 Wk H / L (Rs) 46/211 Daily Vol. (3M NSE Avg.) 1,422,184 One -Year Indexed Stock Performance 14 13 12 11 1 9 8 7 6 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Price Performance (%) VOLTAS LTD Nifty 5 1 M 6 M 1 Yr Voltas 3.4 (3.4).9 Nifty Index (.7) (3.5) 1.4 Source: Bloomberg
Voltas posted strong EBIT margin of 13.2% in FY16 and 14.1% in 1HFY17 as the year started with a strong summer season. While there are many variables affecting the margin profile including commodity prices, currency movement (import content is high at 5%), competitive intensity, seasonality in demand and high advertising expenditure (at 4% to 6% of sales for Voltas), the management feels that over the next five years the sustainable operating margin profile will be 1%-11%. Further, Voltas is also prudent in making a provision for warranty at the time of the sale of AC itself and also in reporting advertisement expenses as a part of business expenses, which certain other players may not be following. Diversification into air-cooler and other consumer products After expanding its consumer goods product portfolio last year with the launch of air-coolers, Voltas is studying other similar product categories where it can leverage its brand. It is perceived that the brand Voltas has a consumer connect with products linked to air and water and hence categories such as airpurifier, refrigerators, washing machines and microwave ovens are under evaluation. Voltas launched aircoolers in Delhi and Punjab last year and subsequently expanded to a few other states (like Gujarat, Madhya Pradesh and parts of North and Central India). In FY16, it sold 7, units of air-coolers with the average selling price being Rs6, to Rs7, while in 1HFY17 it sold 5, units of air-coolers. So far, the aircooler category was being serviced largely by just three organised brands Symphony, Bajaj Electricals and Kenstar. With the launch of its air-coolers last year, Voltas has become the fourth-largest brand and it aims to be the second-largest in the long run. The air-cooler industry s size currently is 5mn units, of which only 3% is catered to by the organised segment, while the unorganised market s size of 7% is likely to decline sharply in the long run. Other UCP segment updates Voltas will be bidding for EESL tender for ACs, but there is lack of clarity about the extent of vendors responsibility on matters like installation, storage, servicing etc. Inverter ACs constituted 6% of sales for Voltas last year versus 1% in case of the industry. Voltas performed very well in South India market in 1HFY17 and is the market leader in all four zones in India. 2%-22% of top-line of UCP is accounted for by commercial refrigeration. It is a B2B business and hence unlikely to be impacted by demonetisation. Current indirect tax rate for Voltas is 25%-27%. It is not clear what GST rate will be levied on AC and refrigeration products. One manufacturing plant of Voltas is losing excise duty benefit in February 217, but additional net impact on the tax rate will be restricted to.5%-1% as Voltas would start receiving input credit. New BEE norms are due in 218. Electro-mechanical projects segment (EMPS) outlook Voltas is currently reporting weak margin for its EMPS segment (EBIT margin of 1.4% in FY16 as well as in 1HFY17). While EMPS orders are taken at the bidding-level margin of 4%-5%, time overrun because of delay on the part of customers to execute and commission their projects leads to a margin of only 1%-2% on closure of projects. Further, delay in certification of projects from customers and settlement of dues after Voltas has completed its scope of work affects profitability, especially in Middle East projects. The management expects a few low-margin overseas EMPS orders to attain financial closure in 2HFY17 as their certification and settlement is likely to conclude. These low-margin orders were booked when crude oil prices were much higher (above US$1/barrel) and faced delay in execution after the sharp decline in crude oil prices as some project developers were in financial difficulty. Post completion of these old projects, Voltas expects the margins to recover from FY18 onwards gradually. Its order book, from FY18 onwards, will mainly consist of new projects won over the past one year which has much lesser risk of time overrun. In the international EMPS order book of Rs21bn as of 1HFY17-end (49% of total order book), Rs12bn orders were won in the past 12 months which have a much better margin profile. Its overseas order book consists of Rs18bn orders from the Middle East and Rs3bn orders from Singapore. Voltas is much more cautious in taking international orders now and has a four-level internal review committee to approve each project order. In the domestic market, Voltas is not experiencing any execution issues post demonetisation as a large part of its domestic order book is geared towards government orders. The domestic order book stood at Rs22bn as of 1HFY17-end (51% of total order book) in which the only large private order under execution is the 2 Voltas
1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 Institutional Equities convention centre of Reliance Industries at BKC in Mumbai (Rs2.2bn). Incrementally, Voltas is focusing more on rural electrification and water segments in domestic EMPS market. In rural electrification segment, Voltas currently has an order book of Rs2.2bn-Rs2.5bn and has worked only in Madhya Pradesh. It intends to expand its presence in a few more states. In water segment, Voltas has an order book of Rs2.5bn-Rs2.6bn including the recently won project of setting up a water treatment plant for Agra smart city worth Rs1.2bn. Along with other smart city-linked water projects, Voltas also aims for more industrial orders, once corporate capex revives. Outlook and valuation Post 2QFY17 results, we had cut our FY17/FY18 earnings estimates for Voltas by 16%/13%, respectively, factoring in the impact of demonetisation on the UCP segment and softer execution traction in EMPS. We expect Voltas to post 17% adjusted earnings CAGR over FY16-FY19E along with a free cash flow generation of Rs8.8bn. Capex-light balance sheet remains strong with low leverage and high return ratios (RoCE/RoIC of 19%/45%, respectively, in FY19E) and low net working capital requirement. We have valued Voltas at 22x September 218E earnings (1HFY19), translating to a target price of Rs325. We believe the stock is fairly priced currently and hence we have Accumulate rating on it. Exhibit 1: Segment-wise snapshot Y/E March 2QFY16 1QFY17 2QFY17 YoY (%) QoQ (%) 1HFY16 1HFY17 YoY (%) Revenues (Rsmn) Electro-mechanical projects 6,355 5,82 5,432 (14.5) (6.4) 11,99 11,235 (6.3) Engineering products 962 691 751 (21.9) 8.6 1,663 1,442 (13.2) Unitary cooling products 3,121 11,956 3,542 13.5 (7.4) 12,399 15,498 25. Revenue mix (%) Electro-mechanical projects 6.9 31.4 55.9 - - 46. 39.9 - Engineering products 9.2 3.7 7.7 - - 6.4 5.1 - Unitary cooling products 29.9 64.8 36.4 - - 47.6 55. - EBIT (Rsmn) Electro-mechanical projects 174 18 54 (69.3) (5.6) 259 162 (37.6) Engineering products 34 193 34 (1.6) 57.6 579 496 (14.3) Unitary cooling products 341 1,779 49 19.9 (77.) 1,477 2,187 48.1 EBIT margin (%) Electro-mechanical projects 2.7 1.9 1. - - 2.2 1.4 - Engineering products 35.3 27.9 4.4 - - 34.8 34.4 - Unitary cooling products 1.9 14.9 11.5 - - 11.9 14.1 - Exhibit 2: EMPS trend in order inflow and backlog (Rsbn) 14 12 1 8 6 4 2 (Rsbn) 6 5 4 3 2 1 Order intake (LHS) Order backlog (RHS) 3 Voltas
Apr-6 Feb-7 Jan-8 Dec-8 Oct-9 Sep-1 Aug-11 Jun-12 May-13 Apr-14 Feb-15 Jan-16 Dec-16 Apr-6 Feb-7 Jan-8 Institutional Equities Dec-8 Oct-9 Sep-1 Aug-11 Jun-12 May-13 Apr-14 Feb-15 Jan-16 Dec-16 Exhibit 3: UCP trend in EBIT margin profile Exhibit 4: EMPS trend in EBIT margin profile (%) 16 (%) 1 14 12 1 8 6 4 1.2 8.4 9. 12.3 13.9 13.2 13.3 13.5 14. 8 6 4 2 7.9 5.4 1.6 1. 1.4 1.8 2.5 3. 2 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E (2) FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E (1.5) Exhibit 5: Trend in cash flow position Exhibit 6: Trend in return ratios (Rsmn) 6, 5, (%) 5 4 38.7 44.2 36.8 41.2 45.5 4, 3, 2, 1, 3 2 1 21.7 18.5 14.2 13.4 11.6 12.1 19.6 17.1 17.6 16.6 14.4 13.8 16.2 15.9 18.8 17.5 FY13 FY14 FY15 FY16 FY17E FY18E FY19E Operating cash flow Free cash flow FY13 FY14 FY15 FY16 FY17E FY18E FY19E RoE RoCE RoIC Exhibit 7: P/E charts (x) 45 4 35 3 25 2 15 1 5 (Rs) 45 4 35 3 25 2 15 1 5 Stock price 5x 1x 15x 2x 25x Source: BSE, Nirmal Bang Institutional Equities Research 4 Voltas
Financial statements (consolidated) Exhibit 8: Income statement Y/E March (Rsmn) FY15 FY16 FY17E FY18E FY19E Net sales 51,831 58,574 56,71 64,665 74,44 % growth (1.6) 13. (3.2) 14. 14.5 Raw material costs 35,975 41,26 39,584 44,683 5,72 Staff costs 5,899 6,699 7,89 7,76 8,515 Other overheads 5,857 6,246 5,911 7,67 8,332 Total expenditure 47,731 54,25 52,584 59,51 67,567 EBITDA 4,1 4,369 4,126 5,155 6,477 % growth 54.4 6.6 (5.6) 24.9 25.6 EBITDA margin (%) 7.9 7.5 7.3 8. 8.7 Other income 1,87 1,176 1,384 1,462 1,558 Interest costs 233 153 18 148 13 Depreciation 28 278 311 34 369 Profit before tax 4,675 5,114 5,19 6,129 7,536 Tax 1,276 1,599 1,45 1,716 2,11 Net profit 3,398 3,515 3,614 4,413 5,426 Minority interest 5 111 - - - Extra-ordinary items 462 47 - - - Reported net profit 3,811 3,81 3,614 4,413 5,426 Adjusted net profit 3,349 3,44 3,614 4,413 5,426 Adjusted PAT margin (%) 6.5 5.8 6.4 6.8 7.3 Adjusted EPS (Rs) 1.1 1.3 1.9 13.3 16.4 % growth 49.6 1.6 6.2 22.1 23. Exhibit 1: Balance sheet Y/E March (Rsmn) FY15 FY16 FY17E FY18E FY19E Share capital 331 331 331 331 331 Reserves 2,69 23,621 26,31 28,939 32,43 Net worth 21,21 23,952 26,362 29,27 32,761 Minority interest 161 258 258 258 258 Short-term loans 1,17 2,599 1,899 1,399 1,199 Long-term loans 47 - - - - Total loans 1,217 2,599 1,899 1,399 1,199 Total liabilities 22,398 26,81 28,52 3,928 34,218 Gross block 4,549 5,15 5,617 6,117 6,617 Depreciation 2,659 2,894 3,25 3,545 3,914 Net block 1,891 2,211 2,413 2,572 2,73 Capital work-in-progress 44 13 - - - Goodwill 798 723 723 723 723 Investments 1,939 15,257 15,257 15,257 15,257 Inventories 8,671 8,927 8,844 9,477 11,21 Debtors 13,386 13,66 13,18 14,133 16,531 Cash 2,516 1,971 2,122 3,465 4,335 Loans and advances 2,66 2,856 3,17 3,338 3,814 Other current assets 7,665 1,435 1,376 1,924 12,484 Total current assets 34,844 37,255 37,62 41,336 48,185 Creditors 15,414 17,451 16,28 17,2 19,63 Other current liabilities & provisions 11,51 11,79 11,724 12,272 13,557 Total current liabilities 26,466 29,16 28,4 29,472 33,16 Net current assets 8,378 8,95 9,616 11,864 15,24 Deferred tax asset (net) 349 511 511 511 511 Total assets 22,398 26,81 28,52 3,928 34,218 Exhibit 4: Exhibit 9: Cash flow Y/E March (Rsmn) FY15 FY16 FY17E FY18E FY19E EBIT 3,82 4,91 3,815 4,815 6,18 (Inc.)/dec. in working capital 1,82 (263) (1,37) (96) (2,29) Cash flow from operations 5,639 3,829 2,446 3,99 3,818 Other income 1,87 1,176 1,384 1,462 1,558 Depreciation 28 278 311 34 369 Tax paid (-) (1,276) (1,599) (1,45) (1,716) (2,11) Minority interest (-) (5) (111) - - - Net cash from operations 5,681 3,572 2,735 3,996 3,635 Capital expenditure (-) (112) (567) (5) (5) (5) Net cash after capex 5,569 3,5 2,235 3,496 3,135 Interest paid (-) (233) (153) (18) (148) (13) Dividends paid (-) (98) (1,12) (1,24) (1,55) (1,935) Inc./(dec.) in short-term borrowing (1,45) 1,43 (7) (5) (2) Inc./(dec.) in long-term borrowing (7) (47) - - - Inc./(dec.) in total borrowings (1,412) 1,383 (7) (5) (2) (Inc.)/dec. in investments (3,618) (4,319) - - - Minority interest 22 98 - - - Cash from financial activities (6,221) (4,111) (2,84) (2,153) (2,265) Others 35 56 - - - Opening cash balance 2,818 2,516 1,971 2,122 3,465 Closing cash balance 2,516 1,971 2,122 3,465 4,335 Change in cash balance (32) (545) 151 1,342 87 Exhibit 5: Exhibit 6: Exhibit 11: Key ratios Y/E March FY15 FY16 FY17E FY18E FY19E Per share (Rs) Adjusted EPS 1.1 1.3 1.9 13.3 16.4 Book value 63.6 72.4 79.7 88.5 99. Valuation (x) P/E 3.5 3. 28.3 23.2 18.8 P/BV 4.9 4.3 3.9 3.5 3.1 EV/EBITDA 24.6 23.5 24.7 19.4 15.3 EV/sales 1.9 1.8 1.8 1.5 1.3 Return ratios (%) RoCE 17.6 16.6 13.8 16.2 18.8 RoE 19.6 17.1 14.4 15.9 17.5 RoIC 38.7 44.2 36.8 41.2 45.5 Profitability ratios (%) EBITDA margin 7.9 7.5 7.3 8. 8.7 EBIT margin 7.4 7. 6.7 7.4 8.2 PAT margin 6.5 5.8 6.4 6.8 7.3 Turnover ratios Total asset turnover ratio (x) 2.4 2.4 2. 2.2 2.3 Debtor days 94 82 83 85 87 Inventory days 62 55 56 57 58 Creditor days 161 145 147 149 15 Solvency ratios (x) Debt-equity.6.11.7.5.4 5 Voltas
Rating track Date Rating Market price (Rs) Target price (Rs) 23 October 213 Buy 85 18 7 November 213 Buy 91 18 13 November 213 Buy 88 18 26 November 213 Buy 93 18 5 February 214 Buy 18 14 5 June 214 Hold 25 223 1 July 214 Accumulate 2 223 18 August 214 Accumulate 221 253 9 October 214 Accumulate 238 253 18 November 214 Buy 279 326 9 January 215 Buy 244 326 16 February 215 Buy 256 322 15 April 215 Buy 33 322 26 May 215 Accumulate 325 343 8 July 215 Accumulate 319 343 17 August 215 Accumulate 315 32 12 October 215 Accumulate 277 32 1 November 215 Accumulate 276 39 8 January 216 Accumulate 297 39 16 February 216 Buy 238 31 12 April 216 Buy 278 31 2 May 216 Accumulate 323 322 16 June 216 Accumulate 325 322 12 July 216 Accumulate 318 322 4 August 216 Accumulate 344 354 13 October 216 Accumulate 38 354 21 November 216 Accumulate 293 325 23 December 216 Accumulate 39 325 6 Voltas
Disclaimer Stock Ratings Absolute Returns BUY > 15% ACCUMULATE -5% to15% SELL < -5% This report is published by Nirmal Bang s Institutional Equities Research desk. Nirmal Bang group has other business units with independent research teams separated by Chinese walls, and therefore may, at times, have different or contrary views on stocks and markets. Reports based on technical and derivative analysis may not match with reports based on a company's fundamental analysis. This report is for the personal information of the authorised recipient and is not for public distribution. This should not be reproduced or redistributed to any other person or in any form. This report is for the general information for the clients of Nirmal Bang Equities Pvt. Ltd., a division of Nirmal Bang, and should not be construed as an offer or solicitation of an offer to buy/sell any securities. We have exercised due diligence in checking the correctness and authenticity of the information contained herein, so far as it relates to current and historical information, but do not guarantee its accuracy or completeness. The opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. Nirmal Bang or any persons connected with it do not accept any liability arising from the use of this document or the information contained therein. The recipients of this material should rely on their own judgment and take their own professional advice before acting on this information. Nirmal Bang or any of its connected persons including its directors or subsidiaries or associates or employees or agents shall not be in any way responsible for any loss or damage that may arise to any person/s from any inadvertent error in the information contained, views and opinions expressed in this publication. Nirmal Bang Equities Private Limited (hereinafter referred to as NBEPL ) is a registered Member of National Stock Exchange of India Limited, Bombay Stock Exchange Limited. NBEPL has registered with SEBI as a Research Entity in terms of SEBI (Research Analyst) Regulations, 214. (Registration No: INH1436-19.8.215 to 18.8.22). NBEPL or its associates including its relatives/analyst do not hold any financial interest/beneficial ownership of more than 1% in the company covered by Analyst. NBEPL or its associates/analyst has not received any compensation from the company covered by Analyst during the past twelve months. NBEPL /analyst has not served as an officer, director or employee of company covered by Analyst and has not been engaged in market-making activity of the company covered by Analyst. The views expressed are based solely on information available publicly and believed to be true. Investors are advised to independently evaluate the market conditions/risks involved before making any investment decision. Access all our reports on Bloomberg, Thomson Reuters and Factset. Team Details: Name Email Id Direct Line Rahul Arora CEO rahul.arora@nirmalbang.com - Girish Pai Head of Research girish.pai@nirmalbang.com +91 22 3926 817 / 18 Dealing Ravi Jagtiani Dealing Desk ravi.jagtiani@nirmalbang.com +91 22 3926 823, +91 22 6636 8833 Pradeep Kasat Dealing Desk pradeep.kasat@nirmalbang.com +91 22 3926 81/811, +91 22 6636 8831 Michael Pillai Dealing Desk michael.pillai@nirmalbang.com +91 22 3926 812/813, +91 22 6636 883 Umesh Bharadia Dealing Desk umesh.bharadia@nirmalbang.com +91-22-39268226 Nirmal Bang Equities Pvt. Ltd. Correspondence Address B-2, 31/32, Marathon Innova, Nr. Peninsula Corporate Park, Lower Parel (W), Mumbai-413. Board No. : 91 22 3926 8/1; Fax. : 22 3926 81 7 Voltas