Jefferies rates Voltas as ‘Buy’, says Q4 FY17 yields positive surprise

By: |
May 29, 2017 4:25 AM

Voltas unitary cooling products i.e., primarily air-conditioner (A/C) segment, has surprised on both revenues and margins.

Jefferies rates Voltas as Buy, Voltas, primarily air-conditioner segment, AC segment, Electromechanical projects segment, engineering, demonetisation, MEP profitability surprises, Ebitda, Working capital Q1FY18 likely to see strong revenue growth continuing in the AC business.

Voltas unitary cooling products i.e., primarily air-conditioner (A/C) segment, has surprised on both revenues and margins. Revenue rose 26% y-o-y (expectation 15%) with reported Ebit margin of 16.4% (expectation 12%). Electromechanical projects segment (MEP), i.e., engineering, has positively surprised with Ebit margins of 5.7% v/s our expectation of 5%.

Cooling Products – maintain market leadership at 21.4%
Management in its press release highlighted that supportive weather and increase in consumer demand across the country has boosted the segment results. Segment revenues came in 26% higher y-o-y, with Ebit margins flat y-o-y at 16.4%. Q3FY17 saw the impact of demonetisation and Q4FY17 has seen complete recovery from the same. We highlighted in our note “Heat Is On “, dated Mar. 29th 2017, that AC pricing has not been under pressure. This is likely to have contributed to margin surprise. Our industry interactions currently suggest Q1FY18e should see the strong Q4 revenue growth continuing as temperatures remain high.

MEP profitability surprises
Voltas management has been consciously focusing on profitability v/s revenue growth in this segment. Order book has risen by 10.3% y-o-y to Rs 43 bn. Margins came in at 5.7% v/s 3.4% y-o-y and 3.9% q-o-q. This has clearly contributed to the Ebitda beat v/s expectations. Given the lumpy nature of this business and as low margin legacy orders have been gradually executed, we believe the next 12-18 months will see this improving profitability trend continue.

Working capital remains under control — less than 10% of sales
Voltas’s balance sheet remains healthy with its net cash position. Cash and current investments are Rs 5 bn versus Rs 8 bn y-o-y. However, non-current investments has moved from Rs 12 bn to Rs 20 bn y-o-y. Q4FY17 results has INDAS compliant balance sheet where we need to understand the classification of investments.

Company description: Voltas Limited is a part of the Tata Group. Voltas provides engineering solutions for areas like heating, ventilation and air conditioning, refrigeration, electro-mechanical projects, textile machinery, etc. It has 3 manufacturing facilities located at Thane, Dadra and Pantnagar.


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