BUY

SUHANI ADILABADKAR RESEARCH REPORT

Q2 FY18

VOLTAS LTD

CMP

CONSOLIDATED

Rs.621.00

TARGET

QUARTERLY OUTLOOK & RECOMMENDATION VOLTAS LTD reported strong yearly growth for the second quarter FY18 supported by higher PAT and controlled expenditure. Revenue stood at Rs. 10367 Mn for current quarter against Rs. 9815 Mn moving 6% up YOY. EBDITA for Q2 FY18 was reported at Rs. 1369 Mn compared to Rs. 1345 Mn same period previous year growing 2% YOY. PAT jumped to Rs. 954 Mn in the current September quarter against Rs. 782 Mn corresponding period previous year growing 22% YOY. Other Income exhibited de-growth of 7% QOQ and 22% YOY in Q2 FY18. Other Income was reported at Rs. 512 Mn compared to Rs. 658 Mn in Q2 FY17. Operating expenditure was at Rs. 9510 Mn in the current quarter against Rs. 9128 Mn same period previous year growing 4% YOY. EBDITA & Net Profit Margin were reported at 13.20% & 9.20% respectively in the current September quarter. EBDITA margin declined 50 basis points whereas Net Profit Margin expanded 123 basis points YOY. One basis point is 1/100th of a percentage. Higher Net Profit Margin was attained on the back of lower finance, depreciation and taxation expenditure in the current second quarter FY18. Interest/finance costs fell 34% YOY from Rs. 33 Mn in Q2 FY17 to Rs. 22 Mn in the current quarter. Taxation was also lower by 19% YOY and was reported at Rs. 343 Mn in Q2 FY18. Voltas Ltd with market cap of Rs 205427 Mn is India's largest air conditioning company, and one of the world's premier engineering solutions providers and project specialists. The company offers engineering solutions for a wide spectrum of industries in areas such as heating, ventilation and air conditioning, refrigeration, electromechanical projects, textile machinery, mining and construction equipment, water management & treatment, cold chain solutions, building management systems, and indoor air quality. Voltas has reported weak sequential numbers in a traditionally weak September quarter, but yearly growth is strong with stable revenue, controlled expenditure and higher PAT. Voltas currently has market share of 23% in the room air conditioner market for September 2017. Engineering Products & Services degrew 11%, whereas Electro-Mechanical Projects & Services and Unitary cooling products grew 3% & 15% respectively in the current September quarter. We recommend BUY for the stock for medium term with target of Rs.725 with PE multiple of 35.38 x FY18E & 30.95 x FY19E.

Rs. 725.00

INDUSTRY

CONSTRUCTION & ENGINEERING

SCRIP CODE

500575

FACE VALUE

Rs. 1.00

MARKET Rs.205426.80 Mn CAP 52 WEEK Rs.653.45/Rs.300.40 HIGH/LOW SHAREHOLDING PATTERN (%) PROMOTER

30.30

PUBLIC

69.70

OTHERS TOTAL

100.00

In Mn

Q2 FY18

Q2 FY17

CHN%

REVENUE

10367.10

9814.60

6%

PAT

953.60

781.60

22%

EBDITA

1368.90

1345.10

2%

2.88

2.36

22%

FY17A

FY18E

FY19E

REVENUE

60950.20

63692.96

65603.75

PAT

5198.60

5806.84

6638.03

EBDITA

7789.10

8525.31

9331.66

EPS

15.72

17.55

20.07

PE

39.52

35.38

30.95

EPS

In Mn

VOLTAS LTD V/S S&P BSE SENSEX

PERFORMANCE METRICS (September Quarter FY18) Profitability Analysis NET PROFIT GROWTH (Rs. In Mn)

EBDITA (Rs. In Mn)

2500

Q2 FY18 2005

2000

1369

1879

Q1 FY18

2673

1500 Q4 FY17 1000

782

816

2605

954 Q3 FY17

1486

500 Q2 FY17

1345

0 Q2 FY17 Q3 FY17 Q4 FY17 Q1 FY18 Q2 FY18

Voltas Ltd reported strong & stable yearly numbers in the current September quarter FY18. PAT grew in double digits i.e at 22% in a seasonally weak quarter.PAT was reported at Rs.954 Mn in Q2 FY18 compared to Rs. 782 Mn same period previous year. Revenue was up 6% YOY at Rs. 10367 Mn against Rs. 9815 Mn same period previous year. Profit Before Tax exhibited a mild growth rate of 3% YOY and stood at Rs. 1287 Mn against Rs. 1249 Mn in Q2 FY17. Operating expenditure stood at Rs. 9510 Mn against Rs. 9128 Mn same period previous year rising 4% YOY but declined 46% on quarterly basis. EBDITA Margin declined 50 basis points YOY and was reported at 13.20% in the current quarter. Net Profit Margin was at 9.20% in the current quarter against 7.96% in the corresponding September quarter previous year. Net Profit Margin improved123 basis points YOY but declined 35 basis points sequentially. Other Income for the September quarter stood at Rs. 512 Mn compared to Rs. 658 Mn falling 22%YOY and 7% on quarterly basis. March & June are the best performing quarters for the company as it’s unitary cooling products garner high revenues and contributes more than half of its income during both these quarters.

0

1000

2000

3000

REVENUE GROWTH (Rs. In Mn) 25000 20583

20000

15000

19681

12001

10367

9815 10000

5000

0 Q2 FY17

Q3 FY17

Q4 FY17

Q1 FY18

Q2 FY18

EBDITA MARGIN (%)

OTHER INCOME (Rs. In Mn)

14.00% 512

Q2 FY18

13.58%

13.71% 13.50%

Q1 FY18

13.00%

550

13.20% Q4 FY17

12.66% 12.50%

12.38%

386

Q3 FY17

597

12.00% Q2 FY17

658

11.50% Q2 FY17 Q3 FY17 Q4 FY17 Q1 FY18 Q2 FY18

0

200

400

600

800

Expenditure Analysis

Rs. In Mn Cost of Materials

Stock In trade

Q2 FY18

Q2 FY17

CHG%

4724.30

5447.30

-13%

COST OF MATERIAL (Rs. In Mn)

12000

1448.00

835.20

73%

10500

10000

9787

8111 8000

Excise Duty

0.00

142.40

-100%

Employee Benefit Expenses

1452.60

1593.70

-9%

Other Expenses

1015.60

1230.40

-17%

Depreciation & Amortization

6000

5447

4724

4000

2000 0

60.90

63.20

-4%

Q2 FY17

Q3 FY17

Q4 FY17

Q1 FY18

Q2 FY18

Cost of material is the major constituent with 54% of operating expenditure. On quarterly basis, cost of material fell 52% whereas YOY decline was 13%. Stock in trade jumped 73% YOY in the current September quarter and it contributes 17% to total operating expenditure. Other expenses constitute the next biggest chunk 12% of operating

expenditure, declining 17% YOY whereas QOQ fall was 47%. Employee Benefit expenditure constituted 17% of operating expenditure in the current quarter declining 9% YOY and 2% sequentially. DEPRECIATION (Rs. In Mn)

INTEREST EXPENSE (Rs. In Mn) 70

63

64

60

61

62

61

60

60

58

50 40

58

30

56 56

20

54

35

33 22

22

10

52 Q2 FY17

Q3 FY17

Q4 FY17

Q1 FY18

Q2 FY18

TAXATION EXPENSE (Rs. In Mn) 800

727

700 600 496

500 421 400

437 343

300 200 100 0 Q2 FY17 Q3 FY17 Q4 FY17 Q1 FY18 Q2 FY18

0 Q2 FY17 Q3 FY17 Q4 FY17 Q1 FY18 Q2 FY18

EBDITA margin de-grew 50 BP YOY as operating profit or EBDITA grew mildly by just 2% compared to revenues moving at 6% YOY. EBDITA Margin stood at 13.20% in Q2 FY1 8 compared to 13.71% same period previous year. Sequential decline was lower at 38 basis points as EBDITA Margin stood at 13.58% in the previous June quarter. Depreciation expenditure de-grew about 4% YOY and was almost constant on sequential basis. Depreciation was reported at Rs. 61 Mn in the current quarter compared to Rs. 63 Mn corresponding quarter previous year. Interest expenses after spiking in Q3 FY17 has been curtailed and stood at Rs. 22 Mn in Q2 FY18 declining 34% YOY and 39% quarterly. Interest costs constitute 0.21% of Revenue. Taxation expenditure accounted 3% of total revenue in current quarter and on yearly terms fell 19%. On quarterly basis, Taxation expenditure decreased 53%. Total expenditure including finance costs and taxation rose 3% YOY and constituted 96% of total revenues compared to 98% in the corresponding quarter previous year.

Segment Revenue Analysis

Rs. In Mn

ElectroMechanical Projects & Services

Engineering Products & Services Unitary Cooling Products for Comfort & Commercial Use

Q2 FY18

Q2 FY17

CHG%

5574.70

5432.40

2.62%

REVENUE MIX

Unitary Cooling Products for Comfort & Commercial Use 40%

666.20

4077.00

751.00

3541.60

-11.29%

15.12%

ElectroMechanical Projects & Services 54%

Engineering Products & Services 6%

Electro-Mechanical Projects & Services Voltas' credentials as an EPC (Engineering, Procurement & Construction) contractor are well-established in electro-mechanical projects, specifically turnkey projects such as Electro-mechanical works consisting of electrical building services, HVAC (heating, ventilation & air conditioning), plumbing, public health, fire fighting, ELV & specialized systems and Electrical power projects. Electro-Mechanical Projects & Services Revenue grew at Rs. 5575 Mn as compared to Rs. 5432 Mn in the corresponding quarter last year. Order Book of the Segment stood higher at Rs. 50000 Mn in the current quarter compared to Rs. 42520 Mn in the corresponding quarter last year. Focus on government projects has helped the domestic project business to garner more orders. New orders during the current quarter were about Rs. 6700 Mn.

Engineering Products & Services Engineering Products & Services mainly constitutes textile machinery, mining and construction machinery. Revenue for Engineering Products & Services was reported at Rs. 666 Mn compared to Rs. 751 Mn in the corresponding quarter last year. Revenue from the segment was lower by 11% YOY and declined 26% sequentially in the current September quarter. Textile Machinery Business was impacted by GST related disruptions in textile industry.

Unitary Cooling Products for Comfort & Commercial Use This segment comprises of commercial refrigeration, air conditioners and water coolers & dispensers. Revenues were reported at Rs. 4077 Mn compared to Rs. 3542 Mn corresponding quarter previous year, rising at 15% YOY. Voltas remains market leader in this segment with 23% market share.

Corporate Profile Voltas is India's largest air conditioning company, and one of the world's premier engineering solutions providers and project specialists. Founded in India in 1954, Voltas Limited offers engineering solutions for a wide spectrum of industries in areas such as heating, ventilation and air conditioning, refrigeration, electro-mechanical projects, textile machinery, mining and construction equipment, water management & treatment, cold chain solutions, building management systems, and indoor air quality. Voltas' operations have been organized into three independent business-specific clusters. Each of these has its own facilities for market coverage and service to customers. Electro-Mechanical Projects & Services encompasses electrical, mechanical & refrigeration solutions and electrical & mechanical solutions (international). Engineering Products & Services comprises of textile machinery and mining & construction equipment. Unitary Cooling Products is the third segment constituting air conditioners, commercial refrigeration and water coolers & dispensers. Over more than five decades, Voltas has reached a position of leadership in its businesses and markets as Voltas is India's largest air conditioning company and India's No 1 air conditioner brand. Voltas is also one of the most trusted names in textile machinery and mining & construction equipment.

Financial Analysis QUARTERLY PROFIT & LOSS STATEMENT OF VOLTAS LTD FROM 31st March 2017 TO 31st Dec 2017E

VALUE

31-Mar-17

30-June-17

30-Sep-17

31-Dec-17E

Rs. In Million

3 months

3 months

3 months

3 months

20582.60

19681.10

10367.10

12233.18

OTHER INCOME

386.00

549.90

512.10

563.31

TOTAL INCOME

20968.60

20231.00

10879.20

12796.49

EXPENDITURE

-18363.40

-17558.20

-9510.30

-11345.79

2605.20

2672.80

1368.90

1450.70

-56.20

-61.20

-60.90

-62.12

2549.00

2611.60

1308.00

1388.58

-57.70

-35.40

-21.50

-22.58

EXCEPTIONAL ITEM

1.60

20.00

0.00

0.00

PROFIT BEFORE TAX

2492.90

2596.20

1286.50

1366.01

TAX

-495.60

-726.60

-342.60

-376.86

PROFIT AFTER TAX

1997.30

1869.60

943.90

989.15

MINORITY INTEREST

0.00

9.50

0.00

0.00

SHARE OF PROFIT / LOSS OF JV & ASSOCIATES

7.40

0.00

9.70

10.67

NET PROFIT

2004.70

1879.10

953.60

999.82

EQUITY CAPITAL

330.80

330.80

330.80

330.80

FACE VALUE

1.00

1.00

1.00

1.00

EPS

6.06

5.68

2.88

3.02

INCOME FROM OPERATIONS

EBDITA DEPRECIATION PROFIT BEFORE INTEREST & TAX INTEREST

ANNUAL PROFIT & LOSS STATEMENT OF VOLTAS LTD FROM 2016 TO 2020E VALUE

Mar-16

Mar-17

Mar-18E

Mar-19E

Mar-20E

Rs. In Million

12 months

12 months

12 months

12 months

12 months

INCOME FROM OPERATIONS

57466.60

60950.20

63692.96

65603.75

68096.69

OTHER INCOME

1367.10

1998.20

2198.02

2527.72

2932.16

TOTAL INCOME

58833.70

62948.40

65890.98

68131.47

71028.85

EXPENDITURE

-53137.00

-55159.30

-57365.67

-58799.81

-60857.81

EBDITA

5696.70

7789.10

8525.31

9331.66

10171.04

DEPRECIATION

-263.50

-244.50

-249.39

-256.87

-263.29

PROFIT BEFORE INTEREST & TAX

5433.20

7544.60

8275.92

9074.79

9907.75

INTEREST

-158.00

-160.40

-163.61

-166.88

-170.22

EXCEPTIONAL GAIN/LOSS

289.40

11.00

0.00

0.00

0.00

PROFIT BEFORE TAX

5564.60

7395.20

8112.31

9074.79

9907.75

TAX

-1695.70

-2088.50

-2104.31

-2230.56

-2409.01

PROFIT AFTER TAX

3868.90

5306.70

6008.00

6844.22

7498.74

MINORITY INTEREST

0.00

0.00

0.00

0.00

0.00

SHARE OF PROFIT / LOSS OF JV & ASSOCIATES

62.20

-192.50

-201.16

-206.19

-209.28

NET PROFIT

3931.10

5114.20

5806.84

6638.03

7289.46

EQUITY CAPITAL

330.80

330.80

330.80

330.80

330.80

27780.10

32735.40

38542.24

44323.58

49642.41

FACE VALUE

1.00

1.00

1.00

1.00

1.00

EPS

11.88

15.72

17.55

20.07

22.04

RESERVES

Ratio Analysis YEAR

FY 16A

FY 17A

FY 18E

FY19E

FY20E

EPS

11.88

15.72

17.55

20.07

22.04

NPM

6.84%

8.53%

9.12%

10.12%

10.70%

EBDITA MAGIN

9.91%

12.78%

13.39%

14.22%

14.94%

ROE

13.98%

15.72%

14.94%

14.87%

14.59%

DEBT EQUITY

0.10

0.05

0.04

0.04

0.04

EV/EBDITA

34.86

25.24

22.84

21.00

20.00

BOOK VALUE

84.98

99.96

117.51

134.99

151.07

P/BV

7.31

6.21

5.28

4.60

4.11

PE

52.26

39.52

35.38

30.95

28.18

BALANCE SHEET OF VOLTAS LTD FROM 2016-20E CAPITAL & LIABILITIES (Rs. In Mn) CAPITAL RESERVES & SURPLUS NETWORTH NON CONTROLLING INTERESTS NON CURRENT LIABILITIES Provisions Deferred Tax Liabilities Other Non Current Liabilities TOTAL NON CURRENT LIABILITIES CURRENT LIABILTIES Borrowings Trade Payables Other Financial Liabilities Provisions Current Tax Liabilities Other Current Liabilities TOTAL CURRENT LIABILITIES TOTAL EQUITY & LIABILITIES

2016

2017

2018E

2019E

2020E

330.80 27780.10 28110.90 266.80

330.80 32735.40 33066.20 285.20

330.80 38542.24 38873.04 300.32

330.80 44323.58 44654.38 316.83

330.80 49642.41 49973.21 334.26

812.60 96.50 8.00 917.10

914.30 107.20 2.00 1023.50

1014.87 80.40 13.00 1108.27

1075.77 82.01 13.26 1171.03

1151.07 84.47 13.66 1249.19

2707.40

1709.40

1743.59

1795.90

1885.69

17487.80

19945.70

16953.85

17801.54

18513.60

515.00 1561.70 516.20 6708.20 29496.30 58791.10

529.70 1770.20 475.00 5990.70 30420.70 64795.60

572.08 1947.22 831.25 7907.72 29955.70 70237.33

600.68 2064.05 872.81 8698.50 31833.47 77975.72

618.70 2167.26 899.00 9568.35 33652.59 85209.25

1952.00 12.90 289.70 723.10 85.60

1727.50 5.50 456.60 723.10 91.70

1983.50 19.25 561.62 759.26 98.58

2181.85 20.21 662.71 782.03 103.51

2334.58 21.22 762.12 797.67 108.68

793.00 11988.50 10.60 317.80 361.00 407.00 594.00 17535.20

586.00 20097.30 7.20 176.00 55.80 305.00 668.30 24900.00

820.40 25724.54 7.60 325.60 530.10 259.25 801.96 31891.65

902.44 30674.89 7.90 407.00 662.63 272.21 898.20 37575.57

956.59 35276.12 8.29 468.05 781.90 277.66 970.05 42762.93

7246.80 6676.50 13672.20 1698.00 156.80 28.50 578.50 11198.60

9070.30 1995.40 14541.10 3130.50 183.80 27.40 724.20 10222.90

7528.35 0.00 14831.92 3224.42 192.99 34.25 470.73 12063.02

7904.77 0.00 15573.52 3482.37 208.43 37.68 527.22 12666.17

8300.00 0.00 16349.36 3656.49 218.85 42.20 579.94 13299.48

Total Current Assets

41255.90

39895.60

38345.68

40400.15

42446.32

TOTAL ASSETS

58791.10

64795.60

70237.33

77975.72

85209.25

ASSETS (Rs. In Mn) NON CURRENT ASSETS Property, Plant & Equipment Capital Work In Progress Investment Property Goodwill Other Intangible Assets Financial Assets  Investments in JVs & Associates  Other Investments  Loans  Other Financial Assets Income Tax Taxes Deferred Tax Assets Other Non Current Assets Total Non Current Assets CURRENT ASSETS Inventories Other Investments Trade Receivables Cash & Cash Equivalents Bank Balances Loans Other Financial Assets Other Current Assets

Industry- Current Scenario Engineering sector has exhibited stupendous growth due to increased investments in infrastructure and industrial production over the last few years. Engineering sector is dependent on both manufacturing and infrastructure sectors which are important to any economy. In India, Engineering Export Promotion Council (EEPC) is the apex body responsible for promotion of engineering goods, products and services from India. India exports transport equipment, capital goods, other machinery/equipment and light engineering products to various countries, especially US and Europe, which account for about 60-65%of exports. Engineering sector in India enjoys a comparative advantage with respect to skilled labor, manufacturing costs, technology and innovation. In addition to all of this, favorable government policies attract foreign investment in the country. As per Department of Industries Policy and Promotion (DIPP), FDI flows in engineering & mechanical industry stood at $ 3296 Mn between 2000-2016. The government has allowed 100% FDI in the sector to give a boost to the manufacturing sector and has also relaxed the excise duties on factory gate tax, capital goods, consumer durables and vehicles.

Comparative Analysis Q2 FY18 VOLTAS LTD Consolidated

SIMPLEX INFRASTRUCTURE LTD LARSEN & TOUBRO LTD

EPS (Rs)

REVENUE (Rs. In Mn)

PAT (Rs. In Mn)

EBDITA (Rs. In Mn)

MKT CAP (Rs. In Mn)

2.88

10367.10

953.60

1368.90

205426.80

5.61

12460.40

277.70

1989.90

28157.20

13.00

264467.60

20203.00

33617.20

1719276.00

Consolidated

SUHANI ADILABADKAR [email protected] 9701063320

Disclosure Name Of Research Analyst

Financial Exposure/Interest

Ownership

Suhani Adilabadkar

Nil

Nil

Relative

Owns Shares In the Company

Less than 1%

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