Voltas' Q4FY18 results (Outperformer) - EMP performance offsets weakness in UCPL
Q4FY18 result highlights
- Adj. PAT at Rs1.94mn (-2.4% yoy): Revenue +1.2% yoy to Rs20.2bn (not comparable; led by growth in EMP) with OPM +192bps yoy to 11.2%. Hence, EBITDA +22% yoy to Rs2.26bn.
- UCPL performance weak: Revenues fell 2% yoy to Rs10.6bn (comparable growth at 12-13% for 4Q18; 16% for FY18) led by pre-buying seen in 3Q18. Voltas maintained its leadership position with mkt share of 22%+ in FY18 (vs 21.4% in FY17). While reported EBIT margins +80bps yoy to 17.2%, LTL margins fell ~120-150bp in Q4FY18 driving down FY18 margins by 100bp to 13.5% (comparable) led by higher RM prices.
- EMP segment shines: Revenues +5.4% yoy on pick up execution while margins +186bps yoy to 7.2% due to focus on timely execution & profitable projects. Intake at Rs12.3bn (+28% yoy) on growth in both domestic & intl. Backlog +17% yoy to Rs50.6bn (60% domestic).
- FY18 adj. PAT at Rs5.7bn (+11%yoy): due to turnaround in EMP. With OPM expansion to 9.8% (+113bp yoy), EBITDA +20% yoy to Rs6.2bn.
Conf call highlights: (1) RAC Industry grew 5% yoy in Q4FY18, 11% in FY18 (2) Share of inverters increased to 30% for Voltas in 4Q18 (40% for industry) led by change in rating norms (3) Unfavorable weather has impacted sales in Q1FY19 (4) Price hikes were taken on some products post rating change (5) MEP intake strong in both domestic & intl mkts led by REC projects, metros and Expo 2020 (6) Voltas-Beko JV to launch products in H2CY18 coinciding with festive season
Key positives: Margin expansion in EMP
Key negatives: Weak UCPL performance
Impact on financials: FY19/20 EPS cut by 4/5% to Rs18.7/22.5
Valuations & view
Voltas’s efforts to focus on process improvements and better commercial terms is reaping benefits, as EMP margins have improved to ~7%. On the other hand, scale benefits, higher focus on inverters and cost efficiencies is resulting in sustenance of mkt leadership in UCPL (~22% mkt share). While there are near term concerns on UCPL growth & margins on weak demand & higher RM prices, we believe long term structural growth remains intact and would add into any correction in the stock. Valuations at 26x FY20E earnings are attractive considering 15% earnings CAGR over FY18-20E), free cash generation & strong balance sheet. Outperformer.
Voltas is an air conditioning company based in India. Co. offers engineering solutions for 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. Co. is principally active in the management and execution of electro-mechanical projects and the installation and servicing of diverse technology-based systems. Co.'s operations are organized along three business segments: Electro-Mechanical Projects & Services; Engineering Products & Services; and Unitary Cooling Products.
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