Voltas' Q3FY18 results (Outperformer) - Strong performance; market share gains in UCPL
Q3FY18 result highlights
- Adj. PAT at Rs995mn (+24% yoy): led by robust growth in UCPL and margin expansion across segments. Revenue +16% yoy to Rs13.7bn, with OPM +91bps yoy to 8%. Hence, EBITDA +31% yoy to Rs1.1bn.
- UCPL – strong performance led by market share gains: Revenues +32% yoy to Rs5.4bn led by pre-buying ahead of energy rating table change in Jan-18 as also re-stocking demand. Voltas strengthened its leadership position with ~23.7% mkt share (23% in Q2FY18). EBIT margins expanded 240bps yoy to 13% on positive operating leverage.
- EMP margin uptick sustains: Revenues grew 7.1% yoy on pick up execution. Margins improved to 7.2% (+321bps yoy) due to focus on timely execution & profitable projects. Intake at Rs16.7bn (-14% yoy) led by infra orders in domestic mkt. Backlog +15% yoy to Rs48.4bn (65% domestic).
Conf call highlights: (1) RAC Industry grew 7% yoy in Q3FY18, 12% volume growth in 9MFY18 (2) Share of inverters increased to 17% for Voltas (24% for industry) led by launch of several inverter SKUs as Voltas increases focus on inverters (3) No price hikes taken and would monitor upcoming season to decide on price hikes to pass through higher RM costs (4) Carillion PLC (Voltas’ contractor for 2 projects in Dubai & Oman) filed for bankruptcy in Jan-18. No impact on execution so far, though some delays in payments possible, with Rs1.77bn outstanding dues (5) Domestic Intake in MEP was led by electrification projects, metros (6) Expo 2020 order have started flowing, Voltas remains cautious on bidding (7) Air coolers sales is up 50% yoy YTD, with Voltas being the 4th largest player
Key positives: Mkt share gains in UCPL, margin expansion in UCPL, EMP
Key negatives: Drop in other income on MTM on debt investments
Impact on financials: FY18/19 EPS cut by 8/6% to Rs16.3/19.5; FY20 at 23.8
Valuations & view
Voltas’s efforts to focus on process improvements and better commercial terms is reaping benefits, as EMP margins are trending towards 6%. On the other hand, scale benefits, focus on inverters (1st to introduce in window ACs) and cost efficiencies is resulting in sustenance of mkt leadership in UCPL (~24% mkt share). Voltas’ addressable market has expanded via the Arcelik JV and lays a strong foundation for long term growth. We believe valuations are attractive at 25x FY20E earnings, considering the long term structural growth, strong earnings growth (17% CAGR over FY17-20E), free cash generation and strong balance sheet (~Rs20bn+ cash). 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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