Voltas

India Equity Research | Engineering and Capital Goods Result Update

VOLTAS INR 93

Cooling ``off’’ ACCUMULATE

Strong revenue and net profit growth; disappointing EBITDA margins

May 18, 2007
Voltas’s (VOLT) Q4FY07 and FY07 results were ahead of our revenue and net earnings
expectations, but disappointing on the EBITDA margin front. Net revenues grew by 40%
Priyanko Panja
Y-o-Y and 30% Y-o-Y to INR 7.2 bn and INR 24 bn in Q4FY07 and FY07, respectively. The +91-22-2286 4300
strong growth was led by its electro mechanical projects (EMPS) and engineering agency priyanko.panja@edelcap.com

services (EAS) segments. The EMPS segment, after registering soft revenue growth of 11% Siddharth Sanghvi
Y-o-Y for 9MFY07, reported growth of 50% Y-o-Y in Q4FY07. +91-22-2286 4397
siddharth.sanghvi@edelcap.com

Regrouping of rental incomes from operating to other income, and accounting of losses of its Hiral Desai
under closure civil construction business led to subdued EBITDA growth of 15% Y-o-Y in +91-22-4009 4537
hiral.desai@edelcap.com
Q4FY07 to INR 347 mn. Further, EBITDA margin disappointed once again with VOLT
reporting 4.8% in Q4FY07 from 5.9% in Q4FY06. As a result, FY07 EBITDA margin was at
4.5% (5.4% in FY06), thereby leading to soft EBITDA growth of 8% Y-o-Y to INR 1 bn, below
our estimate of INR 1.1 bn.

Exceptional income of INR 655 mn in Q4FY07 was largely on account of profit on sale of
trade investments and property. Despite lower EBITDA, VOLT reported higher adjusted net
earnings of INR 544 mn for Q4FY07 on account of dividend from subsidiary, Simtools Ltd., of
INR 120 mn (clubbed under other income) and lower tax provision. Tax provision for Q4FY07
on adjusted PBT of INR 476 mn (excluding exceptional gains and subsidiary dividend) was
lower at 11%. As a result, adjusted net profit for FY07 was at INR 1.2 bn, a 22% Y-o-Y
growth, translating into EPS of INR 3.6.
Reuters : VOLT.BO
Upgrading revenues and profits
Bloomberg : VOLT IN
We are revising up our revenue estimates by 6% each for FY08 and FY09, considering the
INR 22 bn order backlog of its EMPS segment (average execution cycle of ~15 months) and
Market Data
improving capacity utilization levels of its turnaround unitary cooling products (UCL) segment.
52-week range (INR) : 121/ 63
With upgraded revenue growth and higher other income on account of regrouping of rental
Share in issue (mn) : 330.9
income, we are revising our net profit estimates up by 12% and 9% to INR 1.5 bn and INR
M cap (INR bn/USD mn) : 30.8 / 754.6
1.9 bn for FY08 and FY09, respectively.
Avg. Daily Vol. BSE/NSE (‘000) : 1,271.2
Maintain ‘ACCUMULATE’
On our revised EPS of INR 4.5 for FY08E and INR 5.7 for FY09E, the stock trades at P/E of
Share Holding Pattern (%)
21x and 17x, respectively. Voltas’s lower margins Middle-East projects could likely be a drag
on its operating margins. The company also needs to focus more on the immense Promoters : 27.6

opportunities in the domestic retail and aviation segments. With cash reserve of ~ INR 1.6 bn, MFs, FIs & Banks : 19,7

positive surprises could crop up via inorganic growth route. We maintain ‘ACCUMULATE’ FIIs : 28,7

recommendation. Others : 24.0

Financials
Year to March Q4 FY07 Q4 FY06 % change Q3 FY07 % change FY07 FY08E
Revenues (net) (INR mn) 7,214 5,139 40.4 5,689 26.8 24,006 31,063
EBITDA (INR mn) 347 301 15.3 275 26.1 1,087 1,606
Net profit (INR mn) 544 233 133.3 181 200.3 1,184 1,500
EPS (INR) 3.6 0.7 422.7 0.6 517.1 3.6 4.5
P/E (x) 26.0 20.5
EV/EBITDA (x) 1.2 0.9
ROAE (%) 37.4 33.2

1 Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
Voltas

Segmental performance
Strong revenue growth of 30% Y-o-Y in FY07 was led by Voltas’s EMPS and EAS segments. The
former, which registered modest revenue growth of 11% Y-o-Y for 9MFY07, reported growth of
50% Y-o-Y in Q4FY07. It contributed 56% to the revenue mix, marginally lower compared to FY06.
The growth was fuelled by execution of domestic orders, which registered 65% Y-o-Y growth.
Front-ended nature of cost booking and delay in execution of international jobs led to lower
segment margins of 4.8% in FY07 compared to 6.1% in FY06.

VOLT is witnessing a shift in its segment mix in favour of the EAS division. The EAS division’s
share in revenue increased to 18% in FY07 from 12% in FY06, led by strong growth in the
material handling business. Growth in textile machinery was soft, whereas it was below
expectations in the machine tools business. We consider the modal shift towards the EAS
division as a positive, as segmental margins tends to be higher amongst all the segments (20%
plus against 5-6% for its EMPS division) resulting in better return ratios.

As expected, VOLT was successful in turning around its UCL segment post shifting the
manufacturing base to tax-free Uttaranchal from Hyderabad. This segment, which contributed
25% to the revenue mix, reported 1.6% segmental margin as a result of change in strategy from
volume-driven growth to margin focus. With capacity utilization expected to improve in ensuing
periods, we foresee improvement in margins.

With respect to other segments, the lower revenue contribution of 2% in FY07 was on account
of regrouping of its sub segments. The rental income which VOLT earns from its property
development and human resource development cells has been regrouped from other segments
under other income. Further, technical service fees from overseas have been regrouped under
EMPS. Also, with the closing of its loss making civil construction business, the other segment
will only consist of only chemical trading business.

Table 1: Segmental performance

Year to March Q4FY07 Q4FY06 Q3FY07 FY07 FY06
Segment revenue mix (%)
Electro mechanical projects (EMPS) 60.5 55.7 61.5 55.7 59.1
Engineering agency & services (EAS) 17.4 15.8 20.8 17.6 11.6
Unitary cooling products (UCL) 21.2 26.3 15.6 24.9 24.7
Others 0.9 2.2 2.1 1.7 4.6

EBIT margin (%)

Electro mechanical projects (EMPS) 5.7 4.7 5.1 4.8 6.1
Engineering agency & services (EAS) 23.4 26.8 20.6 23.2 30.2
Unitary cooling products (UCL) 5.7 1.0 (3.1) 1.6 (0.1)
Others (121.9) 31.0 34.5 6.8 16.9

EBIT mix (%)

Electro mechanical projects (EMPS) 45.0 33.8 41.0 36.6 46.1
Engineering agency & services (EAS) 53.0 54.3 55.9 56.2 44.3
Unitary cooling products (UCL) 15.7 3.2 (6.4) 5.5 (0.2)
Others (13.8) 8.7 9.5 1.6 9.9
Source: Edelweiss research

2
Voltas

Financials snapshot (INR mn)

Year to March Q4 FY07 Q4 FY06 % change Q3 FY07 % change FY06 FY07 FY08E
Revenues (gross) 7,300 5,305 37.6 5,809 25.7 19,042 24,508 31,713
Less: Excise duty 86 165 (47.8) 119 (27.7) 510 502 649
Revenues (net) 7,214 5,139 40.4 5,689 26.8 18,531 24,006 31,063
Raw material 5,535 3,839 44.2 4,219 31.2 13,987 18,108 23,294
Staff cost 628 506 24.1 638 (1.7) 1,763 2,400 3,043
Other operating expenses 705 494 42.7 557 26.6 1,773 2,411 3,120
Total expenditure 6,867 4,838 41.9 5,414 26.8 17,524 22,919 29,457
EBITDA 347 301 15.3 275 26.1 1,007 1,087 1,606
Depreciation 30 36 (17.4) 29 3.4 111 123 141
EBIT 317 264 19.7 246 28.8 896 964 1,465
Interest (37) (13) 185.9 14 (367.2) 14 - 5 52
Other income 243 90 169.9 85 185.7 296 583 691
Extraordinary items 655 (4) - 13 - - 262 677 -
PBT 1,251 363 244.3 330 278.8 917 2,228 2,105
Tax 52 134 (61.5) 136 (62.1) 212 368 605
Reported net profit 1,199 229 422.9 194 517.1 705 1,861 1,500
Adjusted net profit 544 233 133.3 181 200.3 967 1,184 1,500
Equity capital(FV:INR1) 331 331 0.0 331 - 331 331 331
# of shares (mn) 331 33 900.3 331 - 33 331 331
Adjusted EPS (INR)* 3.6 0.7 422.7 0.6 517.1 2.9 3.6 4.5

as % of net revenues
Raw material 76.7 74.7 2.7 74.2 3.5 75.5 75.4 75.0
Staff cost 8.7 9.8 (11.6) 11.2 (22.5) 9.5 10.0 9.8
Other operating expenses 9.8 9.6 1.7 9.8 (0.1) 9.6 10.0 10.0
EBITDA 4.8 5.9 (17.9) 4.8 (0.5) 5.4 4.5 5.2
Net profit 7.5 4.5 66.2 3.2 136.8 5.2 4.9 4.8
Tax rate 4.1 36.9 (88.8) 41.1 (90.0) 23.1 16.5 28.7

3
Voltas

Company Description

VOLT Limited, part of the TATA group which holds 27.6% stake, is a leading air conditioning and
engineering services provider. It offers engineering solutions through its four business segments in
areas such as heating, ventilation and air conditioning, refrigeration, climate control, electro-
mechanical projects, textile machinery, machine tools, mining and construction, material handling,
water management, building management systems, pollution control and chemicals.

Investment Theme

VOLT’s strong presence in the West-Asian region (particularly Middle East) and specializing in EMPS
contracts have made it a preferred EPC contractor. The flagship EMPS division contributes 55% plus
to the topline, driven by contracts in domestic as well as international markets. We believe VOLT may
gain from international experience and tap opportunities from the ongoing infrastructure boom in
India. Further, with capital goods industry continuing its growth trend, we expect VOLT’ EAS division
to capitalize on the opportunity, which can lead to improvement in overall margins.

Key Risks

Any slow down in capex spend in Middle East and in economic activity with respect to infrastructure
creation in India is likely to dry incremental order intakes for its EMPS division. Further, margins and
lead time for delivery for its EMPS segment can come under pressure with local players
strengthening their operations and entry of more global players. The profitability of its UCL division is
vulnerable to rise in input costs, increase in Chinese imports, and excess capacity.

4
Voltas

Financial Statements

Income statement (INR mn)

Year to March FY05 FY06 FY07UA FY08E FY09E
Income from operations 13,867 18,531 24,007 31,063 38,837
Direct costs 10,399 13,987 18,108 23,294 29,066
Employee costs 1,444 1,763 2,400 3,043 3,804
Other expenses 1,580 1,773 2,411 3,120 3,862
Total operating expenses 13,422 17,524 22,919 29,457 36,732
EBITDA 445 1,007 1,088 1,606 2,105
Depreciation and amortisation 105 111 123 141 167
EBIT 340 896 965 1,465 1,938
Interest expenses 39 14 71 52 41
Other income 225 296 658 691 762
Profit before tax 526 1,179 1,553 2,105 2,659
Provision for tax 72 212 368 605 764
Extraordinary items 50 (262) 677 - -
Reported profit 504 705 1,861 1,500 1,895
Adjusted net profit 454 967 1,184 1,500 1,895
Shares outstanding (mn) 33 33 331 331 331
Dividend per share (adj. for stock split) (INR) 0.5 0.6 0.6 0.8 1.0
Dividend payout (%) 36 21 17 18 17

Common size metrics- as % of net revenues

Year to March FY05 FY06 FY07UA FY08E FY09E
Operating expenses 96.8 94.6 95.5 94.8 94.6
Depreciation 0.8 0.6 0.5 0.5 0.4
Interest expenditure 0.3 0.1 0.3 0.2 0.1
EBITDA margins 3.2 5.4 4.5 5.2 5.4
Net profit margins (adjusted) 3.3 5.2 4.9 4.8 4.9

Growth metrics (%)

Year to March FY05 FY06 FY07UA FY08E FY09E
Revenues 8.9 33.6 29.5 29.4 25.0
EBITDA 35.8 126.4 8.0 47.6 31.0
PBT 42.3 124.0 31.7 35.5 26.4
Net profit (adjusted) 55.7 113.1 22.5 26.6 26.4
EPS 55.7 113.0 22.5 26.6 26.4

Cash flow statement (INR mn)

Year to March FY05 FY06 FY07E FY08E FY09E
Net profit 504 705 1861 1500 1895
Add: Depreciation 105 111 123 141 167
Add: Deferred tax 24 (52) 0 0 0
Gross cash flow 633 764 1984 1641 2062
Less: Dividends 165 227 218 291 364
Less: Changes in W. C. 17 (221) 813 129 933
Operating cash flow 450 758 952 1221 765
Less: Change in investments 8 148 (305) 0 0
Less: Capex 11 322 500 650 650
Free cash flow 432 289 757 571 115

5
Voltas

Balance sheet (INR mn)

As on 31st March FY05 FY06 FY07E FY08E FY09E
Equity capital 331 331 331 331 331
Reserves & surplus 1,605 2,081 3,585 4,794 6,325
Shareholders funds 1,935 2,412 3,916 5,124 6,656
Secured loans 745 470 452 452 452
Unsecured loans 319 250 250 - -
Borrowings 1,064 720 702 452 452
Sources of funds 2,999 3,132 4,617 5,577 7,108
Gross block 2,416 2,698 3,307 3,957 4,607
Depreciation 1,662 1,459 1,582 1,723 1,890
Net block 755 1,238 1,726 2,234 2,718
Capital work in progress 70 110 0 0 0
Total fixed assets 824 1,348 1,726 2,234 2,718
Investments 462 610 305 305 305
Inventories 2,400 2,992 3,806 5,170 6,788
Sundry debtors 3,613 3,977 4,403 5,697 7,122
Cash and equivalents 1,457 1,086 1,686 2,008 2,123
Loans and advances 1,174 1,282 1,408 1,278 1,589
Total current assets 8,644 9,337 11,302 14,153 17,622
Sundry creditors and others 6,175 7,297 7,529 9,366 11,289
Provisions 972 1,133 1,454 2,017 2,515
Total CL & provisions 7,147 8,431 8,983 11,383 13,804
Net current assets 1,497 906 2,320 2,770 3,818
Net deferred tax 215 267 267 267 267
Uses of funds 2,999 3,132 4,617 5,577 7,108
BV per share post stock split 6 7 12 15 20

Ratios
Year to March FY05 FY06 FY07E FY08E FY09E
ROAE (%) 23.7 44.5 37.4 33.2 32.2
ROACE (%) 11.9 29.2 24.9 28.7 30.6
Current ratio (x) 1.2 1.1 1.3 1.2 1.3
Debtors (days) 95 78 67 67 67
Fixed assets t/o (x) 16.8 13.7 13.9 13.9 14.3
Average working capital turnover (x) 11.4 15.4 14.9 12.2 11.8
Average capital employed turnover (x) 4.8 6.0 6.2 6.1 6.1
Gross debt/equity (x) 0.5 0.3 0.2 0.1 0.1

Valuations parameters
Year to March FY05 FY06 FY07E FY08E FY09E
Adjusted EPS- stock split (INR) 1.4 2.9 3.6 4.5 5.7
Y-o-Y growth (%) 55.7 113.0 22.5 26.6 26.4
CEPS (INR) 1.7 3.3 4.0 5.0 6.2
PE (x) 67.8 31.8 26.0 20.5 16.2
Price/BV(x) 15.9 12.8 7.9 6.0 4.6
EV/Sales (x) 2.1 1.6 1.2 0.9 0.8
EV/EBITDA (x) 66.3 29.3 27.1 18.3 14.0

6
Voltas
Edelweiss Securities
th
14 Floor, Express Towers,
Nariman Point, Mumbai – 400 021
Board: (91-22) 2286 4400
Email: research@edelcap.com

Naresh Kothari – 2286 4246 Head, Institutional Equities

Vikas Khemani – 2286 4206 Head, Institutional Equities

INDIA RESEARCH SECTOR INSTITUTIONAL SALES

Shriram Iyer - 2286 4256 Head – Research Nischal Maheshwari - 2286 4205

Gautam Roy - 2286 4305 Airlines, Textile Rajesh Makharia - 2286 4202

Ashutosh Goel - 2286 4287 Automobiles, Auto Components Shabnam Kapur - 2286 4394

Vishal Goyal, CFA - 2286 4370 Banking & Finance Balakumar V - (044) 4263 8283

Revathi Myneni - 2286 4413 Cement Ashish Agrawal - 2286 4301

Sumeet Budhraja - 2286 4430 FMCG Nikhil Garg - 2286 4282

Harish Sharma - 2286 4307 Infrastructure, Auto Components, Mid Caps Swati Khemani - 2286 4266

Priyanko Panja - 2286 4300 Infrastructure, Engineering, Telecom Neha Shahra - 2286 4276

Hitesh Zaveri - 2286 4424 Information Technology Priya Ramchandran - 2286 4389

Parul Inamdar - 2286 4355 Information Technology Anubhav Kanodia - 2286 4361

Priyank Singhal - 2286 4302 Media, Retail Tushar Mahajan - 2286 4439

Prakash Kapadia - 4097 9843 Mid Caps Harsh Biyani - 2286 4419

Niraj Mansingka - 2286 4304 Oil & Gas, Petrochemicals Nirmal Ajmera - 2286 4258

Nimish Mehta - 2286 4295 Pharmaceuticals, Agrochemicals Ankit Doshi - 2286 4671

Manika Premsingh - 4019 4847 Economist Dipesh Shah - 2286 4434

Sunil Jain - 2286 4308 Alternative & Quantitative Vikrant Oak - 4019 4712

Yogesh Radke - 2286 4328 Alternative & Quantitative Abhijit Chakraborty - 4019 4823

Email addresses: firstname.lastname@edelcap.com e.g. naresh.kothari@edelcap.com unless otherwise specified

RATING INTERPRETATION
Buy Expected to appreciate more than 20% over a 12-month period Reduce Expected to depreciate up to 10% over a 12-month period

Accumulate Expected to appreciate up to 20% over a 12-month period Sell Expected to depreciate more than 10% over a 12-month period

Trading Buy Expected to appreciate more than 10% over a 45-day period Trading Sell Expected to depreciate more than 10% over a 45-day period

This document has been prepared by Edelweiss Securities Private Limited (Edelweiss). Edelweiss and its holding company and associate companies are a full service, integrated investment
banking, portfolio management and brokerage group. Our research analysts and sales persons provide important input into our investment banking activities. This document does not
constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction.. The information contained herein is from publicly available
data or other sources believed to be reliable, but we do not represent that it is accurate or complete and it should not be relied on as such. Edelweiss or any of its affiliates shall not be in any
way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provided for assistance only and
is not intended to be and must not alone be taken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this
document should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including
the merits and risks involved), and should consult his own advisors to determine the merits and risks of such investment. The investment discussed or views expressed may not be suitable for
all investors. We and our affiliates, officers, directors, and employees may: (a) from time to time, have long or short positions in, and buy or sell the securities thereof, of company (ies)
mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as advisor or lender / borrower to such company (ies)
or have other potential conflict of interest with respect to any recommendation and related information and opinions. This information is strictly confidential and is being furnished to you solely
for your information. This information should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for
any purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction,
where such distribution, publication, availability or use would be contrary to law, regulation or which would subject Edelweiss and affiliates to any registration or licensing requirements within
such jurisdiction. The distribution of this document in certain jurisdictions may be restricted by law, and persons in whose possession this document comes, should inform themselves about
and observe, any such restrictions. The information given in this document is as of the date of this report and there can be no assurance that future results or events will be consistent with
this information. This information is subject to change without any prior notice. Edelweiss reserves the right to make modifications and alterations to this statement as may be required from
time to time. However, Edelweiss is under no obligation to update or keep the information current. Nevertheless, Edelweiss is committed to providing independent and transparent
recommendation to its client and would be happy to provide any information in response to specific client queries. Neither Edelweiss nor any of its affiliates, directors, employees, agents or
representatives shall be liable for any damages whether direct, indirect, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the
information. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their
securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. Analyst holding in stock: no.

7 Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.