Voltas reported PAT at Rs1.4bn (up 26% YoY) in Q4FY16, ahead of our/street estimate, driven by strong execution and margin expansion in the MEP segment (led by few project reaching profit‐booking stage). Outlook in the MEP segment in international markets continue to be volatile and in domestic market, order pipeline is largely from government projects with private capex still missing. They continue to remain focused on picking‐up orders with right margin profile and commercial terms. In the UCP segment, early onset of summer and warm weather has led to a good start to season and market is expected to see healthy growth for FY17. However, competitive intensity in industry continues to remain high. Voltas expects to maintain margin in 12‐13% range in the UCP segment. We remain positive on Voltas over medium/long, given the improving margin profile of fresh orders, strong consumer business franchise, healthy balance sheet and cash flow. We expect stock to deliver earnings CAGR of 18% over FY16‐18E. Maintain ‘Accumulate’.
- Beat led by MEP segment: Voltas reported sales at Rs18.8bn, up 27% YoY (PLe: Rs15.9bn). Electro‐mechanical projects and Services/Engineering products & Services/Unitary Cooling products grew by 36%/14%/10% YoY, respectively, while EBITDA margins were up 20bps YoY at 9.8%, led by strong recovery in MEP margins. Other income was up 57% YoY to Rs478m. Adj. PAT was up 26% YoY to Rs1.4m (PLe: Rs1.1bn).
- MEP business – Strong execution and margins:MEP revenue was up 36% YoY due to pick‐up in execution of new projects in international markets (mainly Qatar) and segment reported EBIT margin of 3.5%, up 270bps YoY due to few projects reaching margin recognition stage in the current quarter. Order book for the MEP segment was down 11% YoY to Rs39bn. Order inflow for the quarter stood at Rs9.6bn, up 80% YoY. On the domestic front, while there has been a sporadic inflow of positive data points & announcements, private sector, especially in the manufacturing space, continues to adopt a conservative ‘wait & watch’ strategy. Accordingly, it has strategically focused on the industrial sector and Government orders. In International markets, the environment continues to be challenging in the Middle East. The industry also remains exposed to the elements of tight liquidity conditions led by oil prices, hindering the ability/willingness to pay. While dearth of experienced MEP contractors (esp. Qatar) with adequate financial standing has resulted in an increase in enquiry levels for Voltas, the company continues to be particularly conscious about threshold margins and inherent risks associated with new order booking. Voltas remains confident of reaching decent profitability in medium term (4‐5% EBIT).
- UCP‐ good start to season: Revenue for UCP segment was up 10% YoY. Early onset of summer and warmer weather, especially in Southern India, helped sales. EBIT margin was down 160bps YoY to 16.2%. Weakening of the Rupee, coupled with higher spending on sales promotion, has put some pressure on margins, while highlighting that competition intensity in industry remained high. Despite this onslaught, Voltas was successful in protecting its market leadership position (21% MBO market share as on March’16). First year of Air Coolers launch ended on an encouraging note with satisfactory progress on expanding the product range and dealership network. Commercial Refrigeration business continues to strengthen its offerings and now caters to the needs of a constantly growing dairy, chocolate & ice‐cream segment. Despite the competitive intensity, Voltas expects to maintain EBIT margin in 12‐13% range for FY17.
- Outlook and Valuation: The stock is trading at 27x FY17E earnings. We have increased our estimate by ~7% for FY17 & FY18 to factor in strong execution/margins and inflows in the MEP segment and better margin guidance in the UCP segment. We remain positive on Voltas over medium/long, given improving margin profile of fresh orders, strong consumer business franchisee, healthy balance sheet and cash flow. We expect stock to deliver earnings CAGR of 18% over FY16‐18E. Maintain ‘Accumulate with revised PT of Rs343 (previous Rs310).
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