Voltas May 25, 2015 Kunal Sheth kunalsheth@plindia.com +91‐22‐66322257 Samir Bendre samirbendre@plindia.com +91‐22‐66322256 Rating Price Target Price Implied Upside Sensex Nifty Accumulate Rs325 Rs330 1.5% 27,644 8,370 Voltas reported PAT at Rs1.19bn( up 18% YoY) in Q4FY15 which was ahead of our and street estimate largely on account of strong performance in the Unitary Cooling Products (UCP) segment, both on sales and margin front. Voltas retained its leadership position in Room AC with 21% market share despite intense competition. In the MEP segment, companies continue to bid for good quality orders with reasonable margins and commercial terms. We believe that Voltas is the best proxy to play the growth in the AC industry. Improving margin in the MEP segment should also support earnings. We expect stock to deliver earnings CAGR of 24% over FY14‐17E. 
Strong beat on PAT led by healthy margin in UCP segment: Voltas reported sales at Rs14.9bn, up 2% YoY (PLe: Rs14.3bn), led by strong growth in the UCP segment. EBITDA was up by 35.7% YoY at Rs1.43bn (PLe: Rs1.1bn), while EBITDA margins were up by 240bps YoY and up to 9.6% (PLe: 7.9%), led by improved margin in both UCP and Engineering products & services. Reported PAT was up 18.2% YoY to Rs1.19bn (PLe: Rs890m). 
AC business performance continues to be robust: Voltas continued to report strong performance in the AC business despite intense competition and subdued customer sentiments, Voltas sustained its No.1 market position in the UCP business for the second year in row with 21% market share. Amid concerns on weak volume , company reported strong sales growth in the UCP segment (up 22% YoY) and also improved margins up 100 bps YoY to 17.8% due to improving margin realization, better product mix and savings in costs . We note that smart branding, increasing reach and new product launches have helped Voltas build competitive advantage which should help defend its leadership position. Contd...2 (Prices as on May 25, 2015) Trading data Market Cap. (Rs bn) Shares o/s (m) 3M Avg. Daily value (Rs m) Major shareholders Promoters Foreign Domestic Inst. Public & Other Stock Performance (%) 1M 6M Absolute 16.1 20.0 Relative 15.3 22.5 How we differ from Consensus EPS (Rs) PL Cons. 2016 11.4 11.8 2017 14.2 14.5 107.4 330.7 1442 30.30% 21.61% 26.95% 21.14% 12M 72.2 60.2 % Diff. ‐3.5 ‐2.3 Price Performance (RIC: VOLT.BO, BB: VOLT IN) Key financials (Y/e March) Revenues (Rs m) Growth (%) EBITDA (Rs m) PAT (Rs m) EPS (Rs) Growth (%) Net DPS (Rs) 2014
52,660
(4.8)
2,656
2,243
6.8
(1.8)
1.9
2015 51,831 (1.6) 4,100 3,398 10.3 51.5 2.9 2016E
56,877
9.7
4,713
3,763
11.4
10.7
2.8
2017E
65,710
15.5
5,913
4,687
14.2
24.5
3.5
2014
5.0
12.9
11.9
2.0
40.4
47.9
5.9
0.6
2015 7.9 17.1 16.2 2.0 25.9 31.6 5.0 0.9 2016E
8.3
16.9
16.2
1.9
22.5
28.6
4.6
0.9
2017E
9.0
18.9
17.7
1.6
17.5
22.9
4.1
1.1
Source: Bloomberg May‐15
Mar‐15
Jan‐15
Nov‐14
Sep‐14
Jul‐14
May‐14
(Rs)
350
300
250
200
150
100
50
0
Profitability & Valuation EBITDA margin (%) RoE (%) RoCE (%) EV / sales (x) EV / EBITDA (x) PE (x) P / BV (x) Net dividend yield (%) Source: Company Data; PL Research Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report Q4FY15 Result Update AC business continues to drive performance! Exhibit 1:
Voltas 
MEP business‐ focus on profitability continues: MEP segment registered profits for the fourth consecutive quarter against losses until FY14. Order book for the MEP segment was up 8% YoY to Rs39bn. While there has been some growth in the number of new project enquiries in international markets, the commercial conditions in the projects continue to be stringent, particularly in Qatar. In the domestic markets, the enquiry levels continue to be subdued and competition continues to be high. The company continues to focus on profitable orders and cautious in taking orders with lower margins. 
Outlook and Valuation: The stock is trading at 22.9x FY17E earnings. We remain positive on Voltas over medium/long, given the improving margin profile of fresh orders, strong consumer business franchisee, healthy balance sheet and cash flow. However, ~14% rally in last one month restricts near‐term upside. We recommend buying on dips in Voltas. Q4FY15 Result Overview (Rs m) Y/e March Q4FY15
Q4FY14
YoY gr. (%)
Q3FY15
FY15 FY14
YoY gr. (%)
Net Sales 14,900
14,628
1.9
9,511
51,831 52,660
(1.6)
10,320
10,870
(5.1)
6,380
35,975 38,543
(6.7)
69.3
74.3
67.1
69.4 73.2
1,518
1,307
16.2
1,442
5,899 5,947
15.2
11.4 11.3
16.7
1,115
5,857 5,515
11.7
11.3 10.5
Expenditure Raw Material % of Net Sales Personnel Cost % of Net Sales (0.8)
10.2
8.9
1,631
1,398
% of Net Sales 10.9
9.6
Total Expenditure 13,470
13,574
(0.8)
8,937
47,731 50,004
(4.5)
1,430
1,054
35.7
574
4,100 2,656
54.4
9.6
7.2
6.0
7.9 5.0
Other income 303
308
(1.6)
304
1,087 1,002
8.5
Depreciation 81
69
17.9
70
280 248
12.9
1,652
1,293
27.8
808
4,907 3,410
43.9
Others EBITDA Margin (%) EBIT Interest PBT Total Taxes ETR (%) 6.2
58
65
(9.9)
44
233 226
3.1
1,594
1,228
29.8
765
4,675 3,184
46.8
413
392
5.3
147
1,276 941
35.6
25.9
31.9
19.2
27.3 29.6
Adjusted PAT 1,180
836
41.2
629
3,381 2,454
37.8
Reported PAT 1,193
1,010
18.2
1,063
3,860 2,458
57.0
Source: Company Data, PL Research May 25, 2015 2
Exhibit 2:
Voltas Segmental Break‐up (Rs m) Y/e March Q4FY15
Q4FY14
YoY gr. (%)
Q3FY15
FY15 FY14
YoY gr. (%)
5,997
6,857
(12.5)
4,613
22,085 26,924
(18.0)
40.4
47.3
49.1
42.9 51.3
811
988
(17.9)
810
3,601 4,482
8.6
7.0 8.5
19.3
3,836
25,105 20,524
40.8
48.8 39.1
9,391
51,452 52,451
Revenue Electro‐mechanical projects & services % of total Revenue Engineering products & services % of total Revenue Unitary Cooling products % of total Revenue Total 5.5
6.8
7,807
6,543
52.6
45.1
14,841
14,504
2.3
(19.7)
22.3
(1.9)
EBIT Margin (%) Electro‐mechanical projects & services 0.7
(2.0)
2.0
1.0 (1.5)
Engineering products & services 35.4
30.6
29.0
30.0 27.8
Unitary Cooling products 17.8
16.8
13.3
13.9 12.3
Total 11.8
8.7
9.0
9.5 6.4
Source: Company Data, PL Research May 25, 2015 3
Income Statement (Rs m) Y/e March 2014 Net Revenue Raw Material Expenses Gross Profit Employee Cost Other Expenses EBITDA Depr. & Amortization Net Interest Other Income Profit before Tax Total Tax Profit after Tax Ex‐Od items / Min. Int. Adj. PAT Avg. Shares O/S (m) EPS (Rs.) 52,660 38,543 14,118 5,947 5,515 2,656 248 226 1,002 3,184 941 2,243 — 2,243 330.7 6.8 2015 2016E
2017E
51,831 35,975 15,856 5,899 5,857 4,100 280 233 1,087 4,675 1,276 3,398 — 3,398 330.7 10.3 56,877
40,951
15,925
7,565
3,648
4,713
442
258
1,213
5,226
1,463
3,763
—
3,763
330.7
11.4
65,710
47,311
18,399
8,739
3,746
5,913
466
258
1,320
6,509
1,823
4,687
—
4,687
330.7
14.2
Voltas Balance Sheet Abstract (Rs m) Y/e March 2014 2015 2016E
2017E
18,317 2,629 138 21,084 2,208 799 7,320 10,499 2,818 34,157 26,476 259 21,084 21,332 1,217 161 22,709 2,227 798 10,939 8,378 2,516 32,328 26,466 367 22,709 23,116
2,575
177
25,868
2,085
826
10,939
11,651
4,013
32,677
25,038
367
25,868
26,415
2,575
194
29,184
1,919
826
10,939
15,133
6,564
37,662
29,093
367
29,184
Quarterly Financials (Rs m) Y/e March Q1FY15 Q2FY15 Q3FY15
Q4FY15
9,847 777 7.9 69 44 188 853 351 502 502 9,511
574
6.0
70
44
304
765
147
1,063
1,063
14,900
1,430
9.6
81
58
303
1,594
413
1,181
1,181
Shareholder's Funds Total Debt Other Liabilities Total Liabilities Net Fixed Assets Goodwill Investments Net Current Assets Cash & Equivalents Other Current Assets Current Liabilities Other Assets Total Assets Cash Flow Abstract (Rs m) Y/e March C/F from Operations C/F from Investing C/F from Financing Inc. / Dec. in Cash Opening Cash Closing Cash FCFF FCFE 2014 2015 2016E
2017E
3,230 (3,547) (928) (1,245) 3,832 2,588 2,705 2,721 5,731 (3,919) (2,774) (962) 2,588 1,626 5,198 3,786 2,686
(300)
—
2,387
1,626
4,013
2,129
3,487
7,233
(300)
(1,628)
5,305
4,013
6,564
3,922
3,922
2014 2015 2016E
2017E
(4.8) 11.6 (1.8) (1.8) (1.6) 54.4 51.5 51.5 9.7
14.9
10.7
10.7
15.5
25.5
24.5
24.5
8.3
6.6
16.2
16.9
9.0
7.1
17.7
18.9
(0.1)
(6)
(0.2)
(6)
28.6
4.6
22.5
1.9
22.9
4.1
17.5
1.6
28.0
23.2
8.0
92.7
28.0
20.3
8.0
83.7
Key Financial Metrics Y/e March Growth Revenue (%) EBITDA (%) PAT (%) EPS (%) Profitability EBITDA Margin (%) PAT Margin (%) RoCE (%) RoE (%) Balance Sheet Net Debt : Equity Net Wrkng Cap. (days) Valuation PER (x) P / B (x) EV / EBITDA (x) EV / Sales (x) Earnings Quality 5.0 4.3 11.9 12.9 7.9 6.6 16.2 17.1 — 24 (0.1) 26 47.9 5.9 40.4 2.0 31.6 5.0 25.9 2.0 Eff. Tax Rate 29.6 Other Inc / PBT 31.5 Eff. Depr. Rate (%) 5.0 FCFE / PAT 121.3 Source: Company Data, PL Research. 27.3 23.3 5.4 111.4 Net Revenue 17,573 EBITDA 1,319 % of revenue 7.5 Depr. & Amortization 61 Net Interest 87 Other Income 292 Profit before Tax 1,463 Total Tax 365 Profit after Tax 1,098 Adj. PAT 1,098 Source: Company Data, PL Research. May 25, 2015 4
Voltas Prabhudas Lilladher Pvt. Ltd. 3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai‐400 018, India Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209 Rating Distribution of Research Coverage % of Total Coverage
50%
PL’s Recommendation Nomenclature 45.3%
37.9%
40%
30%
16.8%
20%
10%
0.0%
0%
BUY
Accumulate
Reduce
BUY : Over 15% Outperformance to Sensex over 12‐months Accumulate : Outperformance to Sensex over 12‐months Reduce : Underperformance to Sensex over 12‐months Sell : Over 15% underperformance to Sensex over 12‐months Trading Buy : Over 10% absolute upside in 1‐month Trading Sell : Over 10% absolute decline in 1‐month Not Rated (NR) : No specific call on the stock Under Review (UR) : Sell
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