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Sharp Margin Contraction in Key Segment
Voltas (VOLT) has reported a disappointing set of numbers for 4QFY19. While its revenue grew by 1% YoY to Rs20.6bn (vs. our estimate of Rs23bn), adjusted PAT declined by 28% YoY to Rs1.42bn. While revenue from Electro Mechanical Projects (EMP) segment grew by 12% YoY to Rs9.8bn, Unitary cooling segment’s revenue declined by 6% YoY to Rs10bn due to weak demand and higher channel inventory. Blended EBITDA declined by 43% YoY to Rs1.4bn, while EBITDA margin contracted by 540bps to 7% led by 680bps margin decline in unitary cooling segment owing to higher commodity prices and INR depreciation. EMP segment’s margin fell by 310bps YoY to 4.5% in 4Q FY19 Notably, the Company continued to maintain its leadership position in room AC segment with 23.9% market share in FY19 vs. 22.1% in FY18. We reiterate our BUY recommendation on the stock with an unrevised Target Price of Rs647 (from Rs687 earlier), valuing it at 30x of FY21E earnings.
EMP Segment Drives Revenue
VOLT’s revenue grew by a muted 1% YoY to Rs20.6bn. While revenue from Electro Mechanical Projects (EMP) segment grew by 12% YoY to Rs9.8bn, Unitary cooling segment’s revenue declined by 6% YoY to Rs10bnowing to weak demand and higher channel inventory. EMP segment is back on track in FY19 with 27% revenue growth and margin expansion of 120bps to 7.7%. Order inflow stood at Rs10.2bn in 4QFY19. Domestic (Rs3.9bn; down 36% YoY) and international (Rs6.3 bn; up 2% YoY). Domestic project business witnessed robust performance in FY19 with the major chunk of orders coming in from the electrification and infrastructure space.
Unitary Cooling Segment Drags EBITDA Margin
Blended EBITDA declined by 43% YoY to Rs1.4bn, while EBITDA margin contracted by 540bps YoY to 7% due to 680bps decline in margin of unitary cooling segment to 10.4% led by higher commodity prices and INR depreciation. Margin of project business fell by 310bps to 4.5%, while engineering products segment’s margin improved by 510bps to 34.9%. Higher interest cost (Rs106mn vs. Rs43mn in 4QFY18) and poor operating performance led to 28% YoY decline in adjusted PAT to Rs1.42bn. The Management is guided for a sustainable UCP margin of 11% against average margin of 13.8% over FY14-18. Higher competition restricted the price hike for Voltas, as the company maintains its leadership position with 23.9% market share in FY19 (vs. 22.1% in FY18). Voltas Beko JV has launched a basket of products, including 39 SKUs of refrigerators, 17 SKUs of washing machines.
Outlook & Valuation
Sustained market leadership in room AC segment and foray into other consumer durables segments continue to augur well for Voltas. At CMP, the stock trades at 30.6x of FY20E and 26.5x of FY21 earnings. We reiterate our BUY recommendation on the stock with a revised Target Price of Rs647 (from Rs687 earlier), valuing it at 30x of FY21E earnings.
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