1QFY2017 Result Update | Construction & Eng.

August 4, 2016

Voltas

BUY

CMP

`349

Performance Highlights

Target Price

`407

Quarterly highlights - Consolidated

Investment Period

12 Months

Y/E March (` cr)

1QFY17

1QFY16

% chg (yoy)

Gross Sales

1,845

1,561

18.2

Stock Info

EBITDA

189

128

47.6

Sector

Construction & Eng.

Market Cap (` cr)

11,531

Adj. PAT

157

103

52.8

Source: Company, Angel Research;

Net debt (` cr)

Beta

1.4

Voltas reported a strong set of numbers for 1QFY2017. Top-line at `1,845cr is

52 Week High / Low

376/211

higher than our expectation and up 18.2% yoy, led by strong UCP segment sales.

Avg. Daily Volume

1,911,833

UCP segment impressed us with 28.9% yoy increase in revenue to `1,196cr (65%

Face Value (`)

of overall 1QFY2017 revenues). EBITDA margins for the quarter expanded by

BSE Sensex

27,714

204bps yoy at 10.3%. With most of the legacy projects nearing completion, the

Nifty

8,551

EMP segment reported 1.9% EBIT margin, against 1.5% in corresponding quarter

Reuters Code

VOLT.BO

of previous year. Better than expected UCP segment sales coupled with higher

Bloomberg Code

VOLT@IB

other income helped the company report a PAT of `158cr, up 53.7% on yoy basis.

On adjusting for ~`1cr of exceptional item, Adj. PAT grew 52.8% yoy to `157cr.

Shareholding Pattern (%)

Another positive is strong order inflows of `1,083cr for the quarter. Order Book

Promoters

30.3

for EMP segment as of 1QFY2017-end stands at `4,417cr (order book [OB] to

MF / Banks / Indian Fls

28.1

LTM ratio of 1.6x).

FII / NRIs / OCBs

20.5

Indian Public / Others

21.1

Valuation: We expect Voltas to report a strong 13.3% top-line and

18.1%

bottom-line CAGR during FY2016-18E, respectively. On considering the case for

improvement in all of its business segments’ performances, we expect improved

Abs. (%)

3m 1yr 3yr

profitability and better investment return ratios for the company, going forward.

Sensex

9.7

(1.8)

44.5

We assign Voltas 25.0x PE multiple to our FY2018E EPS estimate of `16.3/share

Voltas

20.3

7.3

365.9

and arrive at price target of `407. This reflects 17% upside potential from the

stock’s current market price. Accordingly, we continue to maintain BUY rating on

the stock.

3-Year Daily Price Chart

400

350

Key Financials (Consolidated)

300

Y/E March (` cr)

FY13

FY14

FY15

FY16

FY17E

FY18E

250

Net Sales

5,531

5,266

5,183

5,857

6,511

7,514

200

% chg

6.7

(4.8)

(1.6)

13.0

11.2

15.4

150

100

Net Profit

208

245

384

386

427

538

% chg

28.2

18.1

56.6

0.3

10.8

26.0

EBITDA (%)

4.4

5.0

7.9

7.5

7.9

8.7

EPS (`)

6.3

7.4

11.6

11.7

12.9

16.3

P/E (x)

55.5

47.0

30.0

29.9

27.0

21.4

Source: Company, Angel Research

P/BV (x)

7.1

6.3

5.5

4.8

4.3

3.7

Adj. RoE (%)

12.8

14.2

19.6

17.1

16.7

18.5

RoCE (%)

19.3

22.4

36.4

42.2

46.4

52.7

Yellapu Santosh

EV/Sales (x)

2.1

2.2

2.0

1.8

1.5

022 - 3935 7800 Ext: 6811

EV/EBITDA (x)

46.9

43.3

27.8

26.5

22.3

17.6

[email protected]

Source: Company, Angel Research; Note: CMP as of August 3, 2016; It needs to be noted

that yoy growth for FY2017E is not comparable as FY2016 continues to be reported under

Indian GAAP.

Please refer to important disclosures at the end of this report

Voltas | 1QFY2017 Result Update

Exhibit 1: Quarterly Performance (Consolidated)

Particulars (` cr)

1QFY17

1QFY16

% chg (yoy)

Gross Sales

1,845

1,561

18.2

Total Expenditure

1,656

1,433

15.5

Excise Duty

(11.5)

Cost of materials consumed

994

934

6.4

Purchase of stock-in-trade

323

192

68.8

Employee benefits Expense

163

149

9.2

Other Expenses

171

153

11.9

EBITDA

189

128

47.6

EBIDTA %

10.3

8.2

Depreciation

11.0

EBIT

183

122

49.3

Interest and Financial Charges

44.0

Other Income

65.2

PBT before Exceptional Items

224

147

52.5

Exceptional Items

PBT

225

147

53.1

Tax

% of PBT

28.9

30.8

PAT from Ord. activities

160

102

57.1

Share of profit/ (loss) of associate

(0)

nmf

Minority interest in (profit)/ loss

(2)

(1)

PAT

158

103

53.7

Other Comprehensive Income

(5)

nmf

Total Comprehensive Income

184

88.3

Adj. PAT

157

103

52.8

Adj. PAT %

8.5

6.6

Dil. EPS

4.76

3.10

53.5

Source: Company, Angel Research; Note: nmf- Not meaningful;*Reported as per Ind AS, FY2016

numbers & other remaining quarters continue to be reported as per Indian GAAP; It needs to be

noted that yoy growth for FY2017E is not comparable as FY2016 continues to be reported under

Indian GAAP

Strong UCP segment execution leads to strong 1Q sales

Voltas reported better than expected top-line numbers mainly driven by strong

execution across their EMP & and sales across their UCP segment. Voltas reported

18.2% yoy gross sales growth to `1,845cr.

UCP segment impressed us with 28.9% yoy increase in gross sales to `1,196cr

(65% of 1QFY2017 revenues). UCP segment benefitted from strong AC sales as

well as strong traction seen across their Air Cooler sales. Voltas sold ~50,000 Air

Coolers in 1FY2017 (vs. ~70,000 units in FY2016). Voltas has been able to retain

its numero-uno position commanding ~22% share in Multi-brand outlet sales in

1QFY2017.

Also, EMP and EPS segments reported better than expected gross sales numbers at

`580cr and `69cr, respectively.

August 4, 2016

Voltas | 1QFY2017 Result Update

EBITDA margin expands yoy to 10.3%

Higher than expected contribution from UCP segment led to surprise on EBITDA

margin front at 10.3% for 1QFY2017. Voltas reported 204bps yoy EBITDA margin

expansion to 10.3%. The company reported 6.4% yoy increase in raw material

costs, lower than the yoy gross sales growth, thereby contributing to the EBITDA

margin expansion.

With most of the EMP segment legacy projects having completed, this segment

reported 1.9% EBIT margin, against 1.5% margin in 1QFY2016. Despites strong

AC sales, 68.8% yoy increase in purchase of stock-in-trade, led to restricted UCP

segment EBIT margin expansion to 14.9% in 1QFY2017 (vs 12.2% in 1QFY2016).

Adj.PAT margin expands to 8.5%

Better than expected sales at UCP segment, coupled with higher other income

helped the company report Core business PAT of `158cr, which is up 53.7% on

yoy basis. Reported PAT numbers also benefitted on account of higher other

income, which increased 65.2% yoy to `46cr (reflecting impact of increased

current investments and cash balance). On adjusting for ~`1cr of exceptional

item, Adj. PAT grew 52.8% yoy to `157cr.

On considering impact of comprehensive other income (includes `26cr of gain on

revaluation of longer term equity investments) total comprehensive income grew

88.3% yoy to `184cr.

Order Book grows 12.9% yoy to `4,417cr

Voltas reported 12.9% yoy increase in its Order book to `4,417cr (OB to LTM ratio

of 1.6x), reflecting `1,083cr of Order wins during 1QFY2017. Amongst the

projects won during the quarter, key ones include (1) `530cr order for MEP works

of a Mall in Qatar, and (2) `201cr order for MEP works of a Commercial Building

in Qatar.

August 4, 2016

Voltas | 1QFY2017 Result Update

Valuation

At the current market price of `349, the stock is trading at FY2017E and FY2018E

P/E of 27.0x and 21.4x, respectively. With 7^th pay commission to be implemented,

inflation under control, rate cut cycle expected to continue, coupled with Voltas’

strong positioning in Air Conditioning market, we believe that the company should

continue to report strong growth in UCP segment, going forward.

In FY2016, UCP segment contributed ~67% of consol. EBIT. Also, completion of

low margin EMP projects and increased contribution of high margin projects

indicate that EBIT margins of EMP segment would improve from 1.4% in FY2016 to

5.0% in FY2018E. On the whole, we expect Voltas to report a top-line and

bottom-line CAGR of 13.3% and 18.1% during FY2016-18E, respectively. Our

growth assumption captures (a) pick-up in international award activity, which

should lead to top-line growth as well as EMP segment EBIT margin expansion,

and (b) continued growth in domestic AC sales, with Voltas being able to retain its

‘numero uno’ status. Noticeably in the last few years, the EBIT mix of Voltas has

shifted from being heavily dependent on the EMP segment to a now dominant

share of the UCP segment. Contribution of UCP segment in consol. EBIT has

increased from 32% in FY2011 to 67% in FY2016. We expect the same to be over

61% levels during FY2016-18E. Considering the shift in the consol. EBIT mix,

positive cues, and case for improvement in the business segments’ performances,

we expect scope for improved profitability and better investment return ratios,

going forward. We assign Voltas 25.0x PE multiple to our FY2018E EPS estimate of

`16.3/share and arrive at a price target of `407. Given the upside from current

levels, we maintain Buy rating on the stock.

August 4, 2016

Voltas | 1QFY2017 Result Update

Investment Arguments

Growth in UCP segment to continue: Voltas has maintained 20%+ market share in

the domestic air-conditioning market despite stiff competition from MNC players.

Its ‘numero uno’ position is owing to its (1) wide distribution network (10,000-

11,000 touch-points), (2) wide portfolio of 65+ models, (3) strong post-sale

support (including 5-year warranty on compressor), and (4) strong advertising

focus with the company being among top 5 media spenders in the AC segment.

With economic indicators turning favorable, the company’s competitive positioning

should help the UCP segment report a 19.5% top-line and 16.6% EBIT CAGR,

respectively, during FY2016-18E.

Gradual recovery in the EMP business: Voltas’ EMP business was adversely affected

due to weak awarding environment, slow execution and cost over-runs. In the run-

up to the Qatar World Cup 2022 and Dubai Expo 2020, we expect international

awarding activity to gradually catch-up from FY2017E onwards. Surge in order

book should translate to uptick in execution (we expect 10.7% top-line CAGR

during FY2016-18E). With legacy projects almost completed and contribution of

high margin projects kicking-in, we expect the segment’s margins to expand from

1.4% in FY2016 to 5.0% in FY2018E.

Balance Sheet strength: Voltas pursues an asset light business model and in the

due course of business it resorts to outsourcing and strategic tie-ups, thereby

enabling it to control its operating costs and generate high profitability. As a result,

we expect Voltas to revert to it its earlier trend of higher RoEs. Given the asset light

business model, the company has been generating strong cash flows (it generated

`1,029cr of cash flows from business during FY2013-16). As of 4QFY2016-end,

Voltas is a debt free company (on net basis), with cash & liquid investment balance

of `863.8cr.

Risks & Concerns

 AC sales contributed ~50% of FY2016 consolidated revenues. Given that

Voltas is present only in the AC business across the entire Consumer Durables

space, loss of major market share could act as a risk to our estimates. Any

such development could lead to lower than expected EBIT contribution to the

consol. profits and our estimates.

 Revenues from the EPS segment are based on agreement for supplying Textile,

Mining & Construction equipment. Any termination of such agreements shall

impact our forecasted revenues for the segment.

 Most of the long term international projects are fixed price contracts and in the

due course of its business, Voltas also imports. Any adverse currency

fluctuations may impact the raw material pricing as well as margins.

 Cancellation of Qatar World Cup 2022 or Expo 2020 could affect our EMP

segment assumptions.

August 4, 2016

Voltas | 1QFY2017 Result Update

Profit & Loss Statement (Consolidated)

Y/E March (` cr)

FY13

FY14

FY15

FY16

FY17E FY18E

Net Sales

5,531

5,266

5,183

5,857

6,511

7,514

% Chg

6.7

(4.8)

(1.6)

13.0

11.2

15.4

Total Expenditure

5,287

5,000

4,773

5,421

5,995

6,859

Cost of RM Consumed

4,167

3,854

3,597

4,126

4,568

5,242

Employee benefits Expense

633

595

590

670

746

845

Other Expenses

487

551

586

625

681

771

EBITDA

244

266

410

437

516

655

% Chg

(27.5)

8.9

54.4

6.6

18.1

26.9

EBIDTA %

4.4

5.0

7.9

7.5

7.9

8.7

Depreciation

EBIT

216

241

382

409

485

622

% Chg

(28.6)

11.4

58.7

7.1

18.5

28.3

Interest and Fin. Charges

Other Income

100

109

118

131

142

PBT

268

318

467

511

600

755

Exceptional Items

Prior Period Adjustments

Tax

128

160

174

219

% of PBT

27.2

29.6

27.3

31.3

29.0

PAT from ordinary activities

207

246

386

392

426

536

Share of Profit / (loss of

Associate) & Minority Interest

(0)

(2)

(7)

in (profit)/ loss

PAT

208

245

384

386

427

538

% Chg

28.2

18.1

56.6

0.3

10.8

26.0

PAT %

3.8

4.7

7.4

6.6

7.2

Diluted EPS

6.3

7.4

11.6

11.7

12.9

16.3

% Chg

28.2

18.1

56.6

0.3

10.8

26.0

Note: 1QFY2016 & 1QFY2017 numbers are reported as per Ind AS, FY2016 numbers & other

quarters continue to be reported as per Indian GAAP.

August 4, 2016

Voltas | 1QFY2017 Result Update

Balance Sheet (Consolidated)

Y/E March (` cr)

FY13

FY14

FY15

FY16

FY17E

FY18E

Sources of Funds

Equity Capital

Reserves & Surplus Total

1,593

1,786

2,069

2,362

2,675

3,064

Networth

1,626

1,819

2,102

2,395

2,708

3,097

Total Debt

261

263

122

260

155

100

Minority Interest

Long-term Liabilities &

120

122

130

156

166

180

Provision

Total Liabilities

2,019

2,218

2,370

2,837

3,055

3,402

Application of Funds

Gross Block

406

459

455

508

534

560

Accumulated

195

251

266

294

325

358

Depreciation

Net Block

211

209

189

215

209

202

Capital WIP

Goodwill

Investments

407

732

1,094

1,526

1,609

1,844

Deferred Tax Assets

Inventories

978

901

867

893

1,013

1,190

Sundry Debtors

1,362

1,335

1,339

1,307

1,538

1,765

Cash and Bank Balance

350

282

252

197

186

131

Loans & Advances &

1,041

1,027

922

1,167

1,174

1,338

Oth. Current Assets

Current Liabilities

2,548

2,527

2,519

2,762

2,969

3,375

Net Current Assets

1,183

1,018

861

802

942

1,048

Other Assets

104

152

105

162

165

176

Total Assets

2,019

2,218

2,370

2,837

3,055

3,402

Note: 1QFY2016 & 1QFY2017 numbers are reported as per Ind AS, FY2016 numbers & other

quarters continue to be reported as per Indian GAAP.

August 4, 2016

Voltas | 1QFY2017 Result Update

Cash Flow Statement (Consolidated)

Y/E March (` cr)

FY13

FY14

FY15

FY16

FY17E FY18E

Profit before tax

243

257

434

511

600

755

Depreciation

Other Adjustments

(147)

(40)

(248)

(75)

(83)

Change in Working Capital

164

(26)

(144)

(159)

Interest & Fin. Charges (net)

Direct taxes paid

(92)

(74)

(80)

(160)

(174)

(219)

Cash Flow from Operations

334

221

411

249

332

(Inc)/ Dec in Fixed Assets

(20)

210

(57)

(23)

(27)

(Inc)/ Dec in Invest. & Int. recd.

(273)

(269)

(432)

(3)

(145)

Cash Flow from Investing

(292)

(59)

(489)

(26)

(173)

Inc./ (Dec.) in Borrowings

(19)

(140)

138

(105)

(55)

Issue/ (Buy Back) of Equity

Dividend Paid (Incl. Tax)

(61)

(57)

(64)

(92)

(114)

(150)

Finance Cost

(26)

(17)

(16)

(15)

(9)

Cash Flow from Financing

(53)

(93)

(221)

(234)

(214)

Inc./(Dec.) in Cash

(51)

(59)

(47)

(11)

(55)

Opening Cash balances

200

255

203

144

Closing Cash balances

255

203

144

Note: 1QFY2016 & 1QFY2017 numbers are reported as per Ind AS, FY2016 numbers & other

quarters continue to be reported as per Indian GAAP.

August 4, 2016

Voltas | 1QFY2017 Result Update

Key Ratios

Y/E March

FY13

FY14

FY15

FY16

FY17E FY18E

Valuation Ratio (x)

P/E (on FDEPS)

55.5

47.0

30.0

29.9

27.0

21.4

P/CEPS

48.9

42.7

28.0

27.9

25.1

20.2

Dividend yield (%)

0.5%

0.6%

0.7%

0.9%

1.1%

EV/Sales

2.1

2.2

2.0

1.8

1.5

EV/EBITDA

46.9

43.3

27.8

26.5

22.3

17.6

EV / Total Assets

5.7

5.2

4.8

4.1

3.8

3.4

Per Share Data (`)

EPS (Diluted)

6.3

7.4

11.6

11.7

12.9

16.3

Cash EPS

7.1

8.2

12.5

13.9

17.3

DPS

1.9

2.3

2.4

3.0

3.9

Book Value

49.1

55.0

63.5

72.4

81.9

93.6

Returns (%)

RoCE (Pre-tax)

19.3

22.4

36.4

42.2

46.4

52.7

Angel RoIC (Pre-tax)

16.2

16.4

22.1

19.8

21.5

23.9

RoE

12.8

14.2

19.6

17.1

16.7

18.5

Turnover ratios (x)

Asset Turnover (Gross Block) (x)

13.6

12.2

11.3

12.2

12.5

13.7

Inventory / Sales (days)

Receivables (days)

Payables (days)

113

116

112

102

100

NWC days

Leverage Ratios (x)

Net D/E ratio (x)

(0.1)

(0.0)

(0.1)

0.0

(0.0)

Interest Coverage Ratio (x)

8.0

15.1

21.1

34.4

41.0

81.1

Note: 1QFY2016 & 1QFY2017 numbers are reported as per Ind AS, FY2016 numbers & other

quarters continue to be reported as per Indian GAAP.

August 4, 2016

Voltas | 1QFY2017 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

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Disclosure of Interest Statement

Voltas

1. Financial interest of research analyst or Angel or his Associate or his relative

2. Ownership of 1% or more of the stock by research analyst or Angel or associates or relatives

3. Served as an officer, director or employee of the company covered under Research

4. Broking relationship with company covered under Research

Ratings (Based on expected returns

Buy (> 15%)

Accumulate (5% to 15%)

Neutral (-5 to 5%)

over 12 months investment period):

Reduce (-5% to -15%)

Sell (< -15)

August 4, 2016