VOLTAS

VOLTAS IS a major engineering service provider whose operations is organised into four independent strategic business units. Under the engineering products and services segment, the company designs and manufacturers, machine tools, mining & construction equipment and sells textile machinery. About 80% of the revenues from this segment comes from manufacturing of forklift, trucks, cranes, warehousing equipment and construction equipment and sale of accessories, spare parts and maintenance services, while the rest 20% comes from commission income.

The company provides electrical, mechanical, HVAC and refrigeration solutions under the EM projects and services division.

Water treatment and management is also a part of this business, which contribute the most to the total revenues and profits.

Cooling appliances and commercial refrigeration products are manufactured and marketed under unitary cooling products division. The company is also in chemicals trading business, but it contributes less than 1% to the top line. Voltas earns 5% of its revenues from its foreign operations, which mainly include execution of projects in Middle East, Far East and South East Asia.

FINANCIALS

The company posted a 29% growth in revenue during December 2008. In comparison, total operating expenditure during the quarter was up by 33% YoY. This resulted in contraction in its operating margin which hit its bottom line. On expense side, the employee cost rose over 40% in year ended December 2008.

GROWTH STRATEGY

In last few years, it has changed its business strategy to emerge as a one stop solution provider rather than a manufacturer. The strategy has paidit handsomely. At the end of September ‘08, its domestic order book in EM projects and services segment stood at Rs 1,000 crore, while international order book stood at Rs 4,500 crore with an average completion cycle of 24-30 months. For the domestic market, the company has formed industrial verticals in order to focus on areas like airports, power and steel, which are likely to have sustained growth.

RISKS

Historically, Volta’s tends to sit on higher inventories, which depressed its cash flows. In last few years, it has cleaned up its act but, its cash flows from operations continues to be erratic. The company is a big importer of equipment and cooling products. The recent depreciation in the rupee raised the cost imported goods which hurt its profitability. Bulk of Voltas’ overseas business is in West Asia especially UAE and Qatar. The global credit crisis and falling crude oil prices has hit these economies hard leading to a slowdown in construction activities. This will have an adverse impact on Voltas’s earnings in next few quarters.

TO SUM IT UP

Volta’s is expected to take a hit on its earnings and profitability thanks to its high exposure to the gulf countries as well as slowing construction and engineering activities in domestic market. The company earns substantial non-operating other income from recurring rental income and investment of surplus funds. However, this segment is likely to hit due to a gloomy realty sector and fall in yields across asset classes. It doesn’t have a track record of higher dividend pay. However, with a higher beta, the company could turn out a well fit for risk-loving investors.

Beta: 0.94
Institutional Holding: 26.54%*
Current dividend Yield: 3.34%
Current P/E 5.45
Current m-cap: Rs1337 cr