Voltas - Waiting for the sunshine - Prabhudas Lilladher

Margin improvement drive earnings surprise: Voltas reported numbers which was ahead of our and street estimate by reporting better-than-expected margin for the quarter. It reported EBIT margin of 8.3% in the MEP segment (100bps improvement QoQ). The improved margins were primarily driven by improved follow-up, leading to recovery of variation claims in few old projects. Sales reported de-growth of 5.8% YoY at Rs15.7bn lower than our expectation of Rs17.1bn. PAT was up 7% YoY to Rs1.04bn.

Update on Sidra Project: Sidra Medical and Research Centre Hospital project in Qatar is ~67% complete. Voltas has taken a hit of Rs3.2bn in FY12 on this project. The company believes that the execution of the Sidra project will get extended beyond FY13 as client continues to make changes in the project design. Voltas will conduct a techno commercial study in July-August (similar to one done in Q3FY12) to assess if any further provisions are required in the project.

Outlook on ordering: Voltas ended the year with an order book of Rs42.3bn, down 12% YoY. It bagged orders worth ~Rs23bn in FY12 and Rs4.5bn in Q4FY12. In the international markets, the company has started seeing some signs of revival, especially in the Dubai markets and expects to see more traction over the next six months. In Abu Dhabi, the airport order has been awarded to the main contractor. We expect the sub contractor to get finalised by October (Voltas along with JV partner bid for the same). The Joint Venture established in the new geography of KSA has begun to make progress and expects traction in Qatar and the KSA markets (already bagged orders worth Rs3.6bn in Qatar though a private JV). In domestic markets, the commercial real estate and IT/ITES continues to be slow. However, hospital and hotels have seen some traction. Entry into in new segment in industrial space like Power, water and MEP project for automotive industry will help widen the scope of business and support growth in orders.

Working capital and cash generation continue to be under stress: Working capital continues to be impacted due to: (a) a cautious approach in the international market towards passing on variation claims (b) stress on liquidity in the domestic market leading to difficulty in money collection (c) requirement to fund Sidra project losses and (d) low order flow leading to lower advances. Also, the change in nature of business to sub contractor from main contractor and more MEP project against HVAC project also impacted the working capital. The working capital % sales went up to 15.8% in FY12 against 7.9%. However, though the working capital is likely to be elevated due to change in business mix, some improvement from current levels can be expected as domestic liquidity is improves over the course of the year.

Looking at a turnaround in RIE in FY13: The performance of Rohini Industrial Electricals (RIE) continued to be disappointing due to poor margins and losses from carried-forward 'legacy' projects attributable to its earlier management. It reported a loss of Rs260m for FY12 and an order book of Rs2.3bn. The company highlighted that new orders are being procured at reasonable margins; various initiatives to reduce costs have been undertaken along with some key personnel changes to ensure a turnaround. During the year, RIE issued preference shares of Rs250m subscribed by Voltas, apart from injecting cash to ensure a positive net worth, qualifying RIE to bid for Govt. and other Public Sector projects.

Targeting 10% growth in the UCP segment: Indian AC industry, on the whole, witnessed de-growth in sales volumes (estimated at 20%) during 2011-12. Voltas' volume saw a de-growth of ~10%. It managed to hold on to the 'No. 2' position in the industry, with a market share of 16.9% and narrow the gap with No. 1 to 150bps from 500-600bps). The new 'all-weather' AC has received good response from the consumer. The company now has a presence of over 5000+ consumer touch points. It will continue with its strategy of channel expansion, more specifically focused towards Tier-2 and Tier-3 markets, where higher demand is expected. However, the outlook on margin continued to be subdued due to intense competition from the more recent Japanese entrants. Also, weak overall sentiment makes it difficult to pass on cost increase to the market, given the price sensitivity of Indian consumers.

Upgrade to Accumulate: The stock is trading at 10.8x FY14E earnings. We believe that the worst might be behind us, given the large part of provision on Sidra project has already been accounted for. Write-back from Sidra project could provide positive surprises. The outlook might be slightly muted in the near term on order flow, given the increased reach in terms of geography in international markets and business segments in the domestic market. This should help order flow once cycle turns. We believe that a lot of pessimism related to order flow is in the price and hence, downside seems to be limited. We upgrade the stock to 'Accumulate' from 'Reduce'.

Source : Equity Bulls

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