Voltas - Gaining momentum!!! - Prabhudas Lilladher

Results better‐than‐expected: Voltas reported sales ahead of ours as well as street estimates, with improved execution at Rs16.12bn, growth of 19.8% YoY. The growth surprise came from the UCP segment which grew by 34% YoY (~Rs7.54bn), Electro-mechanical Projects & Services (MEP) segment grew by 9.5% YoY (~Rs7.41bn) and Engineering Products & Services (EPS) grew by 9.6% YoY (~Rs1.07bn). EBITDA margins declined by 240bps YoY and 310 bps QoQ at 5.5%. MEP segment reported EBIT margin of 4.5% (100bps down YoY), UCP segment reported EBIT margin of 8.4% (down by 290bps YoY) and EPS segment reported 18.2% (up by 70bps YoY). The other income increased by robust 87% YoY on account of income from investments and debentures and Rs110m exchange rate gain. Reported PAT de-grew by 40% YoY at Rs790m, better than our expectation of Rs642m. However, adjusted PAT grew by 6.2% YoY at Rs780m.

Improved order booking: Voltas ended the year with flattish growth on order book at Rs45.74bn. The domestic market contributed Rs21.93bn (up 14% YoY) and export market contributed ~Rs23.81bn (down 10% YoY) to overall order book. The orders received in this quarter stood at ~Rs7.69bn (up 2.8x YoY) which includes Rs3.48bn from international market and Rs4.21bn from domestic market. The company has started to see some green shoots in markets like Saudi Arabia, Abu Dhabi and Muscat and Qatar. In Abu Dhabi, the main contractor for airport order has been finalised and soon the sub-contractors would be appointed by October (Voltas along with JV partner bid for the same). Also, there has been US$4.6bn worth infusion into ALDAR, the primary real estate developer in Abu Dhabi. Few tenders are also in the process of being funded in Qatar for the upcoming FIFA 2022 and expected to be released from Q3 onwards. In domestic markets, growth continued due to increased focus on urban infrastructure and industry like metals and automotives and the expansion of scope of work on existing projects, such as the Chennai Metro.

RIE losses reduce; turnaround certain in FY13: The Rohini Industrial Electricals (RIE) has made losses of Rs12m in this quarter. However, the management expects to see a turnaround in the company in FY13 with an order book of Rs2.2bn booked with reasonably good margins. RIE is also regearing itself to move up the value chain as the electrical execution arm of domestic MEP business.

Update on Sidra Project: Sidra Medical and Research Centre Hospital project in Qatar is almost 77% complete. The total revised project cost is Rs15bn. Unexecuted portion stands at Rs3.5bn which is scheduled to be completed by March FY13. The company is closely monitoring the project and is of the view that adequate provision has been made after considering upward revision in costs as well as the variations and claims being negotiated. However, uncertainties exist, given the project's complex 'design and build' nature, changes in design still being made and the unfortunate delay in completion. A detailed Techno Commercial Review is scheduled before the end of Q2 which will provide greater clarity on costs likely to be incurred and additional revenue possibilities. We do not significant negative surprise from the Techno commercial survey and cost write-back also cannot be ruled out.

UCP segment reports very strong sales: UCP segment grew by 34% YoY during the first quarter, aided by 15% volume growth in air-conditioners ahead of the industry which reported de-growth of 5%. Our overall growth has been supported by a strong advertising campaign based on well researched consumer insights, culminating in the "all-weather" proposition. The extended summer and delayed onset of monsoon also helped volumes. Voltas has emerged as the market leader in the room AC segment in May 2012 across multi-brand outlets with an 18.3% share (independently reported by GfK Nielsen) which was further improved to 19.1% in June, widening the earlier lead of 60bps over the nearest competitor in May to 280bps in June. Market share in Northern India (> 35% of domestic AC market) stood at 25.6%. Voltas has 37.7% market share in Delhi and 35.7% in Punjab, which are India's largest markets for room ACs. The company continues to increase its visibility in the market through advertisements during peak season of IPL etc. Strong growth in sales of commercial refrigeration products, along with a large order received from an institutional customer, also supported sales. The increased volume growth resulted in a sharp reduction of capital employed. Also, the company has monitored its receivables closely whilst negotiating better terms of payments from its suppliers.

Outlook and Valuation: The stock is trading at 10.8x FY14E earnings. We believe that the worst might be behind us, given that the pain on Sidra project has already been accounted for and RIE is likely to break-even in FY13. The outlook on orders looks bright, given the increased reach in terms of geography in international markets and business segments in the domestic market. This should help order flow once the 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 maintain our 'Accumulate' rating on this stock.

Source : Equity Bulls

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