Voltas - Management meet takeaways - Angel Broking

We met Voltas' management to get a purview and update of its business. The company operates in three business segments: Electro Mechanical Projects (EMP), Unitary Cooling Solutions (UCS) and Engineering Products and Services (EPS).

EMP segment margins to decline: Voltas generates a significant portion of its revenues from the gulf countries. Currently, however, the sentiment in the gulf countries remains very weak; hence, there is significant slowdown in industrial capex in the region. Given the capex slowdown, the company is currently bidding for projects in the EPS segment at 4-5% margins (compared to 8-12% during FY2009-2012). The new orders are mainly vanilla jobs which have low margins on account of higher competition. Nevertheless, the company believes that these (low) margins are not sustainable in the long run.

Sidra Project - A drag on the bottom-line: The on-going 7-star hospital project in Qatar has faced massive cost and time over-runs due to frequent design changes by the queen of Qatar. The project's order was worth Rs.1,000cr whereas by December 2011 the total expenditure on the same was Rs.1,300cr. The company has till date written off Rs.200cr as over-run costs which may/may not be recoverable from the Qatar foundation (the project owners). The techno-commercial audit for this project is slated to complete by March 2013 and clarity will emerge on this issue post the results of the audit. The company does not rule out further write-offs in this project. The project is now expected to be completed by June 2013.

INR depreciation affecting UCS segment margins: Approximately 40% of the component cost used in the air conditioners and other cooling products are imported from China which exposes the company to the risk of higher costs in case INR depreciates against the CNY. Recently, the company has not been able to raise prices in proportion to rise in input costs due to lower demand and higher competition. This has affected its UCS segment margins.

Working capital to remain high: The working capital cycle for the company has increased recently on account of delays in collection of receivables (which currently stand at more than 100 days). Historically, the company has been a debt free company as its business is not capital intensive. However, it stated that it may have some debt by the end of FY2013 on account of increase in working capital and low levels of cash generation from its business.

A new strategic business plan expected soon: The company's management informed that it is on the verge of preparing a strategic business plan which is expected to be finalized by March 2013. This will outline the vision 2015 of the company and will give a better understanding of the future direction of the company.

No light at the end of the tunnel yet: Overall, the management sounded very pessimistic about the current business scenario as it does not see any major improvement in the near-term. The company's order book currently stands at Rs.4500cr. (Domestic - Rs.2,200cr and International - Rs.2,300cr) which gives revenue visibility of 15 months. We do not have a rating on the stock currently.

Source : Equity Bulls

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