Voltas - New enquiries remain subdued - Prabhudas Lilladher

We met the management of Voltas. Following are the key takeaways:

- Markets remain challenging: Voltas' order book at the end of Q2FY12 stood at Rs41.37bn, down by 9% YoY. The domestic market contributed Rs22.07bn and export market contributed ~Rs19.3bn to the overall order book. The company highlighted that the enquiries in the domestic markets in Q3FY13 have been slower than those witnessed in H1FY13. The order flow in the first half was largely dominated by industries (~60%) followed by urban infrastructure (25%). Weak sentiments have led to slowdown in enquiries in both these segments in the domestic markets. In the International markets, initial tenders for the FIFA World Cup are likely to hit the market in the next two quarters. Dubai also has announced large investments in infrastructure. KSA market also continues to be active (but Visa is a constraining factor for companies) and Abu Dhabi market has very few project pipelines apart from airport project. The company reiterated the increased competitive intensity both in domestic and international markets.

- Update on Sidra project: Sidra Medical and Research Centre Hospital project in Qatar is almost 85% complete (~Rs15bn project). The revenues booked in the current quarter are with 0% margins. The company had conducted techno commercial audit on Sidra in Q2FY13 and according to the survey, adequate provision has been made for the Sidra project and no further provisioning is required at this point in time. The delivery timelines for the project has been further extended to June 2013 from March 2013 due to delay in arrival of medical equipments. Though the project is ongoing and reviewed every quarter till delivery, however, with only 15% of the project pending to be completed, we do not see any significant negative surprise and expect positive surprise as and when variations and claims are settled.

- UCP segment - Determined to hold on to market leader position: Voltas continued to consolidate its leadership position, After having seized the market leadership position in air-conditioners in May 2012, the company has continued to build on its shares in both, multi-branded exclusive outlets. Voltas has a share of 20.3%, some 500bps ahead of the erstwhile market leader. Voltas is also acknowledged as No.1 in 10 out of the 20 key markets, with greater penetration in Tier 2 and Tier 3 towns. (In Q2FY13, volumes grew by 13% ahead of the industry which reported de-growth of 8%). The company highlighted that, going forward, Voltas will fiercely protect its market leadership position and will further strengthen its distribution reach and improve its customer service proposition. In the UCP segment, the high advertisement spend and competition is putting downward pressure on margins.

- Outlook and Valuation: The stock is trading at 12.4x FY14E earnings. We continue to believe that the worst might be behind us, given that the provisions on cost overruns on Sidra project have already been accounted for. 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 which should help order flow once cycle turns. We maintain our 'Accumulate' rating on this stock.

Source : Equity Bulls

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