Voltas Limited - Healthy in all weather - Antique

We met the management of Voltas to understand current business dynamics and outlook. Voltas is a single window provider and contractor for end-to-end engineering projects and solutions, which serve a wide spectrum of industrial, infrastructural and commercial applications in India and overseas. The meeting re-enforced our view on stock as an attractive long term investment opportunity given recent realignment of its EMP business in line with the changing environment and leadership position in room air-condition business. Following are the key takeaways.

Iconic projects provided learning curve

Voltas received prestigious order for Sidra Medical & Research Center project in Qatar in 2008 which is witnessing significant delay and cost overrun. The project is 91% complete and is expected to complete by March 2014. The company has provided for INR2.77bn in FY12 and INR955m in FY13. Most of the margin dilutive projects are expected to get over by FY14e and new orders are being placed at reasonable margins. The company is re-aligning EMP business to execute smaller and simple projects with separate team in cost effective way. The company is focusing on time bound projects to avoid excessive delays. The management also highlighted the volatility in financial performance due to AS-7.

Construction activates in Middle East to pick up

EMP business derives ~60% revenue from overseas market primarily from Middle East which witnessed high competition due to slow down in past two years. However demand is expected to improve going ahead as most of the geographies company caters to are driven by oil export and have significant surplus. The demand revival is seen in Saudi Arabia, Qatar and Abu Dhabi. Qatar is gearing up for the 2022 FIFA World Cup and would be expanding and upgrading its primary port and international airport, metro transit system, as well as constructing new expressways and causeways in addition to erecting 12 air-conditioned football stadiums.

Unitary cooling to support revenue growth

Unitary Cooling accounts for 33% of revenue and segment reported revenue growth of 19% to INR18.36bn in FY13 with healthy EBIT margin of 9.4%. The company maintained its leadership position in room air condition with 18.4% market share. We expect revenue growth of 17% CAGR to INR25.3bn over FY13-15e.

Valuation and outlook

At the CMP of INR81, the stock is trading at 9.9x FY14e and 8.5x FY15e and P/BV of 1.5xFY14e. The stock trades at a 43% discount to its long-term average PE of 17.5x over FY07-13. We see good value in the stock in the long-term given its strong balance sheet and diversified revenue streams. We maintain HOLD with target price of INR95 (10x FY15e).

Source : Equity Bulls

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