Voltas - Value for your money - Ambit

Even if we assign nil value to Voltas' Electromechanical Projects (EMP) business, its other segments plus cash/ investments (Rs. 28/share) are worth Rs. 86/share. Its room AC business' discernible competitive advantages (built on ability to launch consumer-pull products, wide distribution reach and flexi-sourcing model) support our Unitary Cooling Products (UCP) segments' valuation of Rs. 13.2bn (Rs. 40/share, 7.1x FY15E EBITDA). Improving environment for textile exports support Engineering Products and Service (EPS) segment valuation of Rs. 5.9bn (Rs. 18/share). Whilst we value EMP segment at Rs. 20/share (considering strong reputation, profitable domestic business, history of free cash generation), continuing losses in Middle East remain the key risk. We retain BUY but cut TP to Rs. 106/share (Rs. 113/share earlier).

Competitive position: MODERATE Change to this position: STABLE Uncertainty makes multiples expensive, building valuation by blocks: Capex cycle/consumption uncertainty in India and poor visibility on Middle East business turning around make eps-based multiples (13X and 10X FY14 and FY15 eps, respectively) look expensive. Hence, investors should build fair value for Voltas by assessing valuation contributors in piece-meal. Excluding EMP, our fair value is Rs. 86/share—Rs. 40 from UCP, Rs. 18 from EPS, Rs. 22 from cash/investments and Rs. 6 from rental—implying 34% upside. However, EMP segment turning around is the key catalyst for crystallization of this upside.

Voltas' room AC business, an excellent franchise with strong competitive advantages: Over FY07-13, Voltas gained 4.9% market share to become Room AC leader (June-13: 20.9% share). Its market share gain was built consistently over two distinct phases for industry—high growth (FY09-11)then negative growth (FY11-13)—as it (a) launched consumer-pull products at regular intervals, (b) expanded distribution reach in tier-2/3 cities and (c) capitalized on its flexi-sourcing model. Whilst we expect nominal (3-5%) volume growth over FY14/15, moderating margins and RoCEs over next 5 years, we find large value in UCP business given low penetration rates for ACs. Our implied valuation for UCP is at marginal premium to Whirlpool India.

All is not lost in EMP: Whilst our two-year outlook for the EMP business is negative (6% YoY sales decline in FY14/15E), we believe EMP business has value given Voltas' profitable and leadership status in India (market with large potential), strong reputation with developers and a 10-year history of free cash flow generation after factoring in Rohini acquisition and Sidra's onerous costs. Assuming moderate recovery beginning FY16, we value EMP at Rs. 6.8bn (Rs. 20/share). Legacy order completions and management highlighted costs controls will improve profits albeit gradually.

Downward revision: We cut FY14E/15E sales by 2%/7% due to expected weak demand for room ACs and FY14E/15E EBITDA by 29%/27% owing to losses in EMP in 1QFY14 and even slower recovery expectations in EMP. We cut FY14E/15E PAT by 33%/29% due to lower EBITDA and other income.

Source : Equity Bulls

Keywords