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Visibility improves for textile machinery, UCP segments
We see improved visibility for Voltas’ (VOLT) textile machinery business, driven
by a pick up in announcements for new textile projects (up 48.3% YoY) in
H1FY11. Further, we believe that the company’s unitary cooling business could
spring a positive surprise in FY11E/FY12E on volume growth in the air
conditioning segment. We roll forward our target P/E of ~19x to Sep ’11, giving
us a revised target price of Rs 300 (from Rs 275 earlier). Maintain BUY.
Revival in textile machinery: In addition to the strong pick up in announcements
for new textile projects, the likely increase in allocation for Textile Upgradation
Fund Scheme (TUFS) would boost capacity expansion in the textile sector.
Textile machinery contributed 7.9% of VOLT’s engineering product revenues in
FY10 (engineering products segment was 10.3% of total sales in FY10). The
contribution of the textile machinery segment to the company’s profits, however,
is likely to be higher as this is an agency business.
Volume growth in air conditioners: In our opinion, VOLT’s air conditioning
business is likely to surprise on the upside, driven by the increased reach of its air
conditioning products. Over the years, VOLT has focused on expanding its
channel network to improve product reach and thereby gain market share.
Currently, the company enjoys a 17% market share in the domestic air
conditioning market (ranked second after LG).
Upside provided by a widening geographic presence: VOLT’s order inflows
peaked in FY08 at Rs 37.4bn, driven by successful diversification in the Middle
East. Following the slowdown in Dubai in FY09, the company has strengthened
its presence in other markets such as Saudi Arabia, Oman, Singapore and Hong
Kong. This geographic expansion could drive order inflows for the company in
FY11 and FY12.
Attractive long-term play; BUY: VOLT looks attractive from a long-term
perspective, with a strong balance sheet and impressive return ratios. Further, at
FY10-end, the company had a cash and investment balance of Rs 7bn that is
likely to be used for acquisitions in the water segment. A successful acquisition
would lead to an upgrade in estimates and improvement in return ratios, as
excess capital is absorbed. Historically, the stock has traded in a one-year
forward P/E band of 18x–30x. Our Sep ’11 target price for the stock stands at
Rs 300, implying a 22% upside from current levels. Maintain BUY.
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