VOLTAS Down, but not out :: Edelweiss,

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VOLTAS
Down, but not out


􀂄 Earnings disappoint; UCP division shines again
Voltas’ (VOLT) Q2FY11 earnings, at INR 724 mn (down 19.8% Y-o-Y), were
below our estimate marred primarily by decline in the electro-mechanical project
& services (EMPS) division. This was due to continued delays in large projects in
the international market, primarily Qatar. The company reported 15% Y-o-Y
decline in EBTIDA to INR 1.1 bn led by a 135bps Y-o-Y dip in the margin to
10.1%. The weaker operating performance was driven by forex translation loss,
higher set up costs for its international entities, and increased raw material costs
(up 244bps Y-o-Y to 68.3% of sales). The unitary cooling products’ (UCP)
revenue (seasonal in nature) reported growth at 15.9% Y-o-Y to INR 2,281 mn.
The engineering products & services (EPS) segments’ revenue grew 8.3% Y-o-Y
to INR 1,267 mn. The order book-driven EMPS segment continued slower
execution with revenue decline of 8.1% Y-o-Y at INR 7,066 mn.
􀂄 Order book improves; order inflow spikes 83%
At INR 50 bn, the order backlog in EMPS improved 14% Y-o-Y. International
orders comprised INR 35 bn, while domestic orders made up the balance. Order
accretion for the company stood at INR ~7 bn in Q2FY11, a growth of 83% Y-o-Y
led by increased orders from the domestic market. With this, VOLT has already
bagged new orders worth INR ~17.5 bn, hence we believe the company is on its
way to achieve our order inflow estimate of INR 36.6 bn during FY11, having
already achieved 48% of the order accretion during H1FY11. In our view, the
company’s focus on six geographies (including Singapore and Hong Kong) is
likely to augur well given the increased spending in these regions in the coming
quarters.
􀂄 Outlook and valuations: Positive; maintain ‘BUY’
The UCP and EPS division are expected to continue strong growth momentum in
the coming quarters. Further, while the major EMPS division recorded sluggish
growth during the quarter, we expect execution to pick up in EMPS given that
the current order book will be executed over the next 4-6 quarters. Further, with
clear signs of revival visible for the EPS division besides strong growth for the
UCP division, the company seems well positioned to explore growth avenues,
going forward. At our EPS of INR 11.7 and INR 14.6, the stock is currently
trading at 21.1x and 16.8x its consolidated earnings for FY11E and FY12E,
respectively. We maintain our ‘BUY/ Sector Outperformer’ recommendation/
rating on the stock.