Voltas: Long-term story still looks good :: Nomura

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 Action
We maintain our BUY rating for Voltas Ltd with a revised price target of Rs285. The
company has strong brand presence in all the three business segments in which it
operates and has consistently delivered EPS growth across business cycles. It has
a strong balance sheet, zero debt and high return ratios. Also, it is moving towards
becoming an integrated product and services play.
 Catalysts
The order book for EMP is likely to pick up in the next few quarters, leading to a
significant up-tick in growth in FY12F and beyond, we believe.
Anchor themes
Voltas will likely be a key beneficiary of the pick-up in both infrastructure and
industrial capex in India, the Middle East and ASEAN countries.



Long-term story still looks good
 2Q FY11 EMP revenue and margin drag is temporary
EMP revenue of -8% y-y during 2Q FY11 mainly reflected a delay in
large order (Rs15bn) execution in Qatar, which will likely pick up
during 2H FY11, as per management. Also, the adjusted margin
during the quarter (11.7%) was much better than the reported margin
(8.2%), given several one-offs during the period.
 Other segments continue to do well
Voltas’ other two segments — EPS (engineering products and
services) and UCP (unitary cooling products) — continue to do well,
with y-y revenue growth of 8% and 18%, respectively, in the quarter.
Management looks for this growth momentum to continue.
 Stock has outperformed YTD
The stock has outperformed the Sensex by 24% YTD, and is currently
trading at a one-year forward P/E of 18.1x. We expect the current P/E
multiples to be sustained as both revenue and EPS growth is likely to
pick-up going forward.The EPS estimates for FY11F have gone up by
6% due to better expected margins now.
 Maintain BUY; raise price target
We have increased the PT to Rs285 from Rs270, as we revised our
target one-year forward P/E multiple to 17x from 16.5x, reflecting our
expectation of 25% sustainable EPS growth from FY12F onwards
We maintain our BUY rating on the stock, as we believe the
company will benefit significantly from a pick-up in the domestic capex
cycle due to the nature of its businesses and its strong competitive
position.