Voltas- Rising order backlog & AC sales drives re-rating:: BofA ML

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Voltas
Rising order backlog & AC sales
drives re-rating and PO
􀂄 Raising PO as rising order to drive stronger FY12e & FY13e
Voltas Q2FY11 PAT at Rs924mn was up only 2% y-o-y and was marginally lower
than estimate. Profit was impacted by project delay in Middle East and host of
non-recurring expense. Key positive of the quarter are (1) new order momentum
that could help end FY11e with 20% higher backlog; and (2) around 18% y-o-y
growth in operating income despite 3% decline in sales. We have raised PO to
Rs271 as we expect the stock to re-rate to 17x PE one year roll forward earnings.
Subdued Q2FY11 owing to project delay set to improve
Delay in execution of Rs15bn worth project in Qatar led to 23% decline in
international MEP contributing to 35% of Q2FY11 sales led to 3% decline in total
sales. Ramp up in execution of orders worth Rs30bn bagged so far in 2010 is
likely to negate the impact of Qatar project delay. We expect MEP revenue growth
to be 10% in H2FY11e and 23% in FY12e compared to 5% decline in H1FY11.
Strong growth & margin expansion in room AC encouraging
Voltas continues to be a key beneficiary of rising residential demand for AC owing
to rising purchasing power and improvement in electricity supply. AC sales of
Voltas grew by 35% in volume term and 16% in value term in Q2FY11. Operating
profit of the segment grew 53% y-o-y owing to margin expansion accruing from
higher growth of window AC manufactured in-house by Voltas.
Valuation could re-rate on rising order & despite flat FY11e
Voltas is currently trading at a PE of 20x FY11e and 17x FY12e. During previous
growth phase in 2006-2008, the stock had traded in 15x-20x PE one year forward
earnings. Rising visibility of 20%+ PAT growth in FY12/13e is likely to help re-rate
the stock despite a sluggish FY11e.