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Voltas (VOLT.BO, Sell): Muted order inflow to hamper growth; initiate Sell (on CL)
Source of opportunity
We initiate coverage on Voltas (VOLT.BO) with a Sell rating and a P/E-based 12-month target price of Rs201,
implying 12% potential downside. We add the stock to our regional Conviction List.
Voltas was a key beneficiary of the massive construction activity in the Middle East as a Heating, ventilation
and air conditioning (HVAC) player. However, the company has seen muted order inflow from the region post
the 2008 slowdown and order inflows have not recovered since.
Key expectations
We expect revenue growth to remain low, as we do not foresee a huge jump in orders from Middle East over
the next six to 12 months. Any re-rating for the stock would only happen if there are fresh order wins to
provide revenue visibility in the Mechanical, Electrical and Plumbing (MEP) segment, in our view.
We expect ROE for the company to fall to 29% (FY2011-12 median) 39% (FY2005-10 median) as we forecast
revenue growth to slow in FY10-12 to 11% CAGR vs. FY05-10 CAGR of 27%.
We believe the unitary cooling product (UCP) segment is a key growth driver for Voltas for the next few
years, as demand for Room Air Conditioning (RAC) products rise in India, and we expect the segment to
grow at 25% CAGR over FY10-12, contributing about 30% to overall revenue.
We think consensus is factoring in high order inflows in the next 12 months and expect this to be reflected in
FY13 revenue. Moving to valuations based on FY13 estimates would be aggressive, in our view, as there is
still limited visibility on order inflows that far out.
Catalyst
Evidence of weak order inflows in 2HFY11 given the slow recovery in the Middle East in the near term driving our
below consensus sales growth expectations (3pp below consensus for FY2012) ; pressure on pricing ability on
new projects and increased competition in the RAC segment
Valuation
We derive our 12-month price target of Rs201 based on P/E multiple of 15X 2012E EPS. The stock currently
trades at 18X 12-month forward earnings, which is expensive given the declining growth and return
trajectory.
Hence, we value the stock in-line with its 5-year median historical multiple. We expect EPS CAGR of 8% over
FY10-12, a 41% decline from the EPS CAGR of FY05-10.
Key risks
Pick-up of order inflows in the Middle East, with Voltas winning any significant large-sized orders; stronger-thanexpected
pick-up in the industrial capex cycle to positively affect the engineering division.
Shift in growth trajectory to be negative for Voltas
Voltas has benefited from construction activity in the Middle East over FY06-08 in its capacity as a HVAC player, and has been able
to benefit from the construction-focused infrastructure spend in the domestic market. Despite widespread opportunities in the HVAC
segment in both the international and domestic markets, the company has seen subdued order inflows that could negatively affect
earnings growth for the next few years.
Our key expectations:
Muted order inflows seen in FY09-FY10 and 1HFY11 will likely continue for the next year as construction activity in the Middle
East is being slow to pick up and competition in the MEP segment is intensifying. As a result, we expect the MEP segment
(which contributed 65% of revenue in FY10) to grow only 2% yoy in FY11E and 11% in FY12 amid slow order inflows.
Segment revenue declined by 5% yoy in 1H2011.
Unitary cooling products (UCP) to be the key growth driver over the next few years as demand for the Room Air Conditioning
Products rise in India. We expect the segment to grow at 25% CAGR over FY10-12, contributing 34% to total revenue by
FY12 vs. 25% in FY10.
On the back of slow revenue growth and increasing cash balance, we expect ROE to decline to 29% (median between FY11E-
12E) from 39% (median from FY05-10) and likely to be reflected in valuations.
Despite having an asset-light model with negative working capital as of FY10 and low leverage (0.1X net debt/equity as of FY10)
supported by strong cash balance (10% of FY10 sales), we believe the company’s slow revenue growth will likely be an overhang on
the stock as current valuations are high and do not justify the premium valuation relative to the stock’s trading history.
We value the stock at 15X FY2012E EPS, in line with its 5-year historical median multiple, implying 12% downside from current levels
We think the consensus is expecting a strong order inflow over the next 12 months which will create stronger sales growth into
FY12 and FY13. In our view, this is aggressive as there is limited visibility on order inflows over this timeframe. Additionally, the
data on 1HFY11 order inflows do not suggest a pick-up in order momentum yet.
Based on 1H2011 performance, we expect Voltas to achieve our annual revenue forecast of Rs51.7 bn and order inflow estimate of
Rs33.8 bn.
Unitary Cooling Products (UCP)
We expect Voltas’s UCP segment (with 70% of revenues coming from the room air conditioning) to grow at 25% CAGR over the next
few years, as increasing urbanization should result in increased purchasing power and higher discretionary spending. The
commercial refrigeration and water cooler business (30% revenue contribution to the segment) should also benefit as (1) the need
for improved refrigeration infrastructure rises; and (2) recent climate changes and variation in temperature levels spur demand.
Company description
Voltas Ltd. (Voltas), a TATA Group company, is India’s leading air-conditioning and engineering service provider. It offers solutions
for a number of industries in areas such as heating, ventilation & air conditioning, refrigeration, electro-mechanical projects, water
handling, textile machinery, machine tools, mining & construction equipments and materials handling. Besides being the largest
player in domestic HVAC/ MEP segment, Voltas has a significant presence in MEP in the Middle East. Some of the recent projects
executed in this segment are an F1 race track in Abu Dhabi, the Burj Dubai tower, Rajiv Gandhi International Airport ( Hyderabad),
and Chennai International Airport.
Voltas offers complete solutions from the concept to the commissioning and maintenance for material handling, construction,
mining and textile business. The company acts as an agent to several principals, and sells and services equipment in the mining,
textile, material handling, and construction segments. Voltas also manufactures forklift trucks (annual capacity: 2,000 units) and
warehousing equipment. Voltas is one of the largest manufacturers of forklifts trucks in India with a market share of 40%.
Voltas sells air conditioners, commercial refrigeration, and water coolers and dispensers.
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