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Buy Voltas: Tempering expectations
ƒ Flat sales on weak execution, margins down by 150bps y-y
ƒMgmt cautious on Middle East inflow, no slowdown in domestic
ƒ Lowering F12 EMP growth to 6.2%y-y, intake growth to 15% y-y
ƒ TP cut to INR250 (INR300) on 20x PE our FY12 EPS of INR12.5
Muted sales growth,margins dip Voltas’ F3Q11 flattish sales growth was due to weak execution in its projects business (Electro mechanical projects,“EMPS”), while products businesses showed strength. Overall margins declined 150bps y/y largely due to loss in its recently acquired subsidiary, Rohini Electricals, which the management believes will turn around in F4Q11.
Concerns on Middle East orders
Given the volatile situation in Egypt, management sounded cautious of order intake from Middle East (particularly Jordan & Syria; no new wins in
the current quarter). However, management expects no slowdown in
the domestic projects’ business as its backlog is geared more
towards infrastructure projects which are not seeing any delays.
Lowering order intake and execution estimate for EMPS
Given potential postponement of order placements in the Middle East
as well as rising interest rates in the domestic market, we anticipate
slower awards of big ticket projects. We don’t anticipate any
slowdown in Cooling products and Engineering products (FY12 sales
growth of 25%y/y and 20%y/y respectively). We are less optimistic
about FY12 sales growth for the EMP segment thereby lowering our
growth estimates to 6.2%y/y from 15.7%y/y. Our order intake growth
assumptions stand lowered to -2%y/y (15%y/y previously) for FY11
and 15%y/y (25%y/y previously) for FY12. Also, given rising RM
costs, we lower FY12 EBITDA margin to 9.2% from 10.6%. Our FY12
EPS stands revised to INR12.5/shr from INR14.8/shr.
TP cut by 17% on slower order intake, rising RM costs
Voltas currently trades at P/E of 16.0x/14.5x our revised FY11 and
FY12 EPS estimates, respectively. We are lowering our TP to
INR250/shr based on 20x PE on our revised FY12 EPS estimates of
INR12.52. Order wins and acquisitions (cash and investments:
INR21/share) are catalysts. Our BUY recommendation is based on a)
Voltas being a strong beneficiary of rising infrastructure creation in
India and the Middle East, b) market leadership in the air-conditioner
market, & c) strong emphasis on capital efficiency (high RoCE) and
FCF generation. Key risks: slower than expected pick-up in Middle
East investments, increasing competition and commodity prices.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Buy Voltas: Tempering expectations
ƒ Flat sales on weak execution, margins down by 150bps y-y
ƒMgmt cautious on Middle East inflow, no slowdown in domestic
ƒ Lowering F12 EMP growth to 6.2%y-y, intake growth to 15% y-y
ƒ TP cut to INR250 (INR300) on 20x PE our FY12 EPS of INR12.5
Muted sales growth,margins dip Voltas’ F3Q11 flattish sales growth was due to weak execution in its projects business (Electro mechanical projects,“EMPS”), while products businesses showed strength. Overall margins declined 150bps y/y largely due to loss in its recently acquired subsidiary, Rohini Electricals, which the management believes will turn around in F4Q11.
Concerns on Middle East orders
Given the volatile situation in Egypt, management sounded cautious of order intake from Middle East (particularly Jordan & Syria; no new wins in
the current quarter). However, management expects no slowdown in
the domestic projects’ business as its backlog is geared more
towards infrastructure projects which are not seeing any delays.
Lowering order intake and execution estimate for EMPS
Given potential postponement of order placements in the Middle East
as well as rising interest rates in the domestic market, we anticipate
slower awards of big ticket projects. We don’t anticipate any
slowdown in Cooling products and Engineering products (FY12 sales
growth of 25%y/y and 20%y/y respectively). We are less optimistic
about FY12 sales growth for the EMP segment thereby lowering our
growth estimates to 6.2%y/y from 15.7%y/y. Our order intake growth
assumptions stand lowered to -2%y/y (15%y/y previously) for FY11
and 15%y/y (25%y/y previously) for FY12. Also, given rising RM
costs, we lower FY12 EBITDA margin to 9.2% from 10.6%. Our FY12
EPS stands revised to INR12.5/shr from INR14.8/shr.
TP cut by 17% on slower order intake, rising RM costs
Voltas currently trades at P/E of 16.0x/14.5x our revised FY11 and
FY12 EPS estimates, respectively. We are lowering our TP to
INR250/shr based on 20x PE on our revised FY12 EPS estimates of
INR12.52. Order wins and acquisitions (cash and investments:
INR21/share) are catalysts. Our BUY recommendation is based on a)
Voltas being a strong beneficiary of rising infrastructure creation in
India and the Middle East, b) market leadership in the air-conditioner
market, & c) strong emphasis on capital efficiency (high RoCE) and
FCF generation. Key risks: slower than expected pick-up in Middle
East investments, increasing competition and commodity prices.
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