Voltas - Sharp Reaction; Retain BUY: Target Price: Rs 250: Emkay

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Voltas

Sharp Reaction; Retain BUY

BUY

CMP: Rs 181                                       Target Price: Rs 250

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n     Voltas reports weak performance - (1) revenue up 5% yoy to Rs10.4 bn (2) 140 bps yoy drop in Ebidta margins to 7.6% and (3) 17% yoy decline in APAT to Rs551 mn

n     2nd quarter back-to-back weak performance in Electro Mechanical & Projects (EMP) -  revenues down 3% yoy to Rs6.9 bn, Ebit margins fall 260 bps yoy to 6.4%

n     Earnings revised by -7% and -4% for FY11E and FY12E  - Rs10.5/Share and Rs12.8/Share

n     At 14.0X FY12E- trades 10% lower then Minimum PER of 15.6X FY06-08 cycle – Trading at attractive valuations - Maintain ‘BUY’ with target price of Rs250/Share

Weak performance – Revenues up 5% yoy, Net profits decline 17% yoy

Voltas posted weak performance with 17% yoy decline in net profits to Rs551 mn (yoy

decline for 2nd consecutive quarter) – versus our expectation of Rs710 mn. Weak

performance was driven by - lower revenue growth (up 5% yoy to Rs10.4 bn), especially

driven by low booking in EMP segment – which was further accentuated at the

operational level through negative impact of operating leverage. The Ebidta margins

declined 140 bps yoy to 7.6% whereas gross margins were intact at 32.3%.

Consequently, Ebidta decline 12% yoy to Rs739 mn. Additionally, Voltas also posted

low other income (down 13% yoy) and high interest costs (up 179% yoy).

No reprieve for EMP (-3%); UCP (+28%) and EPS (+22%) maintain growth

trajectory

¾ EMP division posted decline for 4th consecutive quarter – revenues down 3% yoy

and 2% qoq to Rs6.9 bn. EBIT margins fall by 260 bps yoy to 6.4% (lowest in past 10

quarters) – led by Rs90 mn loss in Rohini Industrial Electrical (Vs Rs40 mn profit in

Q3FY10), impact from lower execution and cost-slippages in few contracts.

¾ Unitary Cooling Products (UCP) division witnessed healthy growth at 29% yoy to

Rs2.0 bn (ahead of estimates). With change in revenue mix in favor of low margin

Window AC, EBIT margins declined 270 bps yoy to 9.7%. Voltas has initiated price

hikes and inventory built-up – as shield against high input prices.

¾ The Engineering Products & Services (EPS) division grew by 22% yoy to Rs1.4 bn

with EBIT margins at 17.5% (+390bps yoy) – led by strong performance across

divisions- Textile Machinery, Mining & Construction Equipment and Material Handling

Order inflows at Rs5 bn – asking rate for Q4FY11E at Rs14.5 bn

Voltas recorded order inflows at Rs5.0 bn Vs estimate of Rs10 bn. Voltas has secured

orders worth Rs26.5 bn in 9MFY11 – equivalent to 64% of FY11E order flows.

Consequently the asking rate for Q4FY11E has increased to Rs14.5 bn. We draw attention

to the asking rate in Q4FY10, which stood at Rs18.8 bn (70% of FY10 order inflows), was

delivered in Q4FY10. Similarly, Q4FY11E has much lower asking rate at Rs14.5 bn or 36%

of FY11E order inflows. Current order backlog stood at Rs47.0 bn (net of Rs1.5 bn

decrease on forex fluctuation) – equivalent to 1.4X revenues.

FY11E and FY12E earnings revised by -7% and -4% – lower earnings

correction as we were at lower-end of earnings forecasts

We have fine-tuned our earnings estimates to factor (1) lower execution in EMP business

and (2) lower margins in EMP business - evident in 9MFY11 performance. Consequently,

we revise earning estimates by -7% for FY11E and -4% for FY12E to Rs10.5/Share and

Rs12.8/Share respectively. Since, we had conservative forecasts for FY11E, extent of

earnings correction is capped at 7% ad 4% for FY11E and FY12E respectively.

Cut price target by 9% to Rs250/Share, Maintain BUY

Voltas has corrected by 20% in last one month from Rs220/Share to Rs180/Share. Citing

earnings correction of 7% for FY11E and 4% for FY12E, reaction is overdone. Voltas now

trades at 14X FY12E earnings, which is 10% lower then - Minimum PER of 15.6X of FY06-

08 Capital Goods earnings cycle. Assigning due merit to asset creation cycle and negating

short-term fluctuations, we believe that Voltas is trading at attractive valuations. We also

believe that, incremental risk limits to the extent of earnings correction in ensuing quarters.

We maintain BUY with revised target price of Rs250/Share.