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Management meeting update
We met Voltas’ management yesterday. Management is bullish on the Unitary
Cooling Products division, and anticipates the market to grow at 25-30% over
the next few years; it expects Voltas to continue winning market share. The
company has undertaken price hikes in Jan-11, which should help in offsetting
the impact of rising costs. Execution has picked up in the EMP business, both
for domestic and international projects. Margins of the division, however,
could be lower than expectations (at 7.5-8% cf. our estimate of 8.25-8.5%).
With the stock trading at 13.3x FY12 PE and 3.4x PB, valuations look
attractive and risks appear to be priced in. Maintain BUY.
Bullish on Unitary Cooling Products division
q Strong market growth. Management expects room AC market in India to
continue expanding at 25-30% for the next couple of years.
q Market share gains. Voltas has increased its market share in the last five years,
from 11% in FY04 to ~18% now. Management is confident that the company will
continue winning share as it expands its service network (by about 20% in FY12) in
tier II/ III cities and increases A&P spending.
q Initial sales in March slower than expectations. Following a strong January
and February, room AC sales growth slowed in the initial few weeks of March.
Management, however, noted that a significant proportion of March quarter sales
take place in the last week of March.
q Price hikes. Voltas has increased prices of room ACs by 5-7% in Jan-11. It is
contemplating another price hike in Apr-11. Most of the other competitors (except
Daikin) have also increased prices to offset the impact of rising costs.
q Sustainable margins of 8.5-9%. According to management, recent price hikes,
and increasing scale should help Voltas in sustaining margins in 8.5-9% range.
Surplus inventory of finished goods at the end of 3QFY11 should also help
mitigating the impact of rising costs in 4Q, in management’s view.
q CLSA estimates. We are forecasting 22-23% YoY revenue growth over FY12-13,
and 9% Ebit margins. There could be an upside risk to our estimates.
Execution picking up in EMP business; but margins could be a drag
q Domestic business improving. Management highlighted that domestic business
is going strong, with order inflows as well as execution picking up. Work has started
on Kolkata Airport, while Chennai airport is still moving slow.
q Execution in Qatar projects picking up. Execution has picked up in the two
projects that were moving slow in Qatar (Sindra Medical Centre and Barwa City).
Given that the company’s projects are concentrated in Qatar, Abu Dhabi and
Singapore, it is not seeing any impact of political unrest in Libya/ Egypt.
q Order inflows in the international business could be weak in near term.
Nonetheless, political disturbance in the region could slow project awards in the
near term. Management though remains bullish on the long term prospects as it
believes that there is pressure on governments to invest in infrastructure.
q Sustainable margins of 7.5-8%. Bidding has been aggressive in the Middle East,
with some Dubai-based contractors bidding aggressively in other regions.
Management, thus, believes that margins in this segment should be 7.5-8%.
q Rohini will break-even in FY12. In 9mFY11, Voltas has recorded Rs190m of
losses in Rohini (1% of electro-mechanical revenues). The company had mentioned
in its 3Q conference call that there would be more losses in 4QFY11. Management
confirmed that 4Q should be the last quarter of losses in the subsidiary and it
should break-even/ generate modest profit in FY12. From FY13 onwards, normal
profitability levels of 8-8.5% should resume.
q CLSA estimates. We forecast 9.5% YoY growth in revenues in FY12 and 14% in
FY13. We build in Ebit margins of 8.25% and 8.5% respectively for the two years.
Our conversations with management suggest that margins could turn out to be
lower than our estimates, especially if commodity costs don’t soften. The
management, though highlighted that any variations (i.e. change in designs) in
contracts could ultimately help it ion recording higher margins.
Engineering products business going strong
q Overseas expansion in mining, construction equipment. In mining and
construction equipment business, Voltas has started its operations of Maintenance
Services to an international customer in Mozambique. Expansion in other African
countries should also help in boosting sales.
q JV with KION Group to improve technology, sales network. Voltas had
announced a JV with KION Group earlier this week. Management believes that the
JV (in which KION has a majority stake) will help in improving technology and
expanding sales network. Voltas will continue to manufacture forklifts and
warehousing equipment; the JV will undertake all other activities (supplying
materials, sales etc).
q CLSA estimates. We forecast 25% YoY revenue growth in this segment over FY12-
13. We note, though that revenues from material handling business will decline as
Voltas will book only value addition (as opposed to gross value). Margins will
however improve. We will make the changes to our estimates once management
divulges further information on this JV.
Cash collections should improve in next few quarters
q Reasons for slow cash collection. Management highlighted three reasons for
slow cash collection: a) customers delaying payments because of tight liquidity
conditions; b) nature of business changing (Voltas is now a sub-contractor to EPC
contractors for infra projects while earlier it used to be main contractor for MEP
projects); and c) negotiations with international customers are undergoing on
certain design changes.
q Cash collection will pick as negotiations with customers are concluded.
Management highlighted that cash collection will improve as negotiations with
customers are concluded on variations/ design changes. It sees this happening over
the next few quarters.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Management meeting update
We met Voltas’ management yesterday. Management is bullish on the Unitary
Cooling Products division, and anticipates the market to grow at 25-30% over
the next few years; it expects Voltas to continue winning market share. The
company has undertaken price hikes in Jan-11, which should help in offsetting
the impact of rising costs. Execution has picked up in the EMP business, both
for domestic and international projects. Margins of the division, however,
could be lower than expectations (at 7.5-8% cf. our estimate of 8.25-8.5%).
With the stock trading at 13.3x FY12 PE and 3.4x PB, valuations look
attractive and risks appear to be priced in. Maintain BUY.
Bullish on Unitary Cooling Products division
q Strong market growth. Management expects room AC market in India to
continue expanding at 25-30% for the next couple of years.
q Market share gains. Voltas has increased its market share in the last five years,
from 11% in FY04 to ~18% now. Management is confident that the company will
continue winning share as it expands its service network (by about 20% in FY12) in
tier II/ III cities and increases A&P spending.
q Initial sales in March slower than expectations. Following a strong January
and February, room AC sales growth slowed in the initial few weeks of March.
Management, however, noted that a significant proportion of March quarter sales
take place in the last week of March.
q Price hikes. Voltas has increased prices of room ACs by 5-7% in Jan-11. It is
contemplating another price hike in Apr-11. Most of the other competitors (except
Daikin) have also increased prices to offset the impact of rising costs.
q Sustainable margins of 8.5-9%. According to management, recent price hikes,
and increasing scale should help Voltas in sustaining margins in 8.5-9% range.
Surplus inventory of finished goods at the end of 3QFY11 should also help
mitigating the impact of rising costs in 4Q, in management’s view.
q CLSA estimates. We are forecasting 22-23% YoY revenue growth over FY12-13,
and 9% Ebit margins. There could be an upside risk to our estimates.
Execution picking up in EMP business; but margins could be a drag
q Domestic business improving. Management highlighted that domestic business
is going strong, with order inflows as well as execution picking up. Work has started
on Kolkata Airport, while Chennai airport is still moving slow.
q Execution in Qatar projects picking up. Execution has picked up in the two
projects that were moving slow in Qatar (Sindra Medical Centre and Barwa City).
Given that the company’s projects are concentrated in Qatar, Abu Dhabi and
Singapore, it is not seeing any impact of political unrest in Libya/ Egypt.
q Order inflows in the international business could be weak in near term.
Nonetheless, political disturbance in the region could slow project awards in the
near term. Management though remains bullish on the long term prospects as it
believes that there is pressure on governments to invest in infrastructure.
q Sustainable margins of 7.5-8%. Bidding has been aggressive in the Middle East,
with some Dubai-based contractors bidding aggressively in other regions.
Management, thus, believes that margins in this segment should be 7.5-8%.
q Rohini will break-even in FY12. In 9mFY11, Voltas has recorded Rs190m of
losses in Rohini (1% of electro-mechanical revenues). The company had mentioned
in its 3Q conference call that there would be more losses in 4QFY11. Management
confirmed that 4Q should be the last quarter of losses in the subsidiary and it
should break-even/ generate modest profit in FY12. From FY13 onwards, normal
profitability levels of 8-8.5% should resume.
q CLSA estimates. We forecast 9.5% YoY growth in revenues in FY12 and 14% in
FY13. We build in Ebit margins of 8.25% and 8.5% respectively for the two years.
Our conversations with management suggest that margins could turn out to be
lower than our estimates, especially if commodity costs don’t soften. The
management, though highlighted that any variations (i.e. change in designs) in
contracts could ultimately help it ion recording higher margins.
Engineering products business going strong
q Overseas expansion in mining, construction equipment. In mining and
construction equipment business, Voltas has started its operations of Maintenance
Services to an international customer in Mozambique. Expansion in other African
countries should also help in boosting sales.
q JV with KION Group to improve technology, sales network. Voltas had
announced a JV with KION Group earlier this week. Management believes that the
JV (in which KION has a majority stake) will help in improving technology and
expanding sales network. Voltas will continue to manufacture forklifts and
warehousing equipment; the JV will undertake all other activities (supplying
materials, sales etc).
q CLSA estimates. We forecast 25% YoY revenue growth in this segment over FY12-
13. We note, though that revenues from material handling business will decline as
Voltas will book only value addition (as opposed to gross value). Margins will
however improve. We will make the changes to our estimates once management
divulges further information on this JV.
Cash collections should improve in next few quarters
q Reasons for slow cash collection. Management highlighted three reasons for
slow cash collection: a) customers delaying payments because of tight liquidity
conditions; b) nature of business changing (Voltas is now a sub-contractor to EPC
contractors for infra projects while earlier it used to be main contractor for MEP
projects); and c) negotiations with international customers are undergoing on
certain design changes.
q Cash collection will pick as negotiations with customers are concluded.
Management highlighted that cash collection will improve as negotiations with
customers are concluded on variations/ design changes. It sees this happening over
the next few quarters.
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