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Voltas
Upbeat on domestic outlook
Maintain Buy on earnings recovery & attractive valuation
Voltas is gearing up for a stronger FY12 and an even better FY13. It expects the
strong growth in domestic sales, contributing to 70% of sales, to continue, and
exports to do better in FY12, compared to the 20% decline in FY11. The stock has
fallen 40% since Nov2010, led by profit declines in Q2 and Q3FY11. We expect it
to re-rate from a PE of 12.8xFY12e, driven by stronger profit growth starting in
Q1FY12, led by a sustained jump in air conditioner sales and a pick up in Middle
East project execution.
Room AC sales to stay strong in FY12, despite weak Q4FY11
Voltas is targeting 50% volume growth in room AC sales in India in FY12, driven by
(1) strong AC demand growth in the summer season, starting in Apr2011, led by
rising affordability, and (2) expansion of market share from 19%, led by a new
product range and a 20% jump in dealers. The company is undeterred by the sales
decline in Mar2011, owing to a delay in the onset of summer in northern India.
MEP strong in India and recovering gradually internationally
Voltas reported net sales growth of <5% since Q2FY11, owing to over a 25%
decline in international MEP (Mechanical, Electrical and Plumbing works including
central air-conditioning). Robust growth of over 30% in domestic MEP has failed
to boost overall performance, as international MEP is 60% of the segment. The
company, however, is seeing a pick-up in execution on key international projects,
including Sidra Medical of Qatar, and, hence, is hopeful of better FY12.
Concerns over Middle East jobs & margin overdone
We don't expect the political unrest in the Middle East to affect Voltas, as the
company is restricted to Qatar and UAE. Also, the decline in EBITDA margin, to
7.6% in Q3FY11, owing to a loss in one subsidiary, i.e., Rohini Electrical, will end
in Q4FY11, and should improve in FY12, led by new project pricing rules.
Price objective basis & risk
Voltas (VTSJF)
Our PO of Rs220/sh is based on a PER of 17x FY12e EPS of Rs12.8, which is in
line with the median PE during previous growth cycles. Order inflow is the key
catalyst for the stock's valuation. A favourable change in business outlook for
Voltas, driven by rising infrastructure investment, will likely help re-rate the stock
significantly from current levels.
The risks we see for the company are a lack of new order wins, owing to (1) the
extended phase of slow economic growth, (2) an increase in competition, and (3)
a sharp decline in oil prices, which could impact Middle East economies
adversely.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Voltas
Upbeat on domestic outlook
Maintain Buy on earnings recovery & attractive valuation
Voltas is gearing up for a stronger FY12 and an even better FY13. It expects the
strong growth in domestic sales, contributing to 70% of sales, to continue, and
exports to do better in FY12, compared to the 20% decline in FY11. The stock has
fallen 40% since Nov2010, led by profit declines in Q2 and Q3FY11. We expect it
to re-rate from a PE of 12.8xFY12e, driven by stronger profit growth starting in
Q1FY12, led by a sustained jump in air conditioner sales and a pick up in Middle
East project execution.
Room AC sales to stay strong in FY12, despite weak Q4FY11
Voltas is targeting 50% volume growth in room AC sales in India in FY12, driven by
(1) strong AC demand growth in the summer season, starting in Apr2011, led by
rising affordability, and (2) expansion of market share from 19%, led by a new
product range and a 20% jump in dealers. The company is undeterred by the sales
decline in Mar2011, owing to a delay in the onset of summer in northern India.
MEP strong in India and recovering gradually internationally
Voltas reported net sales growth of <5% since Q2FY11, owing to over a 25%
decline in international MEP (Mechanical, Electrical and Plumbing works including
central air-conditioning). Robust growth of over 30% in domestic MEP has failed
to boost overall performance, as international MEP is 60% of the segment. The
company, however, is seeing a pick-up in execution on key international projects,
including Sidra Medical of Qatar, and, hence, is hopeful of better FY12.
Concerns over Middle East jobs & margin overdone
We don't expect the political unrest in the Middle East to affect Voltas, as the
company is restricted to Qatar and UAE. Also, the decline in EBITDA margin, to
7.6% in Q3FY11, owing to a loss in one subsidiary, i.e., Rohini Electrical, will end
in Q4FY11, and should improve in FY12, led by new project pricing rules.
Price objective basis & risk
Voltas (VTSJF)
Our PO of Rs220/sh is based on a PER of 17x FY12e EPS of Rs12.8, which is in
line with the median PE during previous growth cycles. Order inflow is the key
catalyst for the stock's valuation. A favourable change in business outlook for
Voltas, driven by rising infrastructure investment, will likely help re-rate the stock
significantly from current levels.
The risks we see for the company are a lack of new order wins, owing to (1) the
extended phase of slow economic growth, (2) an increase in competition, and (3)
a sharp decline in oil prices, which could impact Middle East economies
adversely.
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