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VOLTAS LTD
RECOMMENDATION: BUY
TARGET PRICE: RS.200 FY12E P/E: 14.4X
q Order intake from the Middle East in the near-term is likely to remain
muted but the medium term outlook remains positive. The company indicated
that governments are now increasingly focussed on investing in
physical infrastructure in their own country. KSA and Oman have announced
USD 50 bn of investment plans. The company has minor presence
in Bahrain and hence has not seen any disruption in project execution.
In the domestic market, aggressive hiring by the IT/ITES sector is a
tailwind for the company.
q Given near-term subdued activity in project development, we expect
moderate revenue growth in FY12. Cost pressures (Copper prices) are
likely to keep margins under pressure. However, Rohini Electricals numbers
have been a dampener for margins in 9M FY11, we expect the company
to return to profitability in FY12. This may offset margin pressures.
q We have revised revenue estimates downwards for FY12 in view of continuing
slowdown in project awards and sluggish pace of project
completion. However, in view of adequate upside to our target revised
target price of Rs 200 (Rs 231 earlier), we maintain BUY.
MEP Update
Voltas' MEP contracting business had a order book of Rs 47 bn consisting of 16 bn
from India and the balance from mainly Middle East (Abu Dhabi and Qatar). Due to
the after-effects of global economic crisis in 2008, the Middle East construction
market has not been able to regain its lost momentum. As a result, order inflow
from the region has been lackluster.
Voltas maintained that project outlook for the ME continues to be positive and has
not seen any major setback in business due to the political developments in the region.
While the bidding pipeline is more or less the same as compared to the corresponding
period of the previous year, there is greater thrust from respective governments
to direct investment into their own country’s physical infrastructure. Saudi
Arabia and Oman have recently announced USD 50 bn investment plans.
The company has no major jobs going on in Libya and Bahrain and hence has not
faced any disruption in work. On the labour front, the situation is under control. A
positive thing has been that given the turmoil in Bahrain, Dubai is emerging as a
preferred destination for services, which may breath some life into the property
market.
Qatar continues to hold significant promise for the MEP business. It is estimated that
MEP would constitute close to 30% of the construction spending in the run-up to the
FIFA World cup in 2022. Spurred on by spending on infrastructural projects and continued
investments in construction projects, the Saudi Arabian and Qatari markets
are expected to report strong market growth.
Aldar Properties, which is the biggest developer in Abu Dhabi has reportedly suffered
erosion in value of its property portfolio and consequent deterioration in its
debt-repayment ability. The property major posted a loss of AED 12.7 bn in 2010
(mainly attributed to impairment on project portfolio). Aldar Properties, which enjoys
government support, is now working on financial restructuring.
Aldar is Voltas's prime client in the region and has executed prestigious projects like
Ferrari World on Yas Island, and Central market (ongoing). Voltas continues to maintain
strong relationship with Aldar.
Hong Kong and Saudi Arabia are the two new geographies that the company is
tapping.
Order intake in the domestic market had remained strong in Q3 FY11 with the company
winning Rs 4.0 bn vs Rs 1.76 bn in Q3 FY10 (adjusted for Rs 2.0 bn orders to
Rohini Electricals). The management has indicated that traction in domestic market
has continued in Q4 FY11.
Rohini Electricals expected to report improved profitability
Rohini Industrial Electricals Ltd (67% subsidiary) is into the execution of large turnkey
Electrical & Instrumentation contracts for the Power, Process, Industrial and
Commercial projects. This subsidiary reported loss of Rs 90 mn in Q3 FY11 as against
a profit of Rs 40 mn in Q3 FY10. The company had won around Rs 2.0 bn of orders
in Q4 FY10 at very competitive margins. These projects were executed in the 3Q
FY11. Higher input costs added to the margin squeeze. However, management believes
that worst is over for the subsidiary and it should be in a position to contribute
to profits in FY12.
March room AC sales numbers soft on YoY basis
Growth in Room AC sales numbers have been soft in March due to onset of early
summer in India in the previous year. To consolidate its market share of 19% (second
largest) in room ACs (both window and split), Voltas has launched 70 new variants
in the 0.75-3.0 ton range.
In response to the intense cost pressure (firm copper and alumimum) prices, Voltas
had hiked prices by 5% in January and is expected to take a further hike of 3%
shortly. The company is ramping up the number of service centres from 1,300 to
1,700 this year.
Voltas Limited and KION Group GmbH announce JV
Voltas Limited and KION Group GmbH have agreed to establish a joint venture in
India for the development, manufacture, marketing, and servicing of forklift trucks
and warehousing equipment. Voltas's material handling operations will be integrated
into a new joint venture company (JV), where the KION Group will hold a
majority share. The JV Company will be named Voltas Materials Handling (VMH)
and is expected to start operations in April 2011. As per the plan, the manufacturing
of the material handling products will remain in Voltas (Standalone) while the marketing
and selling operations of the forklift business will be done through the JV. The
material handling business (Revenue Rs 1.7-1.8 bn) mainly includes forklifts and
other warehousing equipment and forms part of the engineering services segment.
Impact of Material prices
In recent months, there has been increase in price of Copper and Steel. While the
consumer durables segment is the most vulnerable to rise in material prices, the
company expects to pass on the cost increase through price hikes. Notwithstanding
the YoY softness in Mar 2011, demand for room ACs is expected to remain robust in
April-May period.
The engineering services segment is largly neutral to material prices as this segment
is mainly commission income.
Working Capital has been expanding
Working Capital engagement has been on a rise due to factors including change in
nature of work and longer approval-related turnaround cycle. The company's project
mix has been changed from being the main contractor as in case of MEP projects to
a subcontractor for electrical/infrastructure projects. At subcontractor level, the process
cycle of certification has been time consuming. In an international market
which the company is executing, the design process is long-drawn and billing can be
done only during execution.
Hike in promoter stake?
The stake of the Tata Group has increased marginally during the year to 30.58% in
Dec 2010. The management clarified that the parent group is comfortable with a
stake between 30-35% and there no near-term plans of buyback.
During the 9M FY11 period, revenue growth has been muted mainly due to decline
in revenues of Electromechanical projects segment. Apart from sluggish order intake,
this segment has been hit due to slow-moving projects in India as well as
Middle East. The management has highlighted longer certification and approval
cycle dragging cash realisations.
On the margins front, higher costs and competitive pricing of projects have pulled
down margins especially in the projects segment. Rohini Electricals (included in
Electro-mechanical segment) has reported two consecutive quarters of losses and
was mainly responsible for deterioration in margins.
Order book stands at Rs 47 bn up 19% and provides revenue visibility of 19 months
which is adequate for the company. The company has recently entered the Saudi
Arabian market, which is a significantly large market for MEP. We expect meaningful
order intake from KSA in FY12.
In view of the sedate order intake in 9MFY11 and elongation in order execution
cycle, we have reduced our revenue estimate for FY12.
On the margin front, we expect continued cost pressure to prevail on margins. However,
Rohini Electricals returning to profitability may offset some margin decline due
to cost pressures.
Valuations
n Voltas is trading at 16.5x and 14.4x FY11 and FY12 earnings respectively.
n On an EV/EBITDA basis, the stock is trading at 8.8 FY12 EBITDA.
n In view of the earnings downgrade and changes to future growth estimates in
DCF model, we have reduced target price to Rs 200.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
VOLTAS LTD
RECOMMENDATION: BUY
TARGET PRICE: RS.200 FY12E P/E: 14.4X
q Order intake from the Middle East in the near-term is likely to remain
muted but the medium term outlook remains positive. The company indicated
that governments are now increasingly focussed on investing in
physical infrastructure in their own country. KSA and Oman have announced
USD 50 bn of investment plans. The company has minor presence
in Bahrain and hence has not seen any disruption in project execution.
In the domestic market, aggressive hiring by the IT/ITES sector is a
tailwind for the company.
q Given near-term subdued activity in project development, we expect
moderate revenue growth in FY12. Cost pressures (Copper prices) are
likely to keep margins under pressure. However, Rohini Electricals numbers
have been a dampener for margins in 9M FY11, we expect the company
to return to profitability in FY12. This may offset margin pressures.
q We have revised revenue estimates downwards for FY12 in view of continuing
slowdown in project awards and sluggish pace of project
completion. However, in view of adequate upside to our target revised
target price of Rs 200 (Rs 231 earlier), we maintain BUY.
MEP Update
Voltas' MEP contracting business had a order book of Rs 47 bn consisting of 16 bn
from India and the balance from mainly Middle East (Abu Dhabi and Qatar). Due to
the after-effects of global economic crisis in 2008, the Middle East construction
market has not been able to regain its lost momentum. As a result, order inflow
from the region has been lackluster.
Voltas maintained that project outlook for the ME continues to be positive and has
not seen any major setback in business due to the political developments in the region.
While the bidding pipeline is more or less the same as compared to the corresponding
period of the previous year, there is greater thrust from respective governments
to direct investment into their own country’s physical infrastructure. Saudi
Arabia and Oman have recently announced USD 50 bn investment plans.
The company has no major jobs going on in Libya and Bahrain and hence has not
faced any disruption in work. On the labour front, the situation is under control. A
positive thing has been that given the turmoil in Bahrain, Dubai is emerging as a
preferred destination for services, which may breath some life into the property
market.
Qatar continues to hold significant promise for the MEP business. It is estimated that
MEP would constitute close to 30% of the construction spending in the run-up to the
FIFA World cup in 2022. Spurred on by spending on infrastructural projects and continued
investments in construction projects, the Saudi Arabian and Qatari markets
are expected to report strong market growth.
Aldar Properties, which is the biggest developer in Abu Dhabi has reportedly suffered
erosion in value of its property portfolio and consequent deterioration in its
debt-repayment ability. The property major posted a loss of AED 12.7 bn in 2010
(mainly attributed to impairment on project portfolio). Aldar Properties, which enjoys
government support, is now working on financial restructuring.
Aldar is Voltas's prime client in the region and has executed prestigious projects like
Ferrari World on Yas Island, and Central market (ongoing). Voltas continues to maintain
strong relationship with Aldar.
Hong Kong and Saudi Arabia are the two new geographies that the company is
tapping.
Order intake in the domestic market had remained strong in Q3 FY11 with the company
winning Rs 4.0 bn vs Rs 1.76 bn in Q3 FY10 (adjusted for Rs 2.0 bn orders to
Rohini Electricals). The management has indicated that traction in domestic market
has continued in Q4 FY11.
Rohini Electricals expected to report improved profitability
Rohini Industrial Electricals Ltd (67% subsidiary) is into the execution of large turnkey
Electrical & Instrumentation contracts for the Power, Process, Industrial and
Commercial projects. This subsidiary reported loss of Rs 90 mn in Q3 FY11 as against
a profit of Rs 40 mn in Q3 FY10. The company had won around Rs 2.0 bn of orders
in Q4 FY10 at very competitive margins. These projects were executed in the 3Q
FY11. Higher input costs added to the margin squeeze. However, management believes
that worst is over for the subsidiary and it should be in a position to contribute
to profits in FY12.
March room AC sales numbers soft on YoY basis
Growth in Room AC sales numbers have been soft in March due to onset of early
summer in India in the previous year. To consolidate its market share of 19% (second
largest) in room ACs (both window and split), Voltas has launched 70 new variants
in the 0.75-3.0 ton range.
In response to the intense cost pressure (firm copper and alumimum) prices, Voltas
had hiked prices by 5% in January and is expected to take a further hike of 3%
shortly. The company is ramping up the number of service centres from 1,300 to
1,700 this year.
Voltas Limited and KION Group GmbH announce JV
Voltas Limited and KION Group GmbH have agreed to establish a joint venture in
India for the development, manufacture, marketing, and servicing of forklift trucks
and warehousing equipment. Voltas's material handling operations will be integrated
into a new joint venture company (JV), where the KION Group will hold a
majority share. The JV Company will be named Voltas Materials Handling (VMH)
and is expected to start operations in April 2011. As per the plan, the manufacturing
of the material handling products will remain in Voltas (Standalone) while the marketing
and selling operations of the forklift business will be done through the JV. The
material handling business (Revenue Rs 1.7-1.8 bn) mainly includes forklifts and
other warehousing equipment and forms part of the engineering services segment.
Impact of Material prices
In recent months, there has been increase in price of Copper and Steel. While the
consumer durables segment is the most vulnerable to rise in material prices, the
company expects to pass on the cost increase through price hikes. Notwithstanding
the YoY softness in Mar 2011, demand for room ACs is expected to remain robust in
April-May period.
The engineering services segment is largly neutral to material prices as this segment
is mainly commission income.
Working Capital has been expanding
Working Capital engagement has been on a rise due to factors including change in
nature of work and longer approval-related turnaround cycle. The company's project
mix has been changed from being the main contractor as in case of MEP projects to
a subcontractor for electrical/infrastructure projects. At subcontractor level, the process
cycle of certification has been time consuming. In an international market
which the company is executing, the design process is long-drawn and billing can be
done only during execution.
Hike in promoter stake?
The stake of the Tata Group has increased marginally during the year to 30.58% in
Dec 2010. The management clarified that the parent group is comfortable with a
stake between 30-35% and there no near-term plans of buyback.
During the 9M FY11 period, revenue growth has been muted mainly due to decline
in revenues of Electromechanical projects segment. Apart from sluggish order intake,
this segment has been hit due to slow-moving projects in India as well as
Middle East. The management has highlighted longer certification and approval
cycle dragging cash realisations.
On the margins front, higher costs and competitive pricing of projects have pulled
down margins especially in the projects segment. Rohini Electricals (included in
Electro-mechanical segment) has reported two consecutive quarters of losses and
was mainly responsible for deterioration in margins.
Order book stands at Rs 47 bn up 19% and provides revenue visibility of 19 months
which is adequate for the company. The company has recently entered the Saudi
Arabian market, which is a significantly large market for MEP. We expect meaningful
order intake from KSA in FY12.
In view of the sedate order intake in 9MFY11 and elongation in order execution
cycle, we have reduced our revenue estimate for FY12.
On the margin front, we expect continued cost pressure to prevail on margins. However,
Rohini Electricals returning to profitability may offset some margin decline due
to cost pressures.
Valuations
n Voltas is trading at 16.5x and 14.4x FY11 and FY12 earnings respectively.
n On an EV/EBITDA basis, the stock is trading at 8.8 FY12 EBITDA.
n In view of the earnings downgrade and changes to future growth estimates in
DCF model, we have reduced target price to Rs 200.
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