Voltas (VOLT.BO, Neutral) Muted order inflow :: Goldman Sachs,

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Voltas (VOLT.BO, Neutral)
Muted order inflow to hamper future revenue growth and returns – recovery in its Middle East
business can improve earnings prospects; we maintain our Neutral rating on Voltas
 Voltas’s core strength lies in its execution as a heating, ventilation, and air conditioning (HVAC) specialist
both in India and the Middle East.
 The company has maintained its asset-light model with a low working capital ratio – the company’s strength
lies in operating cash generation (4% of sales for FY11).
 Voltas has seen limited order inflow from international markets post the downturn in 2008 – order inflows
have not recovered since then.
 We forecast revenue growth to remain low as we do not expect a significant increase in orders either from
the Middle East or from domestic segment over next 6-12 months. Any improvement thereafter would only
impact 2H FY13E earnings.
 We expect low revenue growth to hamper the company’s ROE and therefore we forecast it to decline from an
average of 29% between FY05 and FY11 to 23% in FY10-FY13 as revenue growth slows in FY11-FY13E to 7%
vs. an average of 22% between FY05 and FY11.
 We expect the unitary cooling product (UCP) segment to be a key earnings driver for the company over the
next few years as demand for air conditioning products rises in India. We forecast the segment to grow at a
CAGR of 13% over FY11-FY13, contributing about 33% to the company’s overall revenue.
 We lower our FY12-FY14 EPS estimates by 8%-22% as we factor in lower inflows for the company’s heating
segment as well as the impact resulting from the loss of operating leverage on its EBIT margins.
Valuation
 We maintain our Neutral rating on Voltas given limited order inflow is likely to hamper future revenue
growth. We lower our 12-month target price on the stock to Rs154 (from Rs194), based on a 14X P/E to our
rolled forward average of FY12E-13E EPS (vs. 15X previously and at a 7% discount to our 15X target multiple
on BHEL, similar to the discount applied to future returns).
 Voltas currently trades at 11X 12-month forward earnings, which is in line with the declining growth and
returns profile that we expect for the company.
Key risks
 Upside: Pick-up in order inflows in the Middle East, with Voltas securing potential large-sized orders.
 Downside: Lower volumes in the UCP segment.

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