UBS: Voltas - Improved risk-reward profile

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UBS Investment Research
Voltas Ltd
Improved risk-reward profile
􀂄 Event: management meeting to gauge business; FY12 will be challenging
The management meeting indicated a challenging FY12 due to Qatar project costs,
lower retail air conditioner (AC) sales in Q1 FY12, higher working capital and
poor sentiment impacting order flow (Rs44-45bn order book). The next six months
will be critical for order flow to support FY13 visibility. It will be net cash in
FY12E. An exceptional gain of Rs815m booked in Q1 FY12 from the sale of the
material handling business will boost yearly results.
􀂄 Impact: lower estimates and price target on Qatar costs, weak AC sales
We lower our FY12 EPS (excluding exceptionals) estimate by 27.3% and
including exceptionals estimate by 5.6% on the above reasons, and our FY13
estimate by 14.5% assuming peaking of rates, macro improvement, and better
room AC sales, and given UBS does not expect a global recession. We also lower
our price target sharply from Rs225 to Rs170, with lower implied valuations of
14.5x FY13E PE (historical mean of 17.5x) on medium-term uncertainties.
􀂄 Action: better risk-reward profile on valuations, infra story & high returns
Post significant underperformance (26.3% YTD to Nifty) and near trough
valuations (FY13E PE of 10x), the risk-reward profile of the stock has improved.
Long-term mechanical, electrical and plumbing (MEP)/retail AC opportunity in
India/MENA, the company’s net cash position, Tata management and high ROCEs
make us positive on the stock over the long term, albeit with medium-term
uncertainty (difficult to estimate the trough of negative newsflow).
􀂄 Valuation: maintain Buy; long term levered to infra story
We maintain our Buy rating. We derive our price target from a DCF-based
methodology and explicitly forecast long-term valuation drivers using UBS’s
VCAM tool (assume a 12.7% WACC). Our price target implies 14.5x FY13E PE

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