Voltas: 2QFY12 Conference Call Takeaways Citi Research

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Voltas (VOLT.BO)
Alert: 2QFY12 Conference Call Takeaways
We attended the Voltas 2QFY12 conference call. The following are the key takeaways.
 What’s New? (1) Voltas has recently secured LoI for a large retail project in Abu Dhabi
of ~Rs5bn, which is not included in its order book; (2) Management expects margins in
the international business to be under pressure for the next two quarters due to cost
overruns in the Qatar projects; (3) Rohini subsidiary may marginally miss its EBIT
breakeven in FY12; (4) Competitive intensity in the AC industry remains high, largely
due to adverse weather, higher Japanese competition and higher inventory levels.
 Electro-mechanical Projects – Management mentioned that there were difficulties in
the Qatar projects due to faster execution and consequent cost escalations. The
company is hopeful of settling certain variations towards the end of the execution. The
~Rs9bn Sidra project is ~60% completed and is expected to be finished by June 2012.
The ~Rs5.5bn Barwa City project is ~90% complete, and is expected to be finished by
March. The reduction in order inflows has resulted in lesser customer advances. The
company is also seeing a lengthening in debtor days. Voltas mentioned that it was
bidding with margins of ~7-8% in domestic and ~5% in international orders, and will try
to improve margins to ~7% by cost cutting, economies of scale, better design and
procurement.
 Engineering Products & Services – Revenues declined by ~5% YoY largely due to
the transfer of the material handling business. Management mentioned that margins in
the mining and construction business were under pressure due to the recent interest
rate hikes. Delay in securing environmental clearances for mines has also resulted in
lower sales and commissions.
 High Competition in Unitary Cooling Products – Management mentioned that there
has been a sharp industry-wide decline in volumes due to the adverse weather. This
has been compounded by (1) Renewed Japanese competition with aggressive price
cuts – Daikin by ~40%, Hitachi by ~10% and Panasonic by ~15%; (2) High inventory
maintained by other competitors anticipating ~30% YoY volume growth. Strategies to
counter the same – Voltas has limited the impact to ~18% drop in volumes
(maintaining its #2 position in the AC market) and ~7% drop in revenues by (1)
increased focus on water coolers and commercial refrigerators, (2) expanding
distribution network into Tier II and Tier III towns, (3) increasing ad spends, (4) and
leveraging its brand to maintain price levels.
Voltas
Valuation
Our target price for Voltas of Rs121 is based on PE of 12x Dec-FY12 E. We value
Voltas at a discount to its historical PE of 15x given the macro headwinds faced by the
company in the Middle East and muted order inflows impacting earnings growth. We
choose P/E as our valuation methodology for Voltas, as this is in line with other E&C
companies in our coverage.
Risks
We rate Voltas shares High Risk, reflecting the vulnerability of Voltas' business to the
global slowdown, especially in the Middle East. Key downside risks to our target price
include: International projects risks; termination of principal-agent relationships;
increasing competition in domestic and international markets; manpower shortages;
and material prices. Key upside risks to our target price include: stronger-thanexpected
performance driven by the international business; and turnaround of the
domestic operating environment. These risks could impede the stock from achieving
our target price.