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VOLTAS LTD
PRICE: RS.79 RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.91 FY13E P/E: 11.1X
q Voltas' Central Airconditioning projects business would continue to witness
diminished margins in the near future due to higher cost involved
in expediting the execution of Sidra Medical project in Qatar.
q The central Air conditioning projects industry (MEP) continues to witness
difficult market conditions due to dull commercial real estate activity
both in india and abroad. Material cost pressure have also remained at
elevated levels.
q We maintain ACCUMULATE with a revised target price of Rs.91 based on
DCF.
Key highlights
Electromechanical Projects Segment (59% of revenues)
n The order intake (Central Airconditioning projects) in the domestic market has
been healthy and the current order book also provides a revenue visibility of 14
months. However, the company indicated that since the past two months, enquiries
for orders have shrunk appreciably. This may signal that order intake from
indian geography could potentially slacken in the coming months.
n Given the slack enquiry levels combined with the general oversupply in commercial
real estate, outlook for domestic orders is likely to remain subdued for
atleast the next six months.
n The company's project business in the Middle East continues to witness diminished
profitability due to the Sidra Medical and Reseach Center. This is a large
project for a 700 bed hospital and research center from the government of
Qatar.
n Voltas won this project in early 2010, however, the project activity remained
sluggish in the initial months. Subsequently, Voltas was asked to expedite this
project for which it had to employ additional resources in terms of manpower
and materials. That it had exhausted its quota for indian labour also worked
against the company as it had to recruit local labour to complete the project.
This imposed additional cost burden on the company.
n The company also indicated that this was a design and build job and it had to
make frequent modifications to its designs (the mgmt. indicated that a project of
such magnitude has several drawings/designs running into thousands), which also
added to the cost incurred.
n So far as the execution of this order is concerned, the initial order value stood at
Rs 9000 mn (dynamic figure depending on costs fluctuation). Out of which, the
company has executed 40% of the work even as the balance job is planned to
be executed over the next three quarters.
n The management expects that continuing mismatch between costs incurred vs
anticipated would weigh upon the profitability of this segment in the coming
quarters.
Unitary Cooling Business (30% of revenue)- Room AC segment
continues to remain weak
n The room AC market has shrunk by over 30% in the H1 FY12. The room AC industry
was seeing strong growth till Feb 2011 and AC makers had built inventory
in anticipation of robust demand. However, the summer season of 2011 has
been unexpectedly weak for the AC manufacturers. Consequently, most leading
players are saddled with unsold inventory.
n While the inventory levels are high, the industry has not seen price undercutting.
On the contrary, manufacturers (including Voltas) have raised their product
prices.
n The management believes that the Japanese players (Panasonic, Daikin and
Hitachi) could pose a formidable competition in the future. The Yen has appreciated
by 27% against the Rupee in 9MFY12, which is also turning into a cost
advantage for the Japanese players. Given this, players including market leader
LG have been working out their strategies to face the competition from Japanese.
Voltas has a second higher market share (around 19%) in the room AC
segment and expects to hike its Advertising and marketing campaign to protect
its turf.
Segment Margins
(%) Q2FY12 Q2FY11 Q1FY12
Electromechanical projects 0.7 8.2 4.6
Engg products and services 14.8 20.9 17.5
Unitary cooling 2.9 12.3 11.3
Total -8.4 21.7 19.3
Source: Company
Capital engagement has increased significantly in Electromechanical
projects and Unitary Cooling segment
n Higher capital employed has also been on account of slower collections, lower
advances available (due to slower intake of new orders), increase in on-site inventory
and slower clearance of certifications.
n Net working capital has increased to 92 days in H1 FY12 vs 29 days and 8 days
at the end of FY11 and FY10 respectively.
Capital Employed
(Rs mn) Q2FY12 Q2 FY11 Q1FY12
Electromechanical projects 7,123 2,349 6,163
Engg products and services 1,014 980 791
Unitary cooling 3,406 2,510 2,587
Source: Company
Order book remains subdued.
n As of Q2FY12, order backlog at Rs 45 bn is down 10% and 2% on a yoy and
sequential basis respectively. Average execution period is around 20 months.
n The company won two orders in Q2 FY12 1) Retail mall project in Abu Dhabi
worth Rs 5.0 and 2 bn) Rs 3.5 bn project through its Saudi JV. The advances on
these two projects are healthy. However, the company received LOI for the Abu
Dhabi order in 3Q and hence the order will be booked in Q3 FY12.
Outlook remains subdued
n The Management presented a more subdued outlook compared to the our previous
interaction during Q2 FY12 results.
n The management's outlook remains especially grim on the profitability front. It
expects the margins in projects segment to remain thin in the next few quarters.
We see continued sluggishness and margin pressure in the near-term.
Earnings Revised downwards post meeting
FY12 FY13
(Rs mn) Earlier Revised Earlier Revised
Revenue 51087 51087 53861 51530
EBITDA (%) 5.9 5.4 7 6.2
EPS (Rs) 6.4 5.9 8.2 7.0
-8.2% -14.5%
Source: Kotak Securities - Private Client Research
Valuation
n Voltas is currently trading at 13.1x and 11.0x FY12 and FY13 earnings respectively.
n Based on WACC of 14% and terminal growth rate of 4%, we arrive at a oneyear
forward DCF value of Rs 91 (Rs 116 earlier).
n In view of the aforementioned concerns, we maintain ACCUMULATE on the
stock.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
VOLTAS LTD
PRICE: RS.79 RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.91 FY13E P/E: 11.1X
q Voltas' Central Airconditioning projects business would continue to witness
diminished margins in the near future due to higher cost involved
in expediting the execution of Sidra Medical project in Qatar.
q The central Air conditioning projects industry (MEP) continues to witness
difficult market conditions due to dull commercial real estate activity
both in india and abroad. Material cost pressure have also remained at
elevated levels.
q We maintain ACCUMULATE with a revised target price of Rs.91 based on
DCF.
Key highlights
Electromechanical Projects Segment (59% of revenues)
n The order intake (Central Airconditioning projects) in the domestic market has
been healthy and the current order book also provides a revenue visibility of 14
months. However, the company indicated that since the past two months, enquiries
for orders have shrunk appreciably. This may signal that order intake from
indian geography could potentially slacken in the coming months.
n Given the slack enquiry levels combined with the general oversupply in commercial
real estate, outlook for domestic orders is likely to remain subdued for
atleast the next six months.
n The company's project business in the Middle East continues to witness diminished
profitability due to the Sidra Medical and Reseach Center. This is a large
project for a 700 bed hospital and research center from the government of
Qatar.
n Voltas won this project in early 2010, however, the project activity remained
sluggish in the initial months. Subsequently, Voltas was asked to expedite this
project for which it had to employ additional resources in terms of manpower
and materials. That it had exhausted its quota for indian labour also worked
against the company as it had to recruit local labour to complete the project.
This imposed additional cost burden on the company.
n The company also indicated that this was a design and build job and it had to
make frequent modifications to its designs (the mgmt. indicated that a project of
such magnitude has several drawings/designs running into thousands), which also
added to the cost incurred.
n So far as the execution of this order is concerned, the initial order value stood at
Rs 9000 mn (dynamic figure depending on costs fluctuation). Out of which, the
company has executed 40% of the work even as the balance job is planned to
be executed over the next three quarters.
n The management expects that continuing mismatch between costs incurred vs
anticipated would weigh upon the profitability of this segment in the coming
quarters.
Unitary Cooling Business (30% of revenue)- Room AC segment
continues to remain weak
n The room AC market has shrunk by over 30% in the H1 FY12. The room AC industry
was seeing strong growth till Feb 2011 and AC makers had built inventory
in anticipation of robust demand. However, the summer season of 2011 has
been unexpectedly weak for the AC manufacturers. Consequently, most leading
players are saddled with unsold inventory.
n While the inventory levels are high, the industry has not seen price undercutting.
On the contrary, manufacturers (including Voltas) have raised their product
prices.
n The management believes that the Japanese players (Panasonic, Daikin and
Hitachi) could pose a formidable competition in the future. The Yen has appreciated
by 27% against the Rupee in 9MFY12, which is also turning into a cost
advantage for the Japanese players. Given this, players including market leader
LG have been working out their strategies to face the competition from Japanese.
Voltas has a second higher market share (around 19%) in the room AC
segment and expects to hike its Advertising and marketing campaign to protect
its turf.
Segment Margins
(%) Q2FY12 Q2FY11 Q1FY12
Electromechanical projects 0.7 8.2 4.6
Engg products and services 14.8 20.9 17.5
Unitary cooling 2.9 12.3 11.3
Total -8.4 21.7 19.3
Source: Company
Capital engagement has increased significantly in Electromechanical
projects and Unitary Cooling segment
n Higher capital employed has also been on account of slower collections, lower
advances available (due to slower intake of new orders), increase in on-site inventory
and slower clearance of certifications.
n Net working capital has increased to 92 days in H1 FY12 vs 29 days and 8 days
at the end of FY11 and FY10 respectively.
Capital Employed
(Rs mn) Q2FY12 Q2 FY11 Q1FY12
Electromechanical projects 7,123 2,349 6,163
Engg products and services 1,014 980 791
Unitary cooling 3,406 2,510 2,587
Source: Company
Order book remains subdued.
n As of Q2FY12, order backlog at Rs 45 bn is down 10% and 2% on a yoy and
sequential basis respectively. Average execution period is around 20 months.
n The company won two orders in Q2 FY12 1) Retail mall project in Abu Dhabi
worth Rs 5.0 and 2 bn) Rs 3.5 bn project through its Saudi JV. The advances on
these two projects are healthy. However, the company received LOI for the Abu
Dhabi order in 3Q and hence the order will be booked in Q3 FY12.
Outlook remains subdued
n The Management presented a more subdued outlook compared to the our previous
interaction during Q2 FY12 results.
n The management's outlook remains especially grim on the profitability front. It
expects the margins in projects segment to remain thin in the next few quarters.
We see continued sluggishness and margin pressure in the near-term.
Earnings Revised downwards post meeting
FY12 FY13
(Rs mn) Earlier Revised Earlier Revised
Revenue 51087 51087 53861 51530
EBITDA (%) 5.9 5.4 7 6.2
EPS (Rs) 6.4 5.9 8.2 7.0
-8.2% -14.5%
Source: Kotak Securities - Private Client Research
Valuation
n Voltas is currently trading at 13.1x and 11.0x FY12 and FY13 earnings respectively.
n Based on WACC of 14% and terminal growth rate of 4%, we arrive at a oneyear
forward DCF value of Rs 91 (Rs 116 earlier).
n In view of the aforementioned concerns, we maintain ACCUMULATE on the
stock.
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