Voltas Ltd- ICICI Securities Fundamental Top Picks for 2015

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Voltas Ltd (VOLTAS) Target Price: | 348 (48% upside)
• Voltas, India’s leading room air conditioner (RAC) manufacturer (with
~20% volume market share) & electro-mechanical project & services
(EMPS) player, is set to benefit from a changing demographic profile &
revival in India’s investment cycle. Its unitary cooling products (UCP)
division’s revenue has grown at 16% CAGR in FY10-14 mainly due to a
change in product mix towards premium products. With sustained
demand from tier-II, tier-III cities and rising trend of urbanisation, we
expect the UCP division to witness volume growth of ~8% (vs. ~5%
industry growth) for FY14-17E. In the EMPS business, Voltas’ strategy to
focus on profitability by bidding for small size, high margin projects and
their timely execution would help in margin expansion in future. Given
the strong performance of UCP division, its contribution to revenue may
change from current 39% to 44% by FY17E. We expect consolidated
sales, earnings CAGR of ~12%, ~24%, respectively, in FY14-17E
• Voltas follows an asset light model for its UCP division, which has an
assembling capacity of 7,70,000 units and a total dealer network of over
6500 in India. Strong brand recall value and relatively lower A&P
expenditure than competitors helped Voltas maintain EBIT margin of 9-
12% in FY10-14. We expect EBIT margin of the segment to remain strong
(~12.5-12.8% in FY14-17E) due to increasing contribution of split AC.
Strong RoCE of ~40-43% in FY11-14 & strong cash flow generation
capacity of UCP division helped in funding higher working capital
requirement of EMPS business in difficult times. We believe a steady
recovery in profitability of EMPS & robust cash flow generation capacity of
UCP division would generate operating cash flow of | 413 crore in FY17E
• Voltas is trading at a PE multiple of 20x FY16E and 18x FY17E earnings.
We expect the EMPS segment to narrow its losses in FY14 and start
contributing to the EBITDA in FY15E by executing high margin projects. It
will help reduce working capital requirements with improving return
ratios, going forward. The continuous outperformance of the UCP division
makes Voltas a re-rating candidate in line with consumer durable stocks.
Based on our SOTP valuation, we arrive at a target price of | 348