Voltas - Project business disappoints - Sell :: RBS

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Voltas
Project business disappoints
Voltas's project business disappointed in 2Q due to project delays and the high
proportion of recent orders, but we expect traction in this segment to improve in
2H. Valuations for the core engineering business remain expensive compared to
peers, in our view. We maintain our Sell rating with a new target price of Rs178.


Continued disappointment in project business; other segments perform well
Voltas reported 2Q11 results that were in line with our estimates when adjusted for one-offs.
However, its core electromechanical projects and services (MEP) business disappointed with
revenues of Rs7.1bn (down 8.1% yoy) due to execution delays in large projects. This
segment’s revenues have been either flat or declining (yoy) in the past three quarters due to:
1) external delays in the execution of large projects, and 2) the order book mainly comprising
recent inflows, which means projects under execution are only in their initial stages. We see
a recovery in the segment in 2H11 as order execution picks up, but remain cautious on
possible execution delays in large projects, which could derail the segment’s performance.
Both the unitary cooling and engineering products businesses performed well during 2Q.
Order book remains stable; order inflow remains key
The MEP segment reported an order backlog of Rs49.8bn (+14.1% yoy), largely unchanged
qoq, and order inflow of Rs6.8bn (+42.2% yoy). The order book is 1.5x our FY11 segmental
revenue forecast, providing reasonable revenue visibility. Management said its Middle East
business was facing headwinds due to competitive markets while domestic markets
remained mixed. We feel sustained order inflow remains Voltas’s key future earnings driver.
Core engineering business remains expensive; maintain Sell
The consumer products business has performed well but growth should ease in FY12-13F.
We expect the engineering products & services segment to post better growth in FY11 and
FY12, but we think current valuations adequately reflect these positives. Tweaking our
estimates on the 1H results, our DCF-based target price rises to Rs178 (from Rs166) and we
maintain our Sell rating. Deconstructing Voltas’s business units indicates an SOTP valuation
of Rs173. The current stock price implies 32x P/E for the core engineering business, which
we view as expensive. The stock trades at a FY11F P/E of 22.4x.