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VOLTAS LTD
PRICE: RS.121 RECOMMENDATION: BUY
TARGET PRICE: RS.150 FY12E P/E: 14.1X
q Voltas management highlighted continued margin pressure in its
projects and unitary cooling segments. In the projects segment, the company
has been asked to expedite couple of projects in Qatar. This is resulting
in employment of higher resources in terms of manpower.
q Voltas reported 60 bps decline in EBITDA margin in Q1 FY12. Voltas management
has signaled continued pressure on margins. Given this, we
have revised our margin forecast, thus resulting in a 9.4% decline in
earnings.
q Despite, the near-term challenges on growth front, we continue to be
positive on the long-term potential of the business. The business is assetlight
with high ROE and generates substantial cash. Our DCF based target
price works out to Rs 150 (Rs 171 earlier), providing adequate upside
of 24%.
Key Highlights
n Voltas indicated that the outlook for the MEP (Mechanical, Electrical and Plumbing)
business remains cautious and project finalization is getting delayed. In the
international market, the award of certain major projects such as the Louvre Museum,
Al-Ain Hospital, Abu Dhabi, Airport, etc., by the local Govt. has got delayed,
which is resulting in weak order intake.
n On the execution front, certain projects in Qatar have gathered momentum and
there has been faster clearance of design drawings to meet project deadlines.
This sudden step-up in activity has made the company rework its internal planning
mechanisms resulting in increased cost of material, labour and other resource
procurement. This is resulting in challenges on the execution and cost
management front. The overall quantum of such projects is around Rs 9.0 bn out
of the total international order book of Rs 26.3 bn.
Geographical mix of overseas order backlog
Order mix (%)
Qatar 40-45
Abu Dhabi 40
Others (mainly Singapore) 20-25
Source: Company
n The management also highlighted the increased margin pressure in the Middle
East region. The management indicated that the company has tendered recent
bids for as low as 5-6% segment margins vs normal 8-9% in past few years.
However, the company is selective on taking projects at discounted margins. The
company also pointed out that the management's focus on maintaining margins
at certain level has in recent years resulted in loss of orders.
n In bidding for large projects, the company is also taking the consortium route as
a risk mitigating strategy.
n The management highlighted that comparatively fewer iconic projects are being
contemplated in the Middle East region. This has also to some extent worked
against the company as Voltas has a strong presence in providing MEP solutions
to iconic projects like Burj Dubai.
n In domestic MEP projects, the company indicated that working capital has increased
as more projects are being awarded by the main contractor rather than
the main developer (the client). This is resulting in greater levels of approval
before payment is released.
n Rohini Electricals reported a loss of Rs 40 mn in Q1 FY12 driven largely due to
legacy orders. Such orders have now been completed hence the losses would be
under control in the coming quarters. The company has also completed the manpower
and process integration of Rohini Electricals with Voltas. The office of
Rohini Electricals has also moved to the Voltas premises.
n Voltas remains concerned on the margin front and has guided for continued pressure
on the same especially in the MEP segment. The company delivered EBIT
margin of 4.6% in Q1 FY12 vs 6.4% in Q1 FY11. The company does not foresee
any improvement in the margins in the next few quarters.
n In the unitary cooling (room ACs) segment, the company indicated that offtake
of room ACs remains weak. Due to excess inventory in the system, manufacturers
are offering freebies on the product which is increasing the overall costs.
Outlook
n Outlook for domestic market is also lackluster with dull commercial real estate
activity and falling IIP rates.
n With fewer business opportunities, margins are expected to remain compressed
in the medium term.
n In the unitary cooling business, margins would continue to remain under pressure
as the finished goods inventory levels in the industry remain high.
n We see continued sluggishness and margin pressure in the near-term.
Earnings Outlook
n As outlined earlier, the company's projects and unitary cooling segments continue
to witness margin pressure. Management remains concerned and has signaled
continued pressure on margins especially in the MEP projects segment.
n In view of this, we revised our margin assumptions, which has resulted in a 9.4%
decline in forecast profits.
Valuation
n Voltas is currently trading at 14.1x P/E and 9.4x EV/EBITDA on FY12 basis respectively.
n Based on WACC of 14% and terminal growth rate of 4%, we arrive at a oneyear
forward DCF value of Rs 150 (Rs 171 earlier).
Assumption
FCFF in FY12 667
WACC (%) 13.4
PV of FCF 43,685
TV as % of FCF 43.0
Present value per share 132
One year forward value 150
Implied PE FY12 17.4
Revenue growth FY11-17 (%) 9.3
Source: Kotak Securities - Private Client Research
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� �
VOLTAS LTD
PRICE: RS.121 RECOMMENDATION: BUY
TARGET PRICE: RS.150 FY12E P/E: 14.1X
q Voltas management highlighted continued margin pressure in its
projects and unitary cooling segments. In the projects segment, the company
has been asked to expedite couple of projects in Qatar. This is resulting
in employment of higher resources in terms of manpower.
q Voltas reported 60 bps decline in EBITDA margin in Q1 FY12. Voltas management
has signaled continued pressure on margins. Given this, we
have revised our margin forecast, thus resulting in a 9.4% decline in
earnings.
q Despite, the near-term challenges on growth front, we continue to be
positive on the long-term potential of the business. The business is assetlight
with high ROE and generates substantial cash. Our DCF based target
price works out to Rs 150 (Rs 171 earlier), providing adequate upside
of 24%.
Key Highlights
n Voltas indicated that the outlook for the MEP (Mechanical, Electrical and Plumbing)
business remains cautious and project finalization is getting delayed. In the
international market, the award of certain major projects such as the Louvre Museum,
Al-Ain Hospital, Abu Dhabi, Airport, etc., by the local Govt. has got delayed,
which is resulting in weak order intake.
n On the execution front, certain projects in Qatar have gathered momentum and
there has been faster clearance of design drawings to meet project deadlines.
This sudden step-up in activity has made the company rework its internal planning
mechanisms resulting in increased cost of material, labour and other resource
procurement. This is resulting in challenges on the execution and cost
management front. The overall quantum of such projects is around Rs 9.0 bn out
of the total international order book of Rs 26.3 bn.
Geographical mix of overseas order backlog
Order mix (%)
Qatar 40-45
Abu Dhabi 40
Others (mainly Singapore) 20-25
Source: Company
n The management also highlighted the increased margin pressure in the Middle
East region. The management indicated that the company has tendered recent
bids for as low as 5-6% segment margins vs normal 8-9% in past few years.
However, the company is selective on taking projects at discounted margins. The
company also pointed out that the management's focus on maintaining margins
at certain level has in recent years resulted in loss of orders.
n In bidding for large projects, the company is also taking the consortium route as
a risk mitigating strategy.
n The management highlighted that comparatively fewer iconic projects are being
contemplated in the Middle East region. This has also to some extent worked
against the company as Voltas has a strong presence in providing MEP solutions
to iconic projects like Burj Dubai.
n In domestic MEP projects, the company indicated that working capital has increased
as more projects are being awarded by the main contractor rather than
the main developer (the client). This is resulting in greater levels of approval
before payment is released.
n Rohini Electricals reported a loss of Rs 40 mn in Q1 FY12 driven largely due to
legacy orders. Such orders have now been completed hence the losses would be
under control in the coming quarters. The company has also completed the manpower
and process integration of Rohini Electricals with Voltas. The office of
Rohini Electricals has also moved to the Voltas premises.
n Voltas remains concerned on the margin front and has guided for continued pressure
on the same especially in the MEP segment. The company delivered EBIT
margin of 4.6% in Q1 FY12 vs 6.4% in Q1 FY11. The company does not foresee
any improvement in the margins in the next few quarters.
n In the unitary cooling (room ACs) segment, the company indicated that offtake
of room ACs remains weak. Due to excess inventory in the system, manufacturers
are offering freebies on the product which is increasing the overall costs.
Outlook
n Outlook for domestic market is also lackluster with dull commercial real estate
activity and falling IIP rates.
n With fewer business opportunities, margins are expected to remain compressed
in the medium term.
n In the unitary cooling business, margins would continue to remain under pressure
as the finished goods inventory levels in the industry remain high.
n We see continued sluggishness and margin pressure in the near-term.
Earnings Outlook
n As outlined earlier, the company's projects and unitary cooling segments continue
to witness margin pressure. Management remains concerned and has signaled
continued pressure on margins especially in the MEP projects segment.
n In view of this, we revised our margin assumptions, which has resulted in a 9.4%
decline in forecast profits.
Valuation
n Voltas is currently trading at 14.1x P/E and 9.4x EV/EBITDA on FY12 basis respectively.
n Based on WACC of 14% and terminal growth rate of 4%, we arrive at a oneyear
forward DCF value of Rs 150 (Rs 171 earlier).
Assumption
FCFF in FY12 667
WACC (%) 13.4
PV of FCF 43,685
TV as % of FCF 43.0
Present value per share 132
One year forward value 150
Implied PE FY12 17.4
Revenue growth FY11-17 (%) 9.3
Source: Kotak Securities - Private Client Research
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