RESULT UPDATE

VOLTAS Stellar quarter; big white goods market play

India Equity Research| Engineering and Capital Goods

EDELWEISS 4D RATINGS (VOLT) had a strong Q4FY17—margin at 5-years’ high (projects), strong A/C business momentum (revenue up 28%) and easily navigating Absolute Rating BUY margin/market share concerns in this business. That said, a landscape Rating Relative to Sector Performer changing development could be VOLT’s decision to enter the white goods Risk Rating Relative to Sector Low business in a 50:50 JV with Arcelik. It’s a big market (INR350bn, 3x VOLT’s Sector Relative to Market Overweight current AC market), fast growing (10-15%), dominated by MNC’s

(technology edge; so it needs the tie up) and one where its brand & MARKET DATA (R: VOLT.BO, B: VOLT IN) distribution can quickly enable VOLT establish itself. While it’s still early CMP : INR 475 days and there’s more detail needed, we estimate this business to add 8- Target Price : INR 522 10% to VOLT’s earnings in FY20, apart from synergies. That this business 52-week range (INR) : 484 / 287 is profitable and well valued (peers’ 25% ROCE, 35x PE) should augur well Share in issue (mn) : 330.9 for the stock. Enthused by this, we raise FY18/19 EPS estimate 10% each M cap (INR bn/USD mn) : 157 / 2,433 (projects business), see strategic & earnings upside on its JV and raise TP Avg. Daily Vol.BSE/NSE(‘000) : 1,675.0

to INR522 (INR375 earlier; revise up consumer business’ target multiple to 35x (earlier 25x). Maintain ‘BUY’. SHARE HOLDING PATTERN (%)

Current Q3FY17 Q2FY17 Stellar performance allays rising competitive intensity concerns Promoters * 30.3 30.3 30.3 VOLT clocked solid 28% and 21% YoY top-line growth in cooling products business MF's, FI's & BK’s 26.5 27.1 27.2 during Q4FY17 and FY17, respectively, coupled with stable EBITDA margin driven by FII's 20.7 22.4 22.4 better projects margin. While we agree that competitive intensity will escalate, Others 22.5 20.2 20.1 structural drivers like rising middle class and huge untapped market (<5% penetration) * Promoters pledged shares : NIL (% of share in issue) will provide ample growth opportunities over next 5 years.

The Arcelik tie up: Strategic & earnings potential PRICE PERFORMANCE (%) EW Capital The Arcelik tie up, we believe, could be meaningful. It enables VOLT target a big market Stock Nifty Goods Index (refrigerators, washing machines, microwaves dishwashers), leverage its brand & distribution (95% overlap with target market), brings in tech & product access (needed) 1 month 15.3 1.7 (1.3) and potentially opens up an entirely ne`w business line. While more detail is needed, 3 months 33.1 6.4 15.0 our early estimates indicate that even 5% market share in FY20 could add 8-10% to EPS 12 months 40.3 17.8 22.1

(not incorporated). That’s material and could change VOLT’s market’s perception. Outlook & valuations: Expanding target market; maintain ‘BUY’ The stock had a good run and is expensive at 27x FY19E with a 20% pop post the Arcelik announcement. That said, with a potentially landscape changing venture, a benchmark valuation framework that could be fundamentally higher (white goods peers trade at 30-40x), we see valuation tailwinds for AC business. Maintain ‘BUY/SP’.

Financials (Consolidated) (INR mn) Amit Mahawar

Year to March Q4FY17 Q4FY16 % change Q3FY17 % change FY17E FY18E FY19E +91 22 4040 7451 Net revenues 20,351 18,888 7.7 11,805 72.4 60,328 68,449 77,360 [email protected]

EBITDA 2,219 2,142 3.6 890 149.5 5,791 7,132 8,105 Swarnim Maheshwari Adj. net profit 2,018 1,668 20.9 829 143.3 5,079 5,518 6,078 +91 22 4040 7418 [email protected] Dil. EPS (INR) 6.1 5.0 20.9 2.5 143.3 15.4 16.7 18.4

Diluted P/E (x) 30.9 28.5 25.8 ROAE (%) 16.5 15.6 15.3 May 26, 2017 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL , Thomson First Call, Reuters and Factset. Edelweiss Securities Limited Engineering and Capital Goods

Extending presence in white goods segment VOLT and Arcelik (part of the Koc Group, Turkey’s largest industrial and services group) have announced to establish a Joint Venture (50:50) in India to enter the consumer durables market with initial investments of USD100mn. The proposed JV is expected to leverage VOLT’s strong brand presence and wide sales & distribution network with over 12K touch points. Arçelik will bring its strong R&D and manufacturing prowess, in addition to a wide product range and global sourcing capabilities.

The JV, under the Voltas Beko brand, will launch refrigerators, washing machines, microwaves and other white goods / domestic appliances in India. A manufacturing facility will be set up in the country and the JV will also source products from Arçelik’s global manufacturing facilities and vendor base.

White goods market could continue to clock double digit growth over the next 5 years The white goods market in India (refrigerators, washing machines, microwaves and dishwashers) is currently pegged at ~INR350bn, which is expected to clock double digit growth over the next 3-5 years (past 10 years is ~14%) as: A) rise in middle class population and their per capita income will enhance market penetration; and B) increase in discretionary spend on consumer durables and premium products with rising disposable incomes.

Benchmark valuation framework in white goods could rerate VOLT further Conservatively assuming a market share of ~5% by FY20 in the white goods market, the VOLT JV can easily garner revenue of ~INR25bn with PAT of ~INR1.5bn (EBITDA margin at 9%). Benchmarking the current valuation framework of global MNCs like Whirlpool of India and Johnson Controls Hitachi AC, we believe VOLT can easily add around ~USDINR400-500mn market cap (please refer table below).

Management comments about JV • Management believes the JV with Arcelik is a logical extension of the brand in the consumer durables space. Arcelik and KOC are recognised brands in Turkey, UK and Poland in the consumer durables business.

• They together plan to bring Beko brand to India under the Voltas– Beko brand. • The products will be imported initially. However, the company is planning to set up a manufacturing unit soon, details of which will be decided by Arcelik and VOLT mutually.

• VOLT is planning to widen its scope in the consumer durables white goods industry and Arcelik brings a lot of strengths to the table—product range, technological excellence and relevant customer connect.

• The JV will start with VOLT’s distribution channel, but it will be extended going forward.

• VOLT is planning to launch the Voltas– Beko brand during the FY18 diwali season. The range of products includes refrigerators, washing machines, microwaves and dishwashers. Initially, some products will be manufactured and some will be imported.

2 Edelweiss Securities Limited Voltas

• The JV will have a phased investment of INR6.8bn with 50:50 share. The investment can increase based on future demand.

• VOLT is eyeing 10% market share within reasonable time.

Table 1: Valuation Benchmarking and VOLT’s potential FY17 FY18 FY19 FY20 Industry Size (INR bn) 350 394 443 498 Yoy growth % 12.5 12.5 12.5 Market Share (%) Whirlpool 12.5 11.9 12.4 12.7 Hitachi 5.6 5.6 5.8 5.9 VOLT JV 0.8 3.0 5.0 Revenues (INR bn) Whirlpool 44 47.0 55.0 63.3 Hitachi 2022.025.529.3 VOLT JV - 3.2 13.3 24.9 EBITDA Margins (%) Whirlpool 12.9 12.8 13.2 13.4 Hitachi 8.8 8.7 10.6 10.8 VOLT JV 6.0 7.5 9.0 PAT Margins (%) Whirlpool 7.1 8.5 8.6 8.3 Hitachi 4.1 4.8 5.9 5.8 VOLT JV 3.9 4.9 5.9 P/E Multiple (x) Whirlpool 46.8 36.3 30.5 27.6 Hitachi 60.5 46.7 34.3 30.2 VOLT JV 30.0 27.0 Mcap to sales (x) Whirlpool 3.3 3.1 2.6 2.3 Hitachi 2.6 2.3 2.0 1.8 VOLT JV - 2.3 2.0 Potential Mcap for Voltas ltd. On P/E 19.7 (At 50% JV share) (INR bn) On Mcap/ sales 24.9

Source: Bloomberg, Edelweiss research

Table 2: SOTP valuations FY18FY19 Taluation FY19 TP (INR mn) Revenue PAT EPS Revenue PAT EPSMethodol Multiple Comment (INR) EMP Segment 29,698 1,373 4.2 32,871 1,477 4.5 P/E 14 40% discount to S&P BSE 63 Capital Goods Index Engineering 3,555 694 2.1 3,936 749 2.3 P/E 14 40% discount to S&P BSE 32 Segment Capital Goods Index Unitary Cooling 35,059 3,598 10.9 40,399 4,032 12.2 P/E 35 Market leader in 15-20% 427 Segment CAGR industry.

Total 68,312 5,666 17.1 77,206 6,258 18.9 522 Source: Edelweiss research

3 Edelweiss Securities Limited Engineering and Capital Goods

Q4 FY17 conference call: Key highlights

Guidance - FY18: Management is targeting 6% margin in the EMPS segment.

Highlights • FY17 tax rate fell to 28% due to refund from previous adjustments. • In FY17, Voltas’ room AC volumes grew 33% versus industry’s 31%.

Consumer durables industry: The consumer durables industry had market size of INR350bn in India in FY17 with volume of 20mn units. It is expected to grow at 10-15% in coming years wherein Voltas has 10-12% market share.

EMPS segment • There have been some green shoots and positive sentiment across India. Opportunity in the domestic market may be as good/large as in the international arena. • Voltas will be concentrating on profitability and will only bid for projects with better cash realisations.

• Strategy is to pick up the right projects and complete them with the right execution. • Margins have jumped to 5.7% and expected to sustain in FY18 at this level.

• Earlier, Voltas had a lot of legacy orders which were not being executed due to disputes or lack of money. Bulk of such projects has been completed. • The company’s aspiration is that the margins will be ~6% in the next year

• Order inflow for FY17: o INR16.95bn – Domestic o INR11bn - International • No substantial write-backs in the EMPS segment.

UCP segment • It’s been a hot summer so Voltas has grown extremely well.

• Management perceives shift in market towards inverter ACs, which now constitute 14% of the market compared to 10% in FY16. • Voltas has decided that there is a tactical strategy in remaining in window ACs, even though competitors have exited the segment.

• Competition has become more intense in the room AC market in the past 6 months

• Voltas has decided not to participate in the EESL tender due to the cost structure, but has participated in other schemes for ACs of and BSES. However, going forward, it may participate in EESL tenders.

• Outlook for next 2-3 years:

o Voltas anticipates pressure to maintain market share.

o Aim is to maintain EBITDA margin at 14%, which is way higher than industry average of 11%. The company will have to invest more in advertisements to maintain this.

4 Edelweiss Securities Limited Voltas

GST • Tax rates on products post GST: o AC -28% o Air coolers – 18% o All other services industry projects – 18% • For Voltas, the tax rate on AC was 25-26% including import duty before GST; post GST it will be 30-33% including import duty. • Prices of products may be increased post the increase in taxes. Management is currently not sure about the quantum of increase in prices. • Transition to GST is an industry-wide issue and Voltas has started work on it a few months ago. There may be some teething problems initially, but will manage the issues in the best possible manner to ensure a seamless and effective transition. Air Coolers • Voltas’ target is to be among the top 3 players. • Air cooling volumes stood at 170,000 units for FY17. • It has 22 SKUs and has expanded their distribution channel Table 3: Segmental snapshot Year to March Q4FY17 Q4FY16 % change Q3FY17 % change FY17 FY16 % change Revenue (INR mn) Electro mechanical projects (EMPS) 8,290 9,063 (8.5) 7,026 18.0 26,550 28,288 (6.1) Engineering products & services (EPS) 1,068 929 15.0 807 32.3 3,318 3,706 (10.5) Unitary cooling products (UCP) 10,860 8,504 27.7 4,111 164.2 30,469 25,210 20.9 Others - 3 (1) 135.7 (2.2) 50.0 Total revenue 20,215 18,494 9.3 11,942 69.3 60,337 38,711 55.9

Segment revenue mix (%) Electro mechanical projects (EMPS) 41.0 49.0 58.8 44.0 68.0 Engineering products & services (EPS) 5.3 5.0 6.8 5.5 75.0 Unitary cooling products (UCP) 53.7 46.0 34.4 50.5 65.4

EBIT (INR mn) Electro mechanical projects (EMPS) 477 291 63.8 273 74.7 373 259 43.8 Engineering products & services (EPS) 259 302 (14.3) 200 29.1 697 826 (15.6) Unitary cooling products (UCP) 1,781 1,398 27.4 434 310.0 2,622 1,983 32.2 Others Total EBIT 2,516 1,991 26.4 908 177.3 3,691 3,067 20.3

EBIT margin (%) Electro mechanical projects (EMPS) 5.7 3.2 3.9 1.4 0.9 Engineering products & services (EPS) 24.2 32.5 24.8 21.0 22.3 Unitary cooling products (UCP) 16.4 16.4 10.6 8.6 7.9 Others

EBIT mix (%) Electro mechanical projects (EMPS) 18.9 14.6 30.0 10.1 7.0 Engineering products & services (EPS) 10.3 15.2 22.1 18.9 22.4 Unitary cooling products (UCP) 70.8 70.2 47.9 71.0 53.7 Others 0.0 0.0 0.0 0.0 0.0 Source: Edelweiss research

5 Edelweiss Securities Limited Engineering and Capital Goods

Financial snapshot (INR mn) Year to March Q4FY17 Q4FY16 % change Q3FY17 % change FY17 FY18E FY19E Net revenues 20,351 18,888 7.7 11,805 72.4 60,328 68,449 77,360 Staff costs 1,485 1,740 (14.7) 1,478 0.4 6,184 6,838 7,568 Direct costs 14,852 13,408 10.8 8,175 81.7 42,359 47,306 53,581 Other expenses 1,795 1,597 12.4 1,262 42.3 5,994 7,173 8,107 Total expenditure 18,131 16,745 8.3 10,915 66.1 54,537 61,317 69,255 EBITDA 2,219 2,142 3.6 890 149.5 5,791 7,132 8,105 Depreciation 56 75 (25.3) 60 (5.7) 245 338 368 EBIT 2,163 2,067 4.6 830 160.6 5,546 6,793 7,737 Other income 386 393 (1.7) 597 (35.3) 1,998 1,701 1,868 Interest 58 54 6.3 22 165.9 160 165 188 Add: Exceptional items 2 268 (99.4) - 11 - - Profit before tax 2,493 2,673 (6.7) 1,405 77.4 7,395 8,329 9,417 Tax 496 664 (25.3) 437 13.4 2,089 2,582 3,108 Minority interest (14) 48 NA (14) NA 24 29 32 Associate profit share 7 (26) (128.2) (152) (104.9) (193) (200) (200) Reported net profit 2,019 1,936 4.3 829 143.4 5,090 5,518 6,078 Adjusted Profit 2,018 1,668 20.9 829 143.3 5,079 5,518 6,078 Equity capital(FV INR 1) 331 331 331 331 331 331 Diluted shares (mn) 331 331 331 331 331 331 Adjusted Diluted EPS 6.1 5.0 20.9 2.5 143.3 15.4 16.7 18.4 As % of net revenues Direct costs 73.0 71.0 69.3 70.2 69.1 69.3 Employee cost 7.3 9.2 12.5 10.3 10.0 9.8 Other operating expenses 8.8 8.5 10.7 9.9 10.5 10.5 EBITDA 10.9 11.3 7.5 9.6 10.4 10.5 Adjusted net profit 9.9 8.8 7.0 8.4 8.1 7.9 Tax rate 19.9 24.8 31.1 28.2 31.0 33.0

Change in Estimates FY18E FY19E New Old % change New Old % change Comments Net Revenue 68,449 68,163 0.4 77,360 76,636 0.9 EBITDA 7,132 6,495 9.8 8,105 7,370 10.0 EBITDA Margin 10.4 9.5 10.5 9.6 Building in greater margins from EMPS segment Adjusted Profit 5,518 4,851 13.8 6,078 5,560 9.3 After Tax Net Profit Margin 8.1 7.2 7.9 7.3 Capex 827 776 6.6 526 526 0.0

6 Edelweiss Securities Limited Voltas

Company Description Voltas Limited, part of the which holds 30.3% stake, is a leading air conditioning and engineering services provider. Founded in 1954, It offers engineering solutions through its three business segments in areas such as heating, ventilation and air conditioning, refrigeration, climate control, electromechanical projects, textile machinery, machine tools, mining and construction, material handling, water management, building management systems, pollution control and chemicals. Voltas has a higher market share of ~21% in the residential AC market. Voltas has one of the highest distribution touch-points (over 11,000 touch-points/7000 dealers), which can compare well with lots of mid-size local FMCG companies. Unitary Cooling Product and Engineering& Mechanical Project Segment contributes to ~90% topline of the company, while the former contributes more than 60% of the profits of the company.

Investment Theme Low cost power availability driving up AC sales: A new phenomenon as India increases rural penetration for electricity. What would buy other than cement/fans/ac companies?

Low Penetration of ACs gives us comfort on long term sales growth: AC penetration in India stands at <5% vs ~25% in China and ~50% in Korea. Various industry participants indicate that AC sales should see a strong 10-15% growth for the next 3-5 years, given the current low penetration levels.

Company’s unique positioning through distribution/marketing ensuring that they capture a lot of incremental first time sales in the country.

We estimate an EPS CAGR of 24% assuming 10% AC revenue growth in line with average of last eight years. EPS for AC division is estimated at 20% CAGR. ROE for AC business > 50-60% over the cycle. We see a bigger growth story now with Voltas’s entry into US$5-7bn white goods market which is growing at 15% CAGR.

Key Risks Any slowdown in capex spending in West Asia and in economic activity with respect to infrastructure creation in India will dry up EMPS division’s incremental order intake.

Further, margins and lead time for delivery in the EMPS segment can come under pressure with local players strengthening their operations and the entry of new global players.

De-rating following a slowdown in AC demand: As per the trading bands the stock is currently trading at upper quartile of last twenty year trading band. if AC sales were to slow down to less than 5%, the AC business starts getting a multiple closer to 20x, resulting in 12- 15% downside in the stock.

Any major slowdown in consumer discretionary spend might affect the white goods market.

7 Edelweiss Securities Limited Engineering and Capital Goods

Financial Statements Key Assumptions Income statement (INR mn) Year to March FY16 FY17 FY18E FY19E Year to March FY16 FY17 FY18E FY19E Macro Income from operations 57,198 60,328 68,449 77,360 GDP(Y-o-Y %) 7.2 6.5 7.1 7.7 Direct costs 40,871 42,359 47,306 53,581 Inflation (Avg) 4.9 4.8 5.0 5.2 Employee costs 6,351 6,184 6,838 7,568 Repo rate (exit rate) 6.8 6.3 6.3 6.3 Other Expenses 5,646 5,994 7,173 8,107 USD/INR (Avg) 65.0 67.5 69.0 69.0 Total operating expenses 52,869 54,537 61,317 69,255 Company EBITDA 4,330 5,791 7,132 8,105 EMP revenue growth (%) 28.1 (6.1) 8.4 11.0 Depreciation 264 245 338 368 Eng. rev growth (%) 2.8 (10.5) 7.2 10.7 EBIT 4,066 5,546 6,793 7,737 Unitary Cooling product 1.8 19.2 15.1 15.2 Add: Other income 1,367.1 1,998.2 1,700.58 1,867.56 Room AC ( Qnty) 934,338 1,093,176 1,202,493 1,370,842 Less: Interest Expense 158 160 165 188 NSR (INR) 20,732 21,686 22,120 22,562 Add: Exceptional items 289 11 - - Order inflow (INR bn) 22.9 27.9 30.0 31.5 Profit Before Tax 5,565 7,395 8,329 9,417 Tax rate (%) 27.7 28.2 31.0 33.0 Less: Provision for Tax 1,696 2,089 2,582 3,108 Total no. of employees 9,740 8,990 9,476 9,987 Less: Minority Interest 60 24 29 32 Employee cost per head 687,303 687,303 721,668 757,752 Associate profit share 62 (193) (200) (200) Capex (INR mn) 95 39 827 526 Reported Profit 3,871 5,090 5,518 6,078 Dep. (% gross block) 1.9 5.6 5.5 5.5 Exceptional Items 289 11 - - Adjusted Profit 3,582 5,079 5,518 6,078 Shares o /s (mn) 331 331 331 331 Adjusted Basic EPS 10.8 15.4 16.7 18.4 Diluted shares o/s (mn) 331 331 331 331 Adjusted Diluted EPS 10.8 15.4 16.7 18.4 Adjusted Cash EPS 11.6 16.1 17.7 19.5 Dividend per share (DPS) 2.6 3.3 3.6 4.0 Dividend Payout Ratio(%) 28.9 25.9 26.0 26.0

Common size metrics Year to March FY16 FY17 FY18E FY19E Operating expenses 92.4 90.4 89.6 89.5 EBITDA margins 7.6 9.6 10.4 10.5 Net Profit margins 6.4 8.5 8.1 7.9

Growth ratios (%) Year to March FY16 FY17 FY18E FY19E Revenues 10.4 5.5 13.5 13.0 EBITDA 5.6 33.8 23.2 13.6 Adjusted Profit 5.9 41.8 8.6 10.1

8 Edelweiss Securities Limited Voltas

Balance sheet (INR mn) Cash flow metrics As on 31st March FY16 FY17 FY18E FY19E Year to March FY16 FY17 FY18E FY19E Share capital 331 331 331 331 Operating cash flow 4,435 5,888 2,764 6,596 Reserves & Surplus 27,780 32,735 37,019 41,716 Investing cash flow (3,673) (7,966) (827) (526) Shareholders' funds 28,111 33,066 37,350 42,047 Financing cash flow 472 (2,319) (1,185) (1,330) Minority Interest 267 285 314 345 Net cash Flow 1,233 (4,396) 752 4,740 Secured loans 2,707 1,709 1,959 2,209 Capex (176) (39) (827) (526) Total Borrowings 2,707 1,709 1,959 2,209 Dividend paid (877) (1,321) (1,435) (1,580) Long Term Liabilities 821 916 916 916 Def. Tax Liability (net) 206 277 277 277 Profitability and efficiency ratios Sources of funds 32,112 36,255 40,816 45,795 Year to March FY16 FY17 FY18E FY19E Gross Block 4,369 4,390 5,140 5,640 ROAE (%) 14.7 16.5 15.6 15.3 Net Block 1,952 1,728 2,196 2,385 ROACE (%) 20.3 22.8 22.7 22.8 Capital work in progress 13 5 56 56 Inventory Days 71 70 75 75 Intangible Assets 809 815 785 753 Debtors Days 86 85 84 82 Total Fixed Assets 2,773 2,548 3,036 3,194 Payable Days 212 220 212 207 Non current investments 13,389 21,316 21,316 21,316 Cash Conversion Cycle (54) (65) (53) (50) Cash and Equivalents 8,531 5,310 6,061 10,801 Current Ratio 1.6 1.4 1.5 1.6 Inventories 7,247 9,070 10,368 11,744 Debt/EBITDA (x) 0.6 0.3 0.3 0.3 Sundry Debtors 13,672 14,541 16,844 17,979 Fixed asset turnover (x) 21.0 22.8 24.8 25.3 Loans & Advances 39 35 52 62 Gross Debt/Equity 0.1 0.1 0.1 0.1 Other Current Assets 12,732 11,671 13,422 14,764 Adjusted Debt/Equity 0.1 0.1 0.1 0.1 Current Assets (ex cash) 33,690 35,317 40,686 44,549 Interest Coverage Ratio 25.7 34.6 41.1 41.2 Trade payable 24,711 26,466 28,513 32,295 Other Current Liab 1,562 1,770 1,770 1,770 Operating ratios Total Current Liab 26,273 28,236 30,283 34,066 Year to March FY16 FY17 FY18E FY19E Net Curr Assets-ex cash 7,418 7,081 10,403 10,484 Total Asset Turnover 2.1 1.8 1.8 1.8 Uses of funds 32,112 36,254 40,816 45,795 Fixed Asset Turnover 21.0 22.8 24.8 25.3 BVPS (INR) 85.0 100.0 112.9 127.1 Equity Turnover 2.3 2.0 1.9 1.9

Free cash flow (INR mn) Valuation parameters Year to March FY16 FY17 FY18E FY19E Year to March FY16 FY17 FY18E FY19E Reported Profit 3,871 5,090 5,518 6,078 Adj. Diluted EPS (INR) 10.8 15.4 16.7 18.4 Add: Depreciation 264 245 338 368 Y-o-Y growth (%) 5.9 41.8 8.6 10.1 Interest (Net of Tax) 110 115 114 126 Diluted P/E (x) 43.8 30.9 28.5 25.8 Others (721) 102 115 106 P/B (x) 5.6 4.7 4.2 3.7 Less: Changes in WC (911) (337) 3,322 81 EV / Sales (x) 2.6 2.5 2.2 1.9 Operating cash flow 4,435 5,888 2,764 6,596 EV / EBITDA (x) 35.0 26.5 21.5 18.4 Less: Capex 176 39 827 526 Dividend Yield (%) 0.5 0.7 0.8 0.8 Free Cash Flow 4,258 5,849 1,937 6,070

Peer comparison valuation Market cap Diluted P/E (X) P/B (X) ROAE (%) Name (USD mn) FY18E FY19E FY18E FY19E FY18EFY19E Voltas 2,433 28.5 25.8 4.2 3.7 15.6 15.3 Havells India 4,454 37.6 30.4 7.7 6.8 21.8 23.9 Median - 33.0 28.1 6.0 5.3 18.7 19.6 AVERAGE - 33.0 28.1 6.0 5.3 18.7 19.6 Source: Edelweiss research

9 Edelweiss Securities Limited Engineering and Capital Goods

Additional Data Directors Data Chairman Sanjay Johri Managing Director N N Tata Non Independent & Non Executive Director Vinayak Deshpande Non Independent & Non Executive Director J S Bilimoria Independent Non-Executive Director R N Mukhija Independent Non-Executive Director S N Menon Independent Non-Executive Director Nani Javeri Independent Non-Executive Director Nasser Munjee Independent Non-Executive Director

Auditors - Deloitte Haskins & Sells

Holding – Top10 Perc. Holding Perc. Holding ltd 26.64 Franklin resources 13.07 Life insurance corp 6.91 Hdfc asset managemen 4.72 Templeton asset mgmt 3.22 Tata investment corp 3.01 Idfc mutual fund 2.16 Sbi funds management 1.8 Idfc mutual fund 1.77 Hasham investment 1.6

*in last one year

Bulk Deals Data Acquired / Seller B/S Qty Traded Price

No Data Available

*in last one year

Insider Trades Reporting Data Acquired / Seller B/S Qty Traded

No Data Available

*in last one year

10 Edelweiss Securities Limited RATING & INTERPRETATION

Company Absolute Relative Relative Company Absolute Relative Relative reco reco risk reco reco Risk ABB India BUY SO L Bajaj Electricals HOLD SP M Bharat Forge BUY SO M Bharat Heavy Electricals BUY SO M Crompton Greaves HOLD SP M Cummins India BUY SO L Engineers India Ltd BUY SO L Greaves Cotton HOLD SP M Havells India BUY SP M Kalpataru Power BUY SO M KEC International BUY SP M Larsen & Toubro BUY SO M Praj Industries BUY None None Ramkrishna Forgings BUY SP M Siemens HOLD SP L TD Power Systems BUY None None Techno Electric & Engineering BUY SO M Thermax REDUCE SP L Triveni Turbine BUY None None VA Tech Wabag BUY None None Voltas BUY SP L

ABSOLUTE RATING

Ratings Expected absolute returns over 12 months

Buy More than 15%

Hold Between 15% and - 5%

Reduce Less than -5%

RELATIVE RETURNS RATING

Ratings Criteria Sector Outperformer (SO) Stock return > 1.25 x Sector return

Sector Performer (SP) Stock return > 0.75 x Sector return

Stock return < 1.25 x Sector return

Sector Underperformer (SU) Stock return < 0.75 x Sector return

Sector return is market cap weighted average return for the coverage universe within the sector

RELATIVE RISK RATING

Ratings Criteria

Low (L) Bottom 1/3rd percentile in the sector

Medium (M) Middle 1/3rd percentile in the sector

High (H) Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model

SECTOR RATING

Ratings Criteria Overweight (OW) Sector return > 1.25 x Nifty return

Equalweight (EW) Sector return > 0.75 x Nifty return

Sector return < 1.25 x Nifty return

Underweight (UW) Sector return < 0.75 x Nifty return

11 Edelweiss Securities Limited Engineering and Capital Goods

Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, – 400 098. Board: (91-22) 4009 4400, Email: [email protected]

Aditya Narain

Head of Research [email protected]

Coverage group(s) of stocks by primary analyst(s): Engineering and Capital Goods ABB India, Bharat Heavy Electricals, Bharat Forge, Bajaj Electricals, Crompton Greaves, Engineers India Ltd, Greaves Cotton, Havells India, KEC International, Cummins India, Kalpataru Power, Larsen & Toubro, Praj Industries, Ramkrishna Forgings, Siemens, TD Power Systems, Techno Electric & Engineering, Thermax, Triveni Turbine, VA Tech Wabag, Voltas

Recent Research

Date Company Title Price (INR) Recos

25-May-17 Praj Poor quarter; pinning hopes 77 Buy Industries on 2G ethanol; Result Update

25-May-17 Bharat Forge Inline operating performance; 1,084 Buy recovery broad based; Result Update 24-May-17 Engineers Strong profitability; healthy 162 Buy india revenue visibility; Result Update

Distribution of Ratings / Market Cap Edelweiss Research Coverage Universe Rating Interpretation

Buy Hold Reduce Total Rating Expected to

Rating Distribution* 161 67 11 240 Buy appreciate more than 15% over a 12-month period * 1 stocks under review Hold appreciate up to 15% over a 12-month period > 50bn Between 10bn and 50 bn < 10bn

Reduce depreciate more than 5% over a 12-month period Market Cap (INR) 156 62 11

One year price chart

500

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(INR) 350

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250 Jul-16 Jul-16 Jan-17 Jun-16 Oct-16 Apr-17 Apr-17 Sep-16 Sep-16 Feb-17 Feb-17 Dec-16 Aug-16 Nov-16 Nov-16 Mar-17 May-17 May-16 Voltas

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