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VOLTAS Subdued on Weak Sentiments

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VOLTAS Subdued on Weak Sentiments VISIT NOTE VOLTAS Subdued on weak sentiments India Equity Research| Engineering and Capital Goods EDELWEISS 4D RATINGS We met the Voltas (VOLT) management to get an update on the company’s businesses. Management indicated that over the long term, Absolute Rating HOLD large opportunities exists in the projects’ business, the sentiments in the Rating Relative to Sector Performer near term remain weak, resulting in tendency to delay projects/ project Risk Rating Relative to Sector Low Sector Relative to Market Underweight awards. The air conditioner (AC) business has seen good traction and is likely to post volume growth in FY14 after two years of decline, even though effecting price hikes will be challenging. We trim our earnings MARKET DATA (R: VOLT.BO, B: VOLT IN) estimate for FY14e and FY15e by 3% and 4% respectively building in CMP : INR 81 20bps decline in margin given lower traction in projects business and thus Target Price : INR 92 maintain ‘HOLD’ with a revised target price of INR92 (earlier INR96). 52-week range (INR) : 139 / 73 Share in issue (mn) : 330.9 Delays plague project business; focus on select industries M cap (INR bn/USD mn) : 27 / 449 Avg. Daily Vol.BSE/NSE(‘000) : 1,840.7 While VOLT’s order pipeline for international projects business remains large, weak sentiments continue to delay project awards. Qatar market, in particular, is expected SHARE HOLDING PATTER N (%) to commence ordering during the next 12-18 months. In the domestic market, focus remains on IT/ITES, hospitals, select Infra projects (metro rail in particular looks Current Q3FY13 Q2FY13 Promoters * 30.1 30.1 30.1 promising), which show traction; there is little or no activity in retail and hotel industry. MF's, FI's & BK’s 25.4 25.7 26.6 AC industry expected to grow, but price hike a challenge FII's 18.5 21.6 22.5 Others 25.9 22.5 20.7 VOLT maintained its market leadership in AC business at 19.4% as of May 2013. After * Promoters pledged shares : NIL (% of share in issue) declining for the past two years, the AC industry is likely to grow ~10% in FY14. Despite cooling commodity prices, INR depreciation is likely to force players to hike prices. Change in energy efficiency norms could also trigger price hikes to maintain margins, PRIC E PERFORMANCE (%) EW Capital which will be a challenge. Macro headwinds continue to affect agency business and Stock Nifty Goods Index VOLT is looking at international geographies to beat the domestic slump. 1 month (5.2) (4.4) 6.0 3 months 7.4 2.8 (1.6) Outlook and valuations: Tough times; maintain ‘HOLD’ 12 months (20.6) 13.5 (3.9) Macro environment in the projects business continues to remain challenging, both in India and overseas. Rising costs will keep AC business margins under pressure. The stock is trading at 10.8x and 9.5x FY14E and FY15E earnings, respectively. We maintain ‘HOLD/Sector Performer’ with a revised target price of INR92 given the scenario of continued lower traction in the projects business, which we believe drives valuations. Financials Rahul Gajare +91 22 4063 5561 Year to March FY12 FY13 FY14E FY15E [email protected] Revenues (INR mn) 51,857 55,310 61,571 65,700 Amit Mahawar Rev. growth (%) 0.2 6.7 11.3 6.7 +91 22 4040 7451 EBITDA (INR mn) 3,364 2,452 3,410 3,958 [email protected] Net profit (INR mn) 3,128 1,957 2,477 2,812 Swarnim Maheshwari EPS (INR) 9.5 5.9 7.5 8.5 +91 22 4040 7418 EPS growth (%) (1.3) (37.4) 26.6 13.5 [email protected] P/E (x) 8.6 13.7 10.8 9.5 ROAE (%) 22.0 12.6 14.4 14.6 July 1, 2013 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited Engineering and Capital Goods Company Description Voltas, a part of the TATA group which holds ~31% stake, is a leading air conditioning and engineering services provider. It offers engineering solutions through its four business segments in areas such as heating, ventilation and air conditioning, refrigeration, climate control, electro-mechanical projects, textile machinery, machine tools, mining and construction, water management, building management systems, pollution control and chemicals. It has a large business of EMPS coming from the gulf countries and Far East. Investment Theme VOLT’s strong presence in the West-Asian region (particularly Middle East) and Far East (Hong Kong & Singapore) specialising in EMPS contracts has made it a preferred EPC-HVAC contractor. The flagship EMPS division contributes 60% plus to the topline, driven by contracts in domestic as well as international markets. We believe VOLT may gain from international experience and tap opportunities from the ongoing infrastructure boom in India. Further, with capital goods industry continuing its growth trend, we expect VOLT’ EPS division to capitalise on the opportunity, which can lead to improvement in overall margins. Key Risks Any slowdown in capex spend in West Asia and in economic activity with respect to infrastructure creation in India is likely to dry up incremental order intakes for its EMPS division. 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. The profitability of its UCP division is vulnerable to rise in input costs, increase in Chinese imports, excess capacity and increased competitive intensity. 2 Edelweiss Securities Limited Voltas Financial Statements (Consolidated) Key Assumptions Income statement (INR mn) Year to March FY12 FY13 FY14E FY15E Year to March FY12 FY13 FY14E FY15E Macro Income from operations 51,857 55,310 61,571 65,700 GDP(Y -o-Y %) 6.2 5.0 6.0 7.0 Direct costs 37,800 41,670 45,607 48,072 Inflation (Avg) 8.9 7.4 5.2 6.0 Employee costs 5,995 6,325 6,996 7,739 Repo rate (exit rate) 8.5 7.5 6.8 6.0 Other Expenses 4,698 4,862 5,558 5,931 USD/INR (Avg) 48.0 54.5 58.0 56.0 Total operating expenses 48,493 52,858 58,161 61,742 Company EBITDA 3,364 2,452 3,410 3,958 EMP revenue growth (%) 4.7 0.5 5.1 0.9 Depreciation & Amortization 340 278 307 348 Engineering revenue growth (%) (26.9) 4.6 12.5 10.7 EBIT 3,025 2,174 3,103 3,610 Unitary Cooling product (1.4) 19.3 18.4 15.2 Other income 985 901 913 909 Room AC ( Qnty) 640,000 723,200 809,984 915,282 Interest expenses 314 398 407 424 NSR (INR) 18,155 20,334 20,944 21,572 Profit before tax 3,696 2,678 3,608 4,095 Order inflow (INR bn) 24.0 19.5 20.0 21.5 Provision for tax 571 728 1,119 1,269 Cost of debt (%) 14.1 13.8 13.5 12.5 Net profit 3,125 1,950 2,490 2,826 Tax rate (%) 26.1 30.0 31.0 31.0 Extraordinary income/ (loss) (1,505) 121 - - Excise duty as a % of sales 0.6 0.6 0.6 0.6 Profit After Tax 1,620 2,071 2,490 2,826 Total no. of employees 9,994 10,244 10,792 11,369 Minority interest (9) (7) 12 14 Employee cost per head(INR mn) 599,880 617,396 648,266 680,680 Profit after minority interest 1,624 2,078 2,477 2,812 Net borrowings (INR mn) 848 663 250 500 Shares outstanding (mn) 331 331 331 331 Capex (INR mn) (232) 325 732 735 Diluted EPS (INR) 9.5 5.9 7.5 8.5 Depreciation as % of gross block 9.1 5.3 5.5 5.5 Dividend per share (INR) 1.1 1.6 1.6 1.8 Dividend payout (%) 11.2 27.0 21.5 21.5 Common size metrics Year to March FY12 FY13 FY14E FY15E Operating expenses 93.5 95.6 94.5 94.0 EBITDA margins 6.5 4.4 5.5 6.0 Net profit margins 6.0 3.5 4.0 4.3 Growth ratios (%) Year to March FY12 FY13 FY14E FY15E Revenues 0.2 6.7 11.3 6.7 EBITDA (23.7) (27.1) 39.1 16.1 Net profit (1.3) (37.4) 26.6 13.5 3 Edelweiss Securities Limited Engineering and Capital Goods Balance sheet (INR mn) Cash flow metrics As on 31st March FY12 FY13E FY14E FY15E Year to March FY12 FY13E FY14E FY15E Equity capital 331 331 331 331 Operating cash flow (2,064) 2,044 1,077 1,050 Reserves & surplus 14,448 15,926 17,869 20,076 Investing cash flow 747 (336) (732) (735) Shareholders funds 14,778 16,256 18,200 20,406 Financing cash flow (270) 216 (283) (105) Minority interest (BS) 170 118 131 145 Net cash flow (1,588) 1,924 62 210 Secured loans 2,153 2,832 3,082 3,582 Capex 232 (325) (732) (735) Unsecured loans 76 60 60 60 Dividends paid (848) (447) (533) (605) Borrowings 2,229 2,892 3,142 3,642 Sources of funds 16,935 19,045 21,251 23,971 Profitability & efficiency ratios Gross block 1,897 1,980 2,418 2,816 Year to March FY12 FY13E FY14E FY15E Depreciation 108 91 71 49 ROAE (%) 22.0 12.6 14.4 14.6 Total fixed assets 2,050 2,110 2,534 2,921 ROACE (%) 21.2 12.7 16.1 16.6 CWIP (incl.
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