Voltas

Waitingforthesunshine
May28,2012 Kunal Sheth kunalsheth@plindia.com +91-22-66322257 Riddhi Kothari riddhikothari@plindia.com +91-22-66322238 Rating Price Target Price Implied Upside Sensex Nifty (PricesasonMay28,2012) Tradingdata Market Cap. (Rs bn) Shares o/s (m) 3M Avg. Daily value (Rs m) Majorshareholders Promoters Foreign Domestic Inst. Public & Other StockPerformance (%) 1M 6M Absolute (1.9) 17.6 Relative 2.3 16.0 HowwedifferfromConsensus EPS(Rs) PL Cons. 2013 8.3 8.6 2014 9.7 10.6 Accumulate Rs107 Rs127 18.7% 16,417 4,986

Update on Sidra Project: Sidra Medical and Research Centre Hospital project in Qatar is ~67% complete. Voltas has taken a hit of Rs3.2bn in FY12 on this project. The company believes that the execution of the Sidra project will get extended beyond FY13 as client continues to make changes in the project design. Voltas will conduct a techno commercial study in July-August (similar to one done in Q3FY12) to assess if any further provisions are required in the project. Outlook on ordering: Voltas ended the year with an order book of Rs42.3bn, down 12% YoY. It bagged orders worth ~Rs23bn in FY12 and Rs4.5bn in Q4FY12. In the international markets, the company has started seeing some signs of revival, especially in the Dubai markets and expects to see more traction over the next six months. In Abu Dhabi, the airport order has been awarded to the main contractor. We expect the sub contractor to get finalised by October (Voltas along with JV partner bid for the same). The Joint Venture established in the new geography of KSA has begun to make progress and expects traction in Qatar and the KSA markets (already bagged orders worth Rs3.6bn in Qatar though a private JV). In domestic markets, the commercial real estate and IT/ITES continues to be slow. However, hospital and hotels have seen some traction. Entry into in new segment in industrial space like Power, water and MEP project for automotive industry will help widen the scope of business and support growth in orders. Contd2
2011 51,768 7.7 4,408 3,114 9.4 (13.4) 2.5 2011 8.5 25.5 24.3 0.6 7.2 11.4 2.6 2.3 2012 51,750 3,258 738 2.2 (76.3) 1.6 2012 6.3 5.2 5.9 0.7 10.7 48.0 2.4 1.5 2013E 49,363 (4.6) 3,081 2,760 8.3 273.1 2.1 2013E 6.2 17.1 15.9 0.7 10.5 12.9 2.0 1.9 2014E 55,016 11.5 3,779 3,223 9.7 16.4 2.4 2014E 6.9 16.9 15.9 0.6 8.1 11.0 1.7 2.3

34.7 330.7 441.2 30.15% 20.00% 26.76% 23.09% 12M (35.0) (24.9) %Diff. 3.7 8.5

PricePerformance(RIC:VOLT.BO,BB:VOLTIN)
(Rs) 180 160 140 120 100 80 60 40 20 0
Nov-11 Jul-11 Sep-11 Mar-12 Jan-12 May-11 May-12

Keyfinancials(Y/eMarch) Revenues (Rs m) Growth(%) EBITDA (Rs m) PAT (Rs m) EPS (Rs) Growth(%) Net DPS (Rs) Profitability&Valuation EBITDAmargin(%) RoE(%) RoCE(%) EV / sales (x) EV / EBITDA (x) PE (x) P / BV (x) Netdividendyield(%) Source:CompanyData;PLResearch

Source:Bloomberg

Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report

Q4FY12ResultUpdate

Margin improvement drive earnings surprise: Voltas reported numbers which was ahead of our and street estimate by reporting better-than-expected margin for the quarter. It reported EBIT margin of 8.3% in the MEP segment (100bps improvement QoQ). The improved margins were primarily driven by improved follow-up, leading to recovery of variation claims in few old projects. Sales reported de-growth of 5.8% YoY at Rs15.7bn lower than our expectation of Rs17.1bn. PAT was up 7% YoY to Rs1.04bn.

Voltas

Working capital and cash generation continue to be under stress: Working

capital continues to be impacted due to: (a) a cautious approach in the international market towards passing on variation claims (b) stress on liquidity in the domestic market leading to difficulty in money collection (c) requirement to fund Sidra project losses and (d) low order flow leading to lower advances. Also, the change in nature of business to sub contractor from main contractor and more MEP project against HVAC project also impacted the working capital. The working capital % sales went up to 15.8% in FY12 against 7.9%. However, though the working capital is likely to be elevated due to change in business mix, some improvement from current levels can be expected as domestic liquidity is improves over the course of the year. Looking at a turnaround in RIE in FY13: The performance of Rohini Industrial Electricals (RIE) continued to be disappointing due to poor margins and losses from carried-forward legacy projects attributable to its earlier management. It reported a loss of Rs260m for FY12 and an order book of Rs2.3bn. The company highlighted that new orders are being procured at reasonable margins; various initiatives to reduce costs have been undertaken along with some key personnel changes to ensure a turnaround. During the year, RIE issued preference shares of Rs250m subscribed by Voltas, apart from injecting cash to ensure a positive net worth, qualifying RIE to bid for Govt. and other Public Sector projects. Targeting 10% growth in the UCP segment: Indian AC industry, on the whole, witnessed de-growth in sales volumes (estimated at 20%) during 2011-12. Voltas volume saw a de-growth of ~10%. It managed to hold on to the No. 2 position in the industry, with a market share of 16.9% and narrow the gap with No. 1 to 150bps from 500-600bps). The new all-weather AC has received good response from the consumer. The company now has a presence of over 5000+ consumer touch points. It will continue with its strategy of channel expansion, more specifically focused towards Tier-2 and Tier-3 markets, where higher demand is expected. However, the outlook on margin continued to be subdued due to intense competition from the more recent Japanese entrants. Also, weak overall sentiment makes it difficult to pass on cost increase to the market, given the price sensitivity of Indian consumers. Upgrade to Accumulate: The stock is trading at 10.8x FY14E earnings. We believe that the worst might be behind us, given the large part of provision on Sidra project has already been accounted for. Write-back from Sidra project could provide positive surprises. The outlook might be slightly muted in the near term on order flow, given the increased reach in terms of geography in international markets and business segments in the domestic market. This should help order flow once cycle turns. We believe that a lot of pessimism related to order flow is in the price and hence, downside seems to be limited. We upgrade the stock to Accumulate from Reduce.

May 28, 2012

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Exhibit1: Y/eMarch NetSales

Q4FY12ResultOverview(Rsm) Q4FY12 15,735 11,629 73.9 1,417 9.0 1,332 8.5 14,378 1,356 8.6 184 64 1,477 95 1,381 360 26.0 1,063 1,047 Q4FY11 16,708 12,369 74.0 1,504 9.0 1,474 8.8 15,347 1,361 8.1 188 53 1,496 42 1,454 544 37.4 940 980 13.0 6.9 (1.8) 21.0 (1.3) 129.4 (5.0) (33.9) (6.3) (0.4) (9.6) (5.8) YoYgr.(%) (5.8) (6.0) Q3FY12 11,539 7,983 69.2 1,628 14.1 1,162 10.1 10,773 766 6.6 272 84 954 64 891 544 61.0 661 (1,165) FY12 51,750 37,780 73.0 5,995 11.6 4,715 9.1 48,490 3,261 6.3 1,092 340 4,013 314 3,699 1,661 44.9 2,686 1,616 FY11 51,768 36,808 71.1 5,563 10.7 4,990 9.6 47,360 4,408 8.5 810 210 5,008 165 4,843 1,729 35.7 3,224 3,516 (16.7) (54.0) 34.8 61.5 (19.9) 90.0 (23.6) (3.9) 2.4 (26.0) (5.5) 7.8 YoYgr.(%) (0.0) 2.6

Expenditure Raw Material %ofNetSales %ofNetSales %ofNetSales Personnel Cost Others Total Expenditure EBITDA Margin(%) Other income Depreciation EBIT Interest PBT Total Taxes ETR(%) AdjustedPAT ReportedPAT Source:CompanyData,PLResearch

May 28, 2012

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Exhibit2: Y/eMarch Revenue

SegmentalBreakup(Rsm) Q4FY12 9,199 58.5 1,069 6.8 5,315 33.8 15,735 Q4FY11 9,494 56.8 1,740 10.4 5,490 32.8 16,715 (5.9) (3.2) (38.6) YoYgr.(%) (3.1) Q3FY12 8,241 71.4 877 7.6 2,338 20.3 11,539 FY12 31,832 61.5 4,121 8.0 15,388 29.7 51,751 FY11 30,411 58.7 5,638 10.9 15,608 30.1 51,768 (0.0) (1.4) (26.9) YoYgr.(%) 4.7

Electro-mechanical projects & services %oftotalRevenue %oftotalRevenue %oftotalRevenue Engineering products & services Unitary Cooling products Total EBIT Electro-mechanical projects & services %oftotalEBITDA %oftotalEBITDA %oftotalEBITDA Engineering products & services Unitary Cooling products Total EBITMargin(%) Electro-mechanical projects & services Engineering products & services Unitary Cooling products Total Source:CompanyData,PLResearch

763 56.3 173 12.8 458 33.8 1,433

788 57.9 242 17.8 581 42.7 1,617

(3.1) (28.4) (21.1) (11.3)

602 78.5 167 21.8 143 18.6 902

1,724 126.7 688 50.5 1,298 95.4 3,956

2,393 175.8 1,031 75.8 1,599 117.5 5,039

(27.9) (33.3) (18.8) (21.5)

8.3 16.2 8.6 9.1

8.3 13.9 10.6 9.7

7.3 19.0 6.1 7.8

5.4 16.7 8.4 7.6

7.9 18.3 10.2 9.7

May 28, 2012

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IncomeStatement(Rsm) Y/eMarch 2011
NetRevenue Raw Material Expenses Gross Profit Employee Cost Other Expenses EBITDA Depr. & Amortization Net Interest Other Income ProfitbeforeTax Total Tax ProfitafterTax Ex-Od items / Min. Int. Adj.PAT Avg.SharesO/S(m) EPS(Rs.) 51,768 36,808 14,961 5,563 4,990 4,408 210 165 810 4,843 1,729 3,114 3,114 330.7 9.4

2012
51,750 37,800 13,951 5,995 4,698 3,258 340 314 2,597 5,201 571 4,629 (883) 738 330.7 2.2

2013E
49,363 35,048 14,315 6,072 5,163 3,081 338 290 1,382 3,834 1,073 2,760 2,760 331.7 8.3

2014E
55,016 39,612 15,405 7,317 4,309 3,779 410 313 1,421 4,476 1,253 3,223 3,223 332.7 9.7

BalanceSheetAbstract(Rsm) Y/eMarch 2011

Shareholder's Funds Total Debt Other Liabilities TotalLiabilities Net Fixed Assets Goodwill Investments Net Current Assets Cash&Equivalents OtherCurrentAssets CurrentLiabilities Other Assets TotalAssets 13,617 1,381 235 15,233 2,458 916 2,613 9,077 4,980 30,329 26,232 170 15,233

2012
14,778 2,234 189 17,202 2,050 890 3,116 10,885 2,710 32,558 24,383 261 17,202

2013E
17,552 2,234 187 19,974 2,212 825 3,193 12,604 5,341 28,824 21,562 1,141 19,974

2014E
20,696 2,234 206 23,136 2,101 826 3,393 14,794 7,104 31,757 24,067 2,021 23,136

CashFlowAbstract(Rsm) Y/eMarch
C/F from Operations C/F from Investing C/F from Financing Inc. / Dec. in Cash Opening Cash Closing Cash FCFF FCFE

2011
392 (288) 96 200 4,694 4,980 (208) 821

2012
(3,075) 890 (80) (2,265) 4,980 2,715 (2,922) (2,069)

2013E
4,300 (577) (1,098) 2,626 2,715 5,341 3,510 3,510

2014E
3,518 (500) (1,256) 1,763 5,341 7,104 2,905 2,905

QuarterlyFinancials(Rsm) Y/eMarch Q1FY12

NetRevenue 13,458 EBITDA 1,062 %ofrevenue 7.9 Depr. & Amortization 103 Net Interest 85 Other Income 215 ProfitbeforeTax 1,904 Total Tax 582 ProfitafterTax 1,318 Adj.PAT 734 Source:CompanyData,PLResearch.

Q2FY12
11,019 76 0.7 89 71 421 587 176 403 228

Q3FY12
11,539 766 6.6 84 64 272 (1,708) 544 353 353

Q4FY12
15,735 1,356 8.6 64 95 184 1,407 360 1,013 1,013

KeyFinancialMetrics Y/eMarch Growth

Revenue (%) EBITDA (%) PAT (%) EPS (%)

2011
7.7 (4.0) (13.4) (13.4)

2012
(26.1) (76.3) (76.3)

2013E
(4.6) (5.4) 274.3 273.1

2014E
11.5 22.7 16.8 16.4 6.9 5.9 15.9 16.9 (0.2) (6) 11.0 1.7 8.1 0.6 28.0 31.7 8.0 90.1

Profitability
EBITDA Margin (%) PAT Margin (%) RoCE (%) RoE (%) 8.5 6.0 24.3 25.5

6.3 1.4 5.9 5.2

6.2 5.6 15.9 17.1

BalanceSheet
Net Debt : Equity Net Wrkng Cap. (days) (0.3) (46)

(44)

(0.2) (5)

Valuation
PER (x) P / B (x) EV / EBITDA (x) EV / Sales (x) 11.4 2.6 7.2 0.6

48.0 2.4 10.7 0.7

12.9 2.0 10.5 0.7

EarningsQuality
Eff. Tax Rate 35.7 Other Inc / PBT 16.7 Eff. Depr. Rate (%) 4.8 FCFE / PAT 26.4 Source:CompanyData,PLResearch.

26.1 29.6 7.8 (280.5)

28.0 36.0 7.0 127.2

May 28, 2012

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Prabhudas Lilladher Pvt. Ltd. 3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai-400 018, India Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209 RatingDistributionofResearchCoverage

60%

54.3%

%of TotalCoverage

50% 40% 30% 20% 10% 0% BUY Accumulate Reduce

21.9%

22.5%

1.3% Sell

Accumulate Sell TradingSell UnderReview(UR) : : : : Outperformance to Sensex over 12-months Over 15% underperformance to Sensex over 12-months Over 10% absolute decline in 1-month Rating likely to change shortly

PLsRecommendationNomenclature
BUY Reduce TradingBuy NotRated(NR) : : : :

Over 15% Outperformance to Sensex over 12-months Underperformance to Sensex over 12-months Over 10% absolute upside in 1-month No specific call on the stock

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May 28, 2012