>VOLTAS (MERRILL LYNCH)

COOLEST ONE; NEW BUY

■ Initiating with Buy and Rs185 PO based on 16xFY11E
We initiate on Voltas, the second largest air-conditioning & engg co in India (70% of sales) and Middle East (30% of sales), with a Buy. We expect it to be a key gainer of (1) thrust on infra in India; & (2) rise in oil price that could drive up capex in Middle East. Voltas FY10E PE has doubled to 16x since 15 May09 led by (1) new govt (2) 20% oil price rise & (3) new orders. We expect the 16xPE to be sustained due to expected 30%+ ROE and 25%+ EPS growth, hence have based
our PO at 16xFY11E.

■ Market size attractive; lead indicators showing uptrend
We expect market size for MEP (air-conditioning, electrification, plumbing etc), engg equipment and room AC in India to double in next five years, driven by India’s thrust on infra and 7%+GDP growth. We expect Middle East MEP market, which is US$5bn+ in size to grow 10% pa driven by US$60/bbl+ oil price. Uptrend is evident from new order wins, rising order execution and declining inventory.

■ FY09-12E EPS CAGR at 26%; 31% higher than consensus
We expect profit to grow 22% in FY10E and 38% in FY11E. Order backlog of 1.9x FY09 sales for MEP key for FY10E. Expect stronger growth in FY11 to be driven by (1) 56% rise in new orders; and (2) 80bp increase in EBITDA margin driven by change in sales mix to favor more profitable mining and construction equipmenT sales. MEP, room AC and engg equipment contributed 60%, 21% and 19% of Voltas FY09 operating profit, respectively.

■ New initiatives + acquisitions could yield further upside
Recent initiatives could yield further upside. These are (1) expansion of presence in MEP work in industrial units like power plants following acquisition of 51% stake in Rs2bn Rohini Electrical last year and (2) entry into water treatment biz where it recently won order worth Rs500mn in India. It has surplus for acquisitions.

To see full report: VOLTAS