>VOLTAS LIMITED (RELIGARE SECURITIES)

Voltas has reported a mixed bag of numbers, with flattish topline growth and order inflows but a strong PAT performance. Profits were driven by EBITDA margin expansion of 360bps YoY, with both the MEP and engineering divisions performing well. However, a dwindling order book marked by a drying up of inflows from international operations, puts a question mark on future business growth and stock performance. We lower our earnings estimates for FY10 and FY11 and reduce our target price from Rs 185 to Rs 167. Maintain Hold.

Weak order booking clouds prospects

■ Revenues flat at Rs 9.9bn: Voltas’ Q3FY10 topline was largely flat YoY while dipping 9.4% sequentially to Rs 9.9bn, falling 9.8% short of our estimate. The electro-mechanical (MEP) division reported flat revenues YoY at Rs 7.1bn, contributing a 72% share. About 61% of the segment’s turnover has been contributed by international operations while the balance came from the domestic business. The engineering products and services (Engineering) division has seen signs of improvement, with 6.8% YoY growth to Rs 1.2bn. In unitary
cooling products (UCP), revenue increased by 26.9% YoY to Rs 1.5bn.

■ EBITDA margin up 364bps YoY to 8.8%: In line with our expectations, the EBITDA margin improved sharply by 364bps YoY, while dipping 207bps sequentially to 8.8%. MEP has reported an improvement in EBIT margin by 220bps YoY to 8.9%, while the engineering division clocked a 386bps expansion to 13.5%. UCP reported a margin of 12.3% as against -3.2% in the same year-ago quarter.

■ Adj PAT rises 65%: Reported PAT has increased by 85.8% YoY to Rs 765mn due to margin expansion and profits on sale of property (Rs 93.5mn) booked during the quarter. Adjusting for the property sale, PAT has risen 64.9% to Rs 663mn.

■ Order book at Rs 39.6bn – concerns persist: The MEP order book stands at Rs 39.6bn, which is 1.2x FY10E revenues of the division, indicating poor visibility for FY11. Of this, the international order book comprises Rs 27.4bn
(including the Rs 7.1bn Yas Retail order which is under suspension).

■ Maintain Hold: The stock is currently trading at 16x FY11E earnings. We have revised our earnings estimates for FY10 and FY11 downward by 2.1% and 9.7% respectively mainly due to MEP order flow concerns. We maintain our Hold rating on the stock with a revised target price of Rs 167 (17x FY11E earnings) from Rs 185 earlier. We believe the conspicuous absence of international order flows will hamper stock performance in the coming months.

To read the full report: VOLTAS