>VOLTAS: Room AC driving growth (MERRILL LYNCH)

■ Raising PO on strong AC growth and uptrend in new project
Our management meeting left us positively surprised on demand, but negatively surprised on FY11e margin. We have tweaked up FY12e EPS to Rs15/sh, which is 20% above consensus. We have cut FY11e EPS by 7% on stock-out cost. We raised our PO to Rs240, as stock could re-rate to a PE of 16x FY12e driven by (1) rising outlook of residential AC market; and (2) cyclical upturn in project business.

■ Room air-conditioner growing 30%+ and has long way to go
Voltas, as the second-largest room AC company in India, with about 18% share, is a key beneficiary of the extremely strong demand growth being seen in room air-conditioners. In fact, AC is the fastest-growing consumer goods in India and likely to remain so, owing to (1) rising affluence along with climate change; and (2) fall in ownership cost owing to rising energy efficiency. Voltas expects room AC revenue, contributing to 25% of its revenue, to grow 30-35% in FY11e.

■ MEP cyclical recovery & new market benefits from H2FY11
Order inflow of project business (65% of FY10 sales) could start growing at a faster pace from H2FY11e, after two flat years. Rising new order inflow in the Middle East for last six months, lack of order cancellations, and rising enquiry level make Voltas confident about a resumption of the MEP boom from H2FY11e. Voltas is increasing its presence from four countries to seven countries to maximize growth. It is also expanding its presence in water treatment and
industrial electrical to boost sales.

■ Strong growth from FY12E; but flat FY11E on stock-out cost
Voltas suffered from excess demand for room ACs in Apr-Jun2010, as it had to source components on short notice and, hence, at higher cost. An increase in the margins in the engineering product segment (15% of FY10e profit), owing to stronger growth of textile & mining equipment having higher margins, could partly offset cost pressure.

To read the full report: VOLTAS