>VOLTAS: cost overrun on Qatar project could surprise on negative side

We met the management of Voltas. The outlook for new orders continues to be weak. The cost overrun on Qatar project could surprise on negative side. UCP margin to be under pressure due to competitive pressure and low volumes. Maintain REDUCE.


■ MEP segment pain to continue: The outlook on domestic orders continues to be grim as enquires levels have dropped since Q2 and the drop is across sector. The management does not expect the outlook to improve for the next 2 quarters as far as domestic MEP is concerned. On international front the order pipe line continues to be limited as few only few countries s like Abu Dhabi , Saudi and Qatar are the awarding leading to very high competitive intensity in those markets driving down the margin profile of orders to 3-4%.


The cost overrun in the Qatar project continues to be ahead of estimate due to change in scope of project and shirked timeline of the project. We believe cost over run on this project will continues to spring negative surprise and impact the earnings for the next 3 quarters as well. Apart from lack of advance due to weak
order flows ,the shirked timelines for the Qatar project have put sever stress on the balance sheet (NWC days increased to 45days in H1FY12 from 26days in H1Fy11)and the working capital cycle is likely to deteriorate further Qatar project gets closed over the next 3 quarters.


■ UCP volumes continue to be weak: The company highlighted that volume continue to be weak even during Diwali season. The AC market has dropped -25- 28%YTD in FY12 resulting in inventory pile up in the industry. We believe inventory pile up will lead to discount by players, heightened competition (specially from Japanese players) and deprecating rupee will lead to pressure on margin over the next few quarter till volumes pick up.


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