VOLTAS: EMP division was strong adjusting for the onetime loss

■ What's changed
Voltas reported a Q3FY12 loss of Rs. 2.0bn after taking one-time impact of Rs. 2.8bn in the loss making Qatar contracts. As a result, 3Q EBITDA margins of 7.5% (350-400 bps above GS and Bloomberg consensus estimates) were more normalized. Revenue for the quarter at Rs 11.6bn also came in above our and consensus expectation, due to better than expected execution on the EMP orders. Order inflow at Rs 9.6bn was slightly above our expectation, with the order book growing 8% yoy partly due to order inflow and partly on account of restatement of the book on yrend foreign exchange rates.


■ Implications
Though the performance of EMP division was strong adjusting for the onetime loss, giving further visibility on normalized margins, we believe that margins are unlikely to go back to historical levels of 8-9% because recent
projects have been bid at lower margins: we expect FY13E EBIT margin of 6.5% for this segment. In addition, the EPS segment is also facing headwinds on the back of a change in the ownership of principal which may result in loss of some domestic contracts for Voltas: we expect revenue growth of 8% in FY13E. Increasing competition and a prolonged winter also leave little to expect from the UCP segment. These headwinds across all segments are the key reason for our Neutral rating.


■ Valuation
We incorporate the one-off in FY12E EPS, but increase EPS for FY13E-14E by 12-16% based on higher inflows, as a result increasing our PE-based 12-m fwd TP to Rs 113 (from Rs 97). The stock trades at 12-m fwd P/B of 2.3X, which in our view is justified given the muted growth: we expect FY11-13E revenue CAGR of 8% and ROEs of 21% vs. 39% over FY05-10.


■ Key risks
Downside risks: lower volumes in the UCP segment. Upside risks: pick-up in order inflows in the Middle East.


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