Monday, May 26, 2008

Voltas Ltd

Comforting prospects

Company Insight:

Voltas offers engineering solutions for a wide spectrum of industries in areas such as heating, ventilation and air conditioning, refrigeration, electro-mechanical projects, textile machinery, machine tools, mining and construction equipment, materials handling, water management, building management systems, indoor air quality and chemicals.

Stock Outlook:

Strong demand for its products and services, improving margins and growing order book augur well for Voltas.The last few years have seen Voltas Limited report strong growth in revenues and improvement in profitability, led by strong demand from user industries as well as the company's efforts.

Notably, Voltas is expected to report robust growth in all its three business segments and also sustain profitability, if not improve further, going forward.

Voltas' good prospects are well supported by increasing investments by user industries in the West Asian markets as well as in India. This should enable the company achieve its targeted annual growth of 35-40 per cent over the next few years.

EMPS: On solid footing:

The biggest revenue contributor is electro-mechanical projects and services (EMPS). This division undertakes MEP (mechanical, electrical and public works) and HVAC (heating, ventilation and air-conditioning) contracts; the latter is a part of MEP.

Among HVAC and MEP projects executed (jointly or solely) include the $227 million MEP contract for Burj Tower, Dubai (world's tallest building), $101 million MEP project for Emirates Palace Hotel in Abu Dhabi, $40 million MEP project for New Hong Kong Airport and HVAC projects for ITC Hotel (Lower Parel, Mumbai) and new Hyderabad International Airport, among many others.

For year ended March 2008, the company saw its order book (largely pertains to the HVAC and MEP business; 95 per cent of total orders) rise 101 per cent to Rs 4,872 crore, of which, international orders accounted for Rs 3,787 crore.

In India, too, there are huge opportunities in HVAC and MEP, which some analysts estimate at Rs 40,000-45,000 crore over the next five years. These would come up on the back of investments planned in sectors like IT and IT-ES, retail, airports, SEZs, hospitality and telecom, among others.

Others: Healthy prospects:

In engineering products and services (18 per cent of segment revenues), which is a combination of in-house manufacturing (70 per cent) and agency commission (30 per cent), Voltas sells equipment to users in the mining and construction, material handling and textiles sectors.

The unitary cooling (air-conditioners, water coolers, commercial refrigeration) products business, which accounted for 27 per cent of revenues, grew by a robust 37.3 per cent in FY08. Notably, it has reported a turnaround as profits grew from Rs 9.9 crore in FY07 to Rs 54 crore in FY08, helped by price rationalisation (including shifting of production to tax-free zone) and improved efficiencies.

Investment rationale

The order book size, which is nearly three times FY08 revenues of electro-mechanical projects business, reflects strong revenue visibility. Given the prospects of the other two businesses, Voltas should achieve its targeted annual growth of over 35 per cent for the next three years. And, profits should grow at similar pace, if not more.

The other trigger could come in the form of an announcement pertaining to its 32-acre land in Hyderabad, which should happen over the next six months. At Rs 158.30, the stock trades at a PE of 14.7 based on FY10 earnings and, can deliver 25 per cent returns over the next one year.

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