Voltas

Investors with a two-year perspective can retain their exposure in the Voltas stock at the current price of Rs 185. The company has reported a 19 per cent sequential jump in its order book in the March quarter after six quarters of sluggish order inflows and declining order book, pointing to a revival in the domestic and international business.

The order book now (Rs 4,700 crore) however is just 1.5 times the revenues of (the MEP — mechanical, electrical and public health — business) last year.

Recovery in the Middle East market is at its nascent stage; order flows need to continue on a robust note in the coming quarters to bring the company back on a strong growth trajectory.

Post declaration of its FY10 results last week, the stock has made considerable gains (up 8 per cent). At the current market price the stock is trading at 18 times its FY10 earnings; the stock has been trading at a PE band of 16-23 times historically.

Middle East matters

Close to 60 per cent of Voltas' revenue is from the MEP business, which draws much of its orders from the Middle East market — United Arab Emirates, Qatar, and Bahrain. Though oil prices have recovered from lows of 2009, the economic situation in the Middle East is not yet out of the woods.

Credit growth remains sluggish on risk aversion among banks and financial institutions following Dubai World's bankruptcy, points out an IMF report.

This will be an impediment to growth and offtake of infrastructure and construction projects in the medium term.

Voltas' revenues from the Middle East have grown at a CAGR of 60 per cent between 2004-05 and 2008-09.

Revenues have been multiplying following the company's acquisitions and JVs and its growing market share. In May this year again, the company entered into a JV with an electronic and industrial products major in Oman, Mustafa Sultan Enterprises LLC. This will give further traction to the company's Middle East business in the coming quarters.

In the domestic market, the acquisition of 51 per cent stake in Rohini Industrial Electricals in September 2008 helped the company widen its business to include electrical and instrumentation projects in the cement, steel, power and oil and gas sectors .

In the first half of FY10, the MEP revenues (domestic plus international) grew at double digit rates (revenues were up over 30 per cent).

However, there was a slowdown in the second half following a lull in capital spending in user industries, and the MEP division closed the year with just 13 per cent growth in revenues.

The MEP business' carry forward order book has been on a decline from the quarter ending June 2008. The value of outstanding orders dropped from Rs 5,675 crore in end-March 2008, to Rs 4,666 crore in end-March 2009 and to Rs 3,964 crore in end-December 2009.

This makes a point that the order flow has been sluggish for almost two years now; the robust numbers of FY09 (MEP revenues up 59 per cent) are largely the result of orders won before the slowdown.

Cool show

Air-conditioners and commercial refrigeration products which make up the company's ‘Unitary Cooling' division witnessed a robust growth in 2009-10. This segment's revenues (25 per cent of the total) reported a growth of 29 per cent in 2009-10 and 72 per cent for the March 2010 quarter.

Voltas launched 50 new models (including the Gold, Platina and Plus versions of Vertis) in room air-conditioners for the 2010 summer with wide choices in features, price and tonnage.

Going ahead, contributions to the top-line from this segment are poised to increase with demand for air-conditioners on the rise in the domestic market.

Engineering reviving

Over the last two quarters there has been a pick up in the orders for textile machineries and mining and construction equipments. However, it hasn't yet translated into revenues for the company. The Engineering Products and Services division saw revenues fall by 14 per cent for FY10 (revenues down 3 per cent in the last six months of FY10).

Margins improve

Profit growth in FY10 outpaced top-line growth. With an 11 per cent growth in sales for 2009-10, Voltas managed a 51 per cent growth in net profits, thanks to the improved profit margins. Efficiency in cost management and fall in the cost of raw materials (raw material cost as a percentage of sales dipped to 47 per cent from 54 per cent in FY09) helped margin expansion at the operating level.

Operating profit margin expanded to 9 per cent in FY10 from 6.8 per cent in FY09. Voltas is quite comfortable on the debt front too. The company's debt-equity ratio stood at 0.2 in FY09. With interest expenses dropping by 23 per cent in 2009-10, outstanding debt can be assumed not to have increased.

via BL