Brokers say buy Voltas, target price of Rs 523

The report lists out some investment rationale, these are below: -

"Over the years, Voltas has established a significant presence in the Middle East. The UAE region is currently flush with liquidity and project finance activity is on an upswing driven by investment in real estate. Voltas generates half of its international projects revenues from Middle and South East Asia. We believe that Voltas' superior project execution and refrigeration design capabilities coupled with its past track record would give it an edge over others in securing future projects."

"The engineering agency business enjoys a 40% EBIT margin as compared to Voltas' average 7% margin. We expect this business to grow at a CAGR of 38% for the next two years. The higher share of this business in the overall revenue mix should further enhance the margins."

"The refrigerator manufacturing operations at Hyderabad have faced a reduction in demand from OEMs coupled with poor offtake of Pepsi coolers and unprecedented increase in input costs. As a result of this, the manufacturing operations at Hyderabad have become unviable. The company is in the process of offering VRS to 750 employees at this plant. We see an early resolution of the manpower rationalisation programme to result in significant improvement in profitability, as Voltas is incurring a loss of Rs 15-20 million per month on this plant."

The report also mentioned concerns, these are below: -

"Slow down in construction activity in the Middle East and any delays in project execution, which might attract penalties."

"Delays in the closure of the Hyderabad unit."

About the company's valuations, the report says, "Over the years, Voltas has been able to position itself as an engineering company with a sizeable international presence. The company is modestly leveraged and cash surplus is greater than the debt. Voltas enjoys good return ratios with RoE of 23.4%. Voltas is currently trading at 15.7x and 13.5x FY06E and FY07E earnings respectively. We recommend a Buy with a price target of Rs 523 over a 12 month horizon i.e. 37% upside from current level."