Accumulate Voltas; target of Rs 97: Aditya Birla Money

Aditya Birla Money is bullish on Voltas and has recommended accumulate rating on the stock with a target of Rs 97 in its February 18, 2013 research report.
 
“Voltas’s top-line during 3QFY13 declined by 0.5 percent YoY and 1 percent QoQ to Rs11,525.4mn. The UCP segment rose marginally by 2 percent YoY; while the Electro mechanical projects (EMP) division is still reeling under pressure and de-grew 3 percent YoY. MEP consolidated order book stood at ~Rs42,100mn which is ~1.4x FY13E revenues of which domestic order book stood at Rs22,610mn while the balance is from the international operations. The international market scenario continuous to be highly uncertain and the near term outlook is challenging as a) the company has stayed away from bidding for new projects below threshold margin and b) stiff competition. In the domestic markets despite uncertain macro environment order inflows are picking. The UCP segment is stabilizing”
 
“The Company’s operating profit declined 70 percent YoY and 45 percent QoQ to Rs242.6mn; while operating margin contracted by 486bps YoY and 167bps QOQ to 2.1 percent during 3QFY13. EMP EBIT margin continue to be under pressure due to cost overruns/variations in international projects and were flat YoY at 0.7 percent as against 1.0 percent during 2QFY13. UCP EBIT margin was also flat YoY at 6.2 percent as against 7.8 percent during 2QFY13 which seems to be stabilizing at 6-6.5 percent levels. Engineering, Products and Services division (EPS) margin surprised positively and improved by ~580 bps YoY and QoQ at 24.7 percent which has helped the company in maintaining the overall margin. Factoring in sharp contraction in the EMP segment and improvement in the EPS segment we revise our margin estimates downwards by 20bps each for FY13 and FY14 to 5.8 percent and 6.9 percent respectively. Capital employed in the MEP segment increased by 97 percent YoY and 16 percent QoQ to Rs10,843mn which led to a marginal rise in company’s debt-to equity ratio to 0.23 levels. On the back of increase in debt levels we revise our debt to equity levels upwards to 0.18 from earlier 0.15 during FY13.”
 
“Voltas has been currently passing through a tough time and the near term environment is also challenging. In the UCP segment the company continues to strengthen its footing and outperform its peers while the EBIT margins are showing signs of stabilization in the medium term; however in the near term margins are likely to be under pressure as competition is intensifying. MEP segment especially on the international front has been a big drag on the company’s overall financials and outlook in the near term is highly challenging, while on the domestic front order inflows are picking up and doing the balancing act. Engineering products division continues to surprise on the positive note and the guidance for the same by the management is encouraging.”
 
“Voltas is likely to face near to medium term headwinds as the macro as well as micro environment is highly uncertain. On the back of margin pressures and rising debt levels we revise our profit estimates downwards by 5.3 percent and 4.3 percent for FY13 and FY14 respectively to Rs2,254.5 mn and Rs2,858.7mn respectively. Majority of the negatives have been priced in and we believe the downside is limited and hence we change our recommendation to “Accumulate” from “Neutral” on the stock. We value the company at 8x FY14 EV/EBITDA and arrive at a price target of Rs96.8/share At the CMP of Rs88.9 Voltas trades at FY14 P/E 10.3x and 6.9x its FY14E EV/EBITDA,” says Aditya Birla Money research report.

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