Cautious on capital goods, Voltas looks expensive: Verma

Sanju Verma, Group CEO of Violet Arch Capital told CNBC-TV18, "The rally in capital goods has been overdone for instance Voltas has had a brilliant rally. I would be very wary now trying to accumulate the stock at current levels of Rs 111. At Rs 111 this stock is ridiculously expensive at around 11.5 times EV to EBITDA and a price to earnings of somewhere between 14-15 times."

She further added, "The September quarter numbers were excellent with the net profit growth coming in at more than 40 percent year-on-year, but some of these structural problems for the capital goods space will continue to remain. Voltas has really got legs on the rally when there was an announcement a couple of weeks back that it had announced acquisition of overseas orders to the tune of Rs 1000 crore from some of the Middle Easter markets."

"What people fail to understand and realise is that the rally will sustain going forward only if the order book inflow translates into execution. One should not forget that even today a large part of the international order book with respect to Voltas is low end low margins, back-ended and the execution cycle is very slow. That tells us what is happening in the larger capital goods space as well both with respect to be it Larsen and Toubro (L&T), Bharat Heavy Electricals (BHEL) or Voltas," Verma said.

She further said, "It is one thing to acquire orders, have a good order inflow and it is another thing to execute them. Order book to sales for most capital goods companies has always been pretty healthy at anywhere between 2.5-3 times revenues. The point I am trying to make is that the working capital cycle is still under tremendous strain for instance in BHEL, we have seen so many brokerage reports saying this is a buy. Why would someone want to buy a company like BHEL which has Rs 20000 crore plus in terms of receivables and Rs 8000 crore of debt on its books and the cash is increasingly deteriorating from Rs 6000 crore a year back to less than Rs 4000 crore now."