votlas --hold for taget rs 300

Voltas Limited
Hold (Target Price: Rs 300)
Market Data
Price on reco. date (Rs)240 (BSE)
Mkt. Price BSE / NSE (Rs)241 / 243
Change since reco. 0.5%
52-week High/Low (Rs)243 / 75
BSE Code500575
No. of shares330.9 m
Free float72.7%
Market cap (Rs m)79,416

Share price chart

Rs 100 invested is now worth...

Promoters 27.3
Banks,FIs and MFs 18.9
FIIs 26.6
Public 20.9
Others 6.3
Total 100.0

By this recommendation of HOLD, what we mean is that existing shareholders would be better off holding onto the stock with a long-term perspective. However, if an investor would like to BUY this stock, then the upside from the current levels is about 25% point-to-point (compounded annual return of 10% during the period November 2007 to March 2010). Investors can take the investment decision based on this premise.

Investment Rationale

On to the 'next' phase of growth: Voltas, which has historically been closely associated with air conditioners (close to 40% share market share for over half a decade in the past), has been on a consistent transformation. As a matter of fact, the company suffered significant losses during the early 1990s, much due to the onslaught of MNCs, who launched a series of 'new generation' ACs, which were much superior that the products from Voltas' stable. During the period between 1993 and 1997, with the entry of the Korean, Japanese and other global giants (like LG, Samsung, Electrolux and Whirlpool), Voltas' market share eroded further. By FY01, the company's share of the domestic AC market plunged to a low of 7%. The decline in the market share was accompanied by significant pricing pressure.

That was seemingly a kicker for the company to transform itself through a series of restructuring initiatives, which involved high investments in innovation and product development, sprucing up the distribution network and aggressive marketing and branding initiatives. This has brought Voltas back to owning a 14.4% share of the Indian AC market (FY07 figures; Source: Voltas annual report). The company is the second largest player in the retail AC segment and a market leader in the institutional category. While the retail segment is competitive, Voltas has been concentrating on large commercial establishments, telecom companies, IT facilities, restaurants, large-scale retailing projects, software development parks and export zones. Lower prices, easy availability of low cost finance, higher disposable income and the urge for better living are factors that we believe will help the AC industry and consequently Voltas grow in the future.

Now, during this phase of restructuring between 2002 and 2007, the company also witnessed a tremendous ramp up in its non-air conditioner businesses. Specifically, the businesses of electromechanical projects & services and engineering agency witnessed compounded annual growth in sales of 29% and 49% respectively during FY02 to FY07. Not only did this spruce up the company's overall topline, the fact that these businesses earned significantly higher margins than the air-conditioner segment also helped Voltas expand its profitability and return ratios.

That was for the past. Now, for the period between 2007 and 2010, Voltas is aiming to make it big in the electromechanical space, with growth also duly supported by continued traction in the engineering agency and AC segments. With the domestic market for electromechanical projects opening up further, as also through a deeper foray into the international markets (largely Mid-East), the company is stepping up its move on to a higher growth trajectory going forward, which we believe is positive. With a strong management team and world-class execution capabilities at its side, we believe that Voltas has the ingredients to become a greater force in the electro-mechanical space going forward. We expect this segment to lead the company's overall topline growth of 31% on a compounded annual basis during the period FY07 to FY10.

EMPS - Not just air-conditioning: During its transformation process (as mentioned above), Voltas also built up a track record of executing large, prestigious electro-mechanical projects (EMPS) in the domestic as well as international market (which is spread across the Middle East region, including city states like Dubai, Bahrain and Macau). As a matter of fact, EMPS involves all aspects of construction of infrastructure like electricals and air conditioning barring the civil structure. After strengthening its position in the air-conditioning space, Voltas is now eyeing a large share of the electro-mechanical investments by way of executing the MEP (mechanical, electrical and plumbing, also inclusive of air-conditioning) portion of the projects as well.

As a matter of fact, in a typical MEP project, the share of air-conditioning ranges from 40% to 50% (though its depends on the project size). As such, after already establishing a name for itself in the air-conditioning part, Voltas shall share a higher portion of the total investment in electromechanical projects by way of positioning itself as an MEP player. This, we believe will provide a great boost to the segment revenues. Profitability, though, is almost equivalent in air-conditioning and MEP.

Given the level of economic activity and infrastructure development that is expected to take place in the domestic and Middle East markets (for the latter, largely on account of strong economic growth on the back of high crude prices), the EMPS division is expected to show strong double-digit growth going forward. We estimate revenues for the division to grow at a compounded rate of 35% during the period FY07 to FY10, against the expected industry growth rate of around 20% per annum. Comfort and new business segments like indoor air quality, energy management and refrigeration are likely to be major contributors of growth in the future. At the end of September 2007, the EMPS division had an order backlog of around Rs 27 bn. International orders form nearly 75% of this backlog, and the company expects to convert these orders to revenues in a span of 18 to 36 months.

Cold chain opportunity: In the refrigeration sub-segment of the EMPS business, which is currently 5% of domestic EMPS revenues, Voltas expects strong growth to come from the cold chain opportunity. The company has already executed Rs 150 m cold chain project for the Adani Group. To make inroads into this emerging opportunity, Voltas has tied up with the Netherlands based storage technology specialist Besseling Group to deliver turnkey solutions for storage of horticulture produce. Considering India's agrarian economy, the opportunity for post harvest solution is huge. We believe that the alliance has tremendous scope when one considers the scale and size of the storage solutions market in India, which is as large as Rs 50 bn. Voltas plans on targeting a sizeable chunk of this market and has already bagged several projects including the one from Adanis, International Flower Auction Sector in Bangalore, Abhirami in Chennai and Jaya Cold Storage in Tamil Nadu.

Engineering agency momentum: The performance of Voltas' engineering agency services (EAS) division has been pretty robust over the past few years and the vibes that are emanating from the management with respect to future growth of this business are very positive. The segment's revenues grew 39% YoY during 1HFY08, led by strong performances from the mining and construction and material handling equipment businesses. Although the textile machinery business recorded some weakness owing to the pressure that textile companies are facing on account of Rupee appreciation, the management has indicated that they expect the growth momentum to be maintained over the next few quarters as well. What they have said is that while new machinery orders have slowed down a bit, considering the already overflowing order books of equipment makers like Lakshmi Machine Works (from where Voltas sources a large part of its trading requirements), growth shall be maintained over the next few quarters.

Anyways, to take into account any pressure from the equipment agency business, Voltas is ramping up its manufacturing presence in the EAS segment (sale of own manufactured equipments contribute around 75% of this segment's revenues). Apart from the strong topline momentum, the more important part of growth of this business is its disproportionate contribution to Voltas' consolidated profitability. Against a revenue contribution of 16% in 1HFY08, the segment's contribution to the company's PBIT was 35%. While there was some pressure on profitability of the EAS division during the first half period (PBIT margins declined to 22% against 26% in 1HFY07), even if the segment were to maintain margins at the current levels (which is what we have estimated), considering the strong growth momentum, there will be an overall positive effect on Voltas' profitability going forward.

The EAS division is dependent on the performance of the mining, textile and the engineering sectors in India. And considering large-scale capacity expansion plans in these sectors and India's growing importance as an offshore manufacturing base, we expect demand for machine tools and machinery to be robust going forward. Overall, we expect the EAS division to be a big growth and profitability driver for the company going forward, though well supported by the electromechanical business.

UCP - Turnaround benefits flocking in: During FY06, Voltas had taken a huge Rs 650 m hit on its books on account of cost of VRS for employees at its Hyderabad refrigerator manufacturing unit, which was incurring heavy losses. Now, in lieu of the closure of the Hyderabad unit and in anticipation of higher demand going forward, the company set up a green-field unit for manufacture of commercial refrigerators, air-conditioning equipments and air coolers in Uttaranchal, so as to get advantage of relatively lower employee costs and tax benefits (100% income tax and excise exemption for 5 and 10 years respectively).

The Uttaranchal plant constitutes the following three sub-units:

  1. Additional capacity other than the one at Dadra for the manufacture of air-conditioning equipments.

  2. Manufacturing of commercial refrigerators, water coolers and specialised ACs for the telecom industry (these were earlier being manufactured at the Hyderabad unit).

  3. Additional capacity (other than the one at Dadra) for manufacture of room ACs (in joint venture with Fedders of the US).

This move out of Hyderabad and into Uttaranchal has helped the company improve profitability of the unitary cooling products (UCP) division. Importantly, the management has indicated that against staff strength of 750 in Hyderabad, it only has 40 employees on its rolls in Uttaranchal, with the remaining being on contract basis. This has helped the company pare some of its employee expenses. We expect the division to clock growth of 28% during the period FY07 and FY10, with EBIT margins to stabilize in the 5% to 6% range.

Fruits of rationalisation: One of the prominent reasons for the troubles that Voltas faced during the 1990s was the company's interests in a host of diverse and unrelated businesses.

The company's key divisions were running in losses, its cost structures were looking increasingly unsustainable and a bloated workforce was adding to the troubles. This led to the company registering its maiden loss in FY97 and missing dividend payout for the first time in its 43 years of existence. Businesses not passing the company's sustainability and profitability tests were sold off. Chief among these were the white goods business, the agro-chemicals manufacturing business and the furniture and LPG cylinders divisions. The company also exited subsidiaries such as premium granites and switchgears. These endeavors led to large-scale rationalisation in the company's staff strength, which declined from 10,700 in FY97 to around 2,900 in FY07.

Shedding of non-profitable businesses and selling idle real estate and investments has also coughed up a fortune for Voltas (Rs 4.1 bn in realisations). This money has been used to repay debts of Rs 2.6 bn and also pay for the VRS initiative. Thanks to these and other measures, the company's annual interest payments have declined from Rs 549 m in FY97 to a net interest income of Rs 5 m in FY07. In our view, the return ratios are likely to improve significantly over the long-term.

Investment Concerns

People problem: People are core to the engineering business, as it involves key technological skill-sets. In our recent interaction, managements of some of the engineering companies have indicated fears about losing key personnel to competition, especially MNC players operating with their Indian arms. Unlike the past, most of the global engineering majors are looking at India and China for growth opportunities, and competition for talent is only going to increase for Voltas. The company is already witnessing relatively increased levels of attrition in the mid-management level on account of the construction boom in the Middle East. At the same time, availability of skilled personnel poses a challenge in the international markets due to restrictive visa regimes imposed by certain countries.

Indigenous competition in EAS: Competition from local players, specifically in the capital goods segment of Voltas' EAS division, has the likelihood of impacting the company's performance in the future. Availability of low-cost indigenous products, government's policy on price preference for PSUs and the entry of overseas players into the market are the key risk to the company's growth in the future.

Competition in the AC market: The retail AC segment is a very competitive market. While manufacturers benefit from reduction in excise duty, the consistent fall in customs duty is also a cause of concern. That said, the unorganised players are likely to be hit owing to the decline in excise duty. Overall, low barriers to entry in the retail segment remain an area of concern. Also, considering India's free trade agreement with Thailand where AC category is present in the 'early harvest scheme', the latter's substantial installed capacity for the product and lower priced imports could pose a threat for AC manufacturers in India, including Voltas. In fact, as reported earlier, global players like Daikin, Electrolux and Haier are already exploring the possibility of using their Thai units to export to the Indian market. This should sound alarm bells for Indian players in the AC business.


Voltas, a Tata Group Company (27.3% stake), is a major player in the electro-mechanical engineering segment, which involves all aspects of construction of infrastructure like electricals and air conditioning barring the civil structure. The electro-mechanical division accounted for 52% of revenues in 1HFY08. The company also has presence in manufacture of forklifts, textile auxiliary, agro-chemicals and trading of chemicals. On the unitary division front, the company has presence in air conditioners, commercial refrigerators and visi-coolers. The unitary division contributed to 31% of revenues in 1HFY08. Voltas also trades in textile and mining machinery and, interestingly, this is the most profitable business segments for the company (16% of 1HFY08 sales yet 35% of total PBIT). The company has emerged from being a consumer appliance company operating in a highly competitive arena to one that has expertise in the niche engineering area of electro-mechanical projects and services. During the period between FY02 to FY07, Voltas grew its revenues and net profits (excluding extraordinary items) at compounded rates of 24% and 48% respectively.

Industry Prospects

World-class infrastructure has emerged as one of the most important necessities for unleashing high and sustained growth and alleviation of poverty in any economy. And with poor infrastructure to support other growth initiatives, the Indian economy continues to be a laggard when compared to its developing peers. From a policy perspective, however, there has been a growing consensus that a private-public partnership is required to remove difficulties concerning the development of infrastructure in the country. The realisation finally seems to be setting in. This makes the future of the Indian engineering sector extremely bright.

Leading players from the sector are also foraying into global markets in a bid to diversify their revenue streams and gain in competencies and scale. Oil money led infrastructure boom in the Middle East has especially been a positive for the Indian engineering companies, especially those catering to the electromechanical, and EPC needs.

As far as the AC segment is concerned, as we have mentioned earlier, penetration level in India is low even compared to few South East Asian economies. Lower prices and aggressive promotions are the key growth drivers for the sector at the retail end. Perhaps, frequent power cuts and the possibility of higher electricity charges at the household level in the long-term are potential threats to the segment's growth.

Comparative Valuations
(FY10E)VoltasBlue Star
Operating Ratios
Revenues (Rs m) 57,730 37,005
EBIDTA margin (%) 9.8 9.2
Net margin (%) 8.3 6.1
Debtor days 65 75
Inventory days 70 43
Working capital to sales (%) 15.8 11.0
Return Ratios
Du Pont Analysis (Return on Equity)
Net margins (Profitability) (%) 8.3 6.1
Sales/Assets (Asset utilisation) (x) 1.7 2.4
Assets/Equity (Leverage) (x) 2.9 3.0
Return on equity (%) 41.5 43.9
Return on total assets (%) 14.3 14.9
Return on capital employed (%) 49.5 50.9
Valuation Ratios
Current price (Rs) 240 440
Price to earnings (x) 16.6 17.5
EV/EBIDTA (x) 12.9 11.8

Risk Analysis

Sector: Voltas derives almost 50% of its revenues from the electro-mechanical business (EMPS), where we see improved visibility into the future and possibility of margin expansion. The company has also derisked the EMPS business from the domestic market and is one of the most aggressive players in this segment in the Middle East region, which is witnessing an investment boom currently. On the domestic front, the emergence of the organised retailing sector that encompasses various areas like restaurants, entertainment centres, departmental stores and also the development of special economic zones and software parks are big positives for the company.

As far as the AC business is concerned, lower prices, easy availability of low cost finance, higher disposable income and the urge for better living are factors that we believe will help growth in the future. On balance, considering the execution risks with electro-mechanical projects, increasing competition in the AC segment and increasing levels of attrition, we shall assign a medium-risk rating of 5 to the sector.

Sales: Voltas generated average revenues to the tune of nearly US$ 440 m per annum in the past five years. Further, in the latest fiscal (FY07), the company generated nearly US$ 660 m in revenues. Considering strong growth prospects in the EMPS segment and other emerging areas like cold chains and wastewater management, we expect Voltas to growth its sales strongly into the future. Based on our parameters, we assign a medium-risk rating of 5 to the stock.

Current ratio: Voltas' average current ratio during the period FY02 to FY07 has been 1.2 times. This indicates that the company is comfortably placed to pay off its short-term obligations, which gives comfort to its lenders. We assign a medium-risk rating of 4.

Debt to equity ratio: A highly leveraged business is the first to get hit during times of economic downturn, as companies have to consistently pay interest costs, despite lower profitability. Considering the company's average debt to equity ratio of 0.4 over the past five fiscals, which is expected to further reduce going forward, we have assigned a low-risk rating of 7 to the stock.

Long term EPS growth: Voltas has grown its net profits at a CAGR of 50% in the past five years, which we believe reposes faith in the company's ability to tide over business cycles much better than its peers. However, the rate of growth is inflated because the company was restructuring its operations. In our view, we see greater visibility in the company's electromechanical division as compared to the other divisions. Nevertheless, taking a three to five years view, we believe that earnings growth of over 35% is possible. As such, the rating assigned to the stock on this factor is 10.

Dividend payout: A stable dividend history inspires confidence in the management's intentions of rewarding shareholders. Voltas' average payout ratio has been a healthy 30% over the past 5 fiscals. Thus, we have assigned a low-risk rating of 7.

Promoter holding: A larger share of promoter holding indicates the confidence of the people who run it. We believe that a greater than 40% promoter holding indicates safety for retail investors. At the end of September 2007, the promoter holding in Voltas stood at 27.3%. We have thus assigned a medium-risk rating of 5 to the stock.

FII holding: We believe that FII holding of greater than 25% can lead to high volatility in the stock price. The FII holding in Voltas at the end of September 2007 stood at 26.6%, which is high. Based on our parameters, the rating assigned is 3, which is part of the high-risk category.

Liquidity: The average daily trading volumes of Voltas' stock over the past 52 weeks stand at around 637,000 shares. Such high liquidity level is a matter of comfort, as this might protect the stock from undue volatility in case of exchange of large holdings among market participants/investors. The rating assigned is 10.

Margin of safety: This is to determine the value of the stock relative to its price and the returns over a risk free rate. Margin of safety of a stock lies in its earning power, which is calculated as EPS divided by market price (reciprocal of P/E). Considering Voltas' P/E of 31.9 times its trailing 12-months earnings, the earning power is 3.1%. This is less than the yield on a 10-year G Sec paper (currently 7.9%). Thus, the rating assigned is 1.

Considering the above parameters, the total ranking assigned to the company is 57. This makes the stock a medium-risk investment from a long-term perspective.

Risk Matrix

High RiskMedium RiskLow Risk
Rating (1 to 3) (4 to 6) (7 to 10)
Sector High Medium Low
Sales (US$ m) < 500 501 - 1,000 > 1,000
Current Ratio (x) < 1 1 - 2 > 2
Debt to equity ratio (x) > 1 0.5 - 1 < 0.5
Long term EPS growth (%) < 10 10 - 20 > 20
Dividend Payout (%) < 15 15 - 25 > 25
Promoter holding (%) < 25 25 - 40 > 40
FII holding (%) > 25 10 - 25 < 10
Liquidity (Nos. '000) < 100 100 - 200 > 200
Margin of Safety (%) < 3 3 - 6 > 6
Final Rating < 30 30 - 60 > 60


We had last recommended Voltas in November 2006 at Rs 103 with a March 2009 target price of Rs 140, which was breached in July 2007. At the current level of Rs 240, the stock is trading at a multiple of 16.6 times our estimated FY10 earnings, which we believe is fairly attractive from long-term investment perspective. We maintain our positive stance on the company, owing to its strong execution skills and the opportunity that is expected in the electromechanical market, both domestic and international.

We, thus, reiterate a 'HOLD' view on the stock, this time from a March 2010 perspective and a higher target of Rs 300. On a point-to-point basis, this implies a return of 25% over the current price.

(Rs m)FY07 FY08EFY09EFY10E
Revenue (Rs m) 25,268 34,520 45,401 57,730
PAT (Rs m) 2,016 2,706 3,646 4,770
EPS (Rs) 6.1 8.2 11.0 14.4
P/E (x) 39.3 29.3 21.7 16.6
Price to BV (x) 18.7 13.2 9.4 6.9
BV= Book Value

Financials at a glance
(Rs m)FY07FY08EFY09EFY10E
Sales 25,268 34,520 45,40157,730
Sales growth (%) 29.3% 36.6% 31.5% 27.2%
Operating profit 1,280 2,934 4,200 5,629
Operating profit margin (%) 5.1% 8.5% 9.3% 9.8%
Net profit 2,016 2,706 3,646 4,770
Net profit margin (%) 8.0% 7.8% 8.0% 8.3%
Balance Sheet
Current assets 13,761 18,482 24,061 30,403
Fixed assets 1,601 1,432 1,348 1,259
Investments 1,248 1,373 1,510 1,661
Total Assets 16,610 21,287 26,919 33,323
Current liabilities 11,252 14,213 17,511 20,841
Net worth 4,242 6,014 8,402 11,527
Loan funds 1,116 1,059 1,006 955
Total liabilities 16,610 21,287 26,919 33,323

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