Chapter heading (1St heading)

Voltas

Onerous contract resulted in loss of 1.16 bn

February 15, 2012

India Equity Research I Engineering & Capital Goods

Results Update

Voltas (VOLT IN) reported net loss of Rs1.16 bn, which includes Rs2.77 bn towards onerous contract (upward revision in the estimates cost of Sidra medical project due to design changes and delays) Net sales was at Rs11.6 bn in 3Q FY12, up 12% y-y, better than our estimates of Rs10.4 bn. We reiterate our BUY rating with a 12-month PT of Rs112 (unchanged). Our PT is based on 12x FY13E earnings (unchanged). We will revise our numbers once we get clarity on existing contracts post conference call Slowdown continues: The electro-mechanic projects (EMPS) segment reported revenue of Rs8.2 bn, up 19.0% y-y. EBIT of the EMPS segment was up 37% y-y, and an EBIT margin of 7.3% y-y, up 95 bp. Revenue of unitary cooling products (UCP) segment was up 18.7% y-y to Rs2.3 bn, with an EBIT of Rs143 mn, down 25% y-y. EBIT margin was at 6.1%, down 358 bp due to the slowdown in sales and high fixed operating and advertisement costs. Revenue of the EPS segment was down 39% y-y and EBIT was at Rs166 mn, down 34% y-y. We will revise our numbers post conference call Orderbook improves marginally: Total orderbook stands at Rs50.9 bn, up 9% y-y. The domestic electro-mechanical business has seen good orders in the health sector. Valuation: Voltas has reported loss of Rs2.77 bn towards onerous contract (upward revision in the estimates cost of Sidra medical project due to design changes and delays) for Sidra medical project in Qatar. The total value of this project for Voltas was over Rs10 bn, the contract is expected to complete by 4Q FY12. The long term business prospects in Middle East remain good and Voltas has recently formed JV in KSA and Oman to expand its reach. We reiterate our BUY rating with a revised 12-month PT of Rs112. Our PT is based on 12x FY13E earnings. We will revise our numbers once we get clarity on existing contracts post conference call Risks: Business may be negatively affected due to the global slowdown, especially in the Middle East, thereby increasing competition in the domestic and overseas markets. An increase in steel/metal prices could have an adverse impact on margin.

BUY
Reuters: VOLT.BO

Rs95
Bloomberg: VOLT IN

12-month price target

Arafat Saiyed arafat.saiyed@quantcapital.co.in +91 22 4088 0374 Amber Singhania amber.singhania@quantcapital.co.in +91 22 4088 0372 Market cap: 52-week high/low: Share o/s: Avg daily trading vol (3m): Avg daily trading val (3m):
Source: Bloomberg

Rs112

Rs31.3 bn (US$634 mn) Rs189/71 331 mn 1826 (000) Rs164 mn (US$3.3 mn)

quant vs Consensus (Rs) Mean High Low quant Nos

Source: Bloomberg

PT 200 250 145 112 Buy(s) 11 Hold(s) 7

EPS (FY13E) 8.5 11.7 6.2 9.4 Sell(s) 12

Shareholding pattern (%) Promoter FIIs MFs/FIs/Banks Others

Source: BSE

Dec11 30.3 17.5 30.2 22.1

Sep11 30.5 17.6 31.2 20.6

Jun11 30.6 18.4 29.8 21.2

Price movement (Rs) vs the Sensex

200 180 160
140 120 100 80 60 Feb-11
VOLT IN Sensex (RHS)

20,000 19,000 18,000

17,000 16,000 15,000 14,000 13,000

Apr-11

Jun-11

Aug-11

Oct-11

Dec-11

Source: Bloomberg

Exhibit 1:
YE March FY09 FY10 FY11 FY12E FY13E

Financials and valuation

Net revenues (Rs mn) 43,259 48,059 51,768 52,922 59,039 Growth (%) 35.1 11.1 7.7 2.2 11.6 EBITDA (Rs mn) 2,831 4,592 4,408 3,253 4,359 margin (%) 6.5 9.6 8.5 6.1 7.4 Adj. PAT (Rs mn) 2,253 3,560 3,171 2,052 3,099 Growth (%) 27.9 58.0 (10.9) (35.3) 51.0 EPS (Rs) 6.8 10.8 9.6 6.2 9.4 Change (%) 27.9 58.0 (10.9) (35.3) 51.0 PER (x) 13.9 8.8 9.9 15.3 10.1 EV/EBITDA (x) 10.1 5.9 6.3 8.7 6.9 ROaE (%) 33.0 38.0 25.9 14.0 18.3 ROaCE (%) 40.1 43.2 31.1 18.1 20.4

Note: pricing as on 14 February 2012; Source: Company data, quant Global Research estimates

Voltas: onerous contract resulted in loss of 1.16 bn

Exhibit 2:
Rs mn Net Sales Ra w Ma teri a l % of Sa l es Empl oyee Exp % of Sa l es Other Expens es % of Sa l es Cos t overruns i n Ci dra Tota l Exp. EBITDA EBITDA Ma rgi n (%) Other Income Depreci a ti on EBIT Interes t Extra ordi na ry i ncome PBT Ta x ra te (%) Ta x Mi nori ty Interes t Reported PAT Adj PAT EPS (Rs )
Source: Company data, quant Global Research

3Q FY12 results
3QFY12 11,647 7,983 68.5 1,628 14.0 1,162 10.0 2,766 13,539 (1,892) (16.2) 164 84 (1,812) 64 172 (1,704) 32 (544) 6 (1,154) (1,271) NA 3Q FY11 10,424 7,053 67.7 1,444 13.9 1,133 10.9 9,629 795 7.6 131 54 872 34 155 993 30 302 17 708 553 1.7 871 663 2.0 NA NA NA NA 2QFY12 11,021 8,112 73.6 1,355 12.3 843 7.7 10,310 711 6.5 223 75 859 60 250 1,049 17 178 25.0 55.3 (307.7) 86.8 (26.3) 12.0 (310.9) 5.7 40.6 NA 31.3 NA 2.5 37.7 12.7 20.2 y-y (%) 11.7 13.2 q-q (%) 5.7 (1.6)

Exhibit 3:
Rs mn Sales

Segmental analysis
3QFY12 11,539 8,241 877 2,338 85 901 602 166 143 (9) 7.8 7.3 18.9 6.1 (10.4) 71.4 7.6 20.3 0.7 3Q FY11 10,395 6,926 1,428 1,969 72 889 440 250 191 9 8.5 6.4 17.5 9.7 12.0 66.6 13.7 18.9 0.7 2QFY12 11,021 7,623 1,202 2,110 86 282 50 178 61 (7) 2.6 0.7 14.8 2.9 (8.4) 69.2 10.9 19.1 0.8 y-y (bp) 94.7 141.7 (357.7) q-q (bp) 664.5 409.6 319.0 y-y (%) 11.0 19.0 (38.6) 18.7 17.7 1.4 36.7 (33.6) (25.1) q-q (%) 4.7 8.1 (27.0) 10.8 NA 219.7 1,107.8 (6.8) 132.2

El ectro Mecha ni ca l Projects Engi neeri ng Products Uni ta ry Cool i ng Products Others EBIT El ectro Mecha ni ca l Projects Engi neeri ng Products Uni ta ry Cool i ng Products Others EBIT margin (%) El ectro Mecha ni ca l Projects Engi neeri ng Products Uni ta ry Cool i ng Products Others Sales breakdown (%) El ectro Mecha ni ca l Projects Engi neeri ng Products Uni ta ry Cool i ng Products Others
Source: Company data, quant Global Research

February 15, 2012

Voltas: onerous contract resulted in loss of 1.16 bn

Exhibit 4:
(Rs mn) Bl ue Sta r * Engi neers Indi a * Techno El ectri c * Tecpro Sys tems * Vol ta s *

Profitability trend
Revenue 3Q FY12 Consensus 6,061 8,773 1,851 6,103 10,563 Change y-y (%) Est/Act* 5,833 7,925 1,697 6,267 11,647 3Q FY12 2Q FY12 (3.9) 17.0 11.2 35.6 11.7 (12.2) 39.4 17.1 51.0 (0.9) 1Q FY12 4Q FY11 6.6 40.8 25.1 39.8 (4.3) 6.3 47.8 (9.6) NA 13.1 3.1 37.1 (8.6) NA 5.3 PAT (adj) 3Q FY12 (57) 1,472 211 212 315 Change y-y (%) (328) 1,513 230 147 (1,271) PL 23.5 40.1 (26.1) NA PL 22.3 39.2 67.3 (0.7) (73.9) 29.3 72.5 271.3 (0.5) (27.5) 32.5 (23.4) NA (32.2) (33.5) 10.3 1.6 NA (16.6) EBITDA Margin (%) 3Q FY12 2.6 20.4 27.9 11.7 5.7 (1.6) 23.0 30.8 9.7 (16.2) 1.3 19.7 35.0 11.5 2.3 3.7 21.1 28.0 11.8 8.1 10.5 20.1 13.7 20.7 8.4 6.7 23.2 24.4 11.2 7.6

3Q FY11 Consensus Est/Act* 3Q FY12 2Q FY12 1Q FY12 4Q FY11 3Q FY11 Consensus Est/Act* 2Q FY12 1Q FY12 4Q FY11 3Q FY11

Source: quant Global Research estimates

February 15, 2012

Voltas: onerous contract resulted in loss of 1.16 bn

Key financials
Exhibit 5:
Net revenues Expenditure Ra w ma teri a l s Empl oyee expens es Other expendi ture EBITDA Other i ncome Depreci a ti on EBIT Interes t expens e Extra ordi na ry Income / (Los s ) PBT Ta xes Mi nori ty Interes t i n profi ts Reported PAT Adjusted PAT EPS (Rs) Outs ta ndi ng Sha res (mn) Cash flow statement Cash flow from operating activity PBT Add: Depreci a ti on Add: Interes t Les s : ta xes pa i d Add: other a djus tments Les s : worki ng ca pi ta l cha nges Total operating cash flows Opera ti ng CF wi thout WC cha nges Cash flow from investing activity Ca pi ta l expendi ture Cha nge i n i nves tments Total investing cash flow Cash flow from financing activity Sha re i s s ua nces Cha nge i n borrowi ngs Di vi dend Interes t pa yment Total financing cash flow Net change in cash Openi ng ca s h & CE Cl os i ng ca s h & CE 0 1,077 (619) (127) 330 1,569 3,002 4,571 0 (1,463) (774) (98) (2,335) 119 4,571 4,689 1,030 (774) (165) 90 291 4,689 4,980 166 (967) (280) (1,081) (193) 4,980 4,787 168 (967) (196) (995) (1,527) 4,787 3,260 (758) 1,023 265 35 (777) (742) (362) (274) (636) (442) 73 (369) (489) (102) (591) 3,719 210 127 (1,172) (192) (1,718) 974 2,692 5,318 214 98 (1,472) (436) (527) 3,196 3,722 5,245 210 165 (1,729) (43) (3,012) 836 3,848 4,405 344 280 (1,345) (2,427) 1,256 3,684 4,889 256 196 (1,564) (3,717) 59 3,777 Key Ratios Effecti ve ta x ra te (%) EBITDA ma rgi n (%) EBIT ma rgi n (%) PAT Ma rgi n (%) Debt to equi ty (x) EPS (Rs ) Ca s h EPS (Rs ) Book Va l ue (Rs ) Valuation Ratios ROa E (%) ROa CE (%) P/BV (x) PE Ra ti o (x) EV/EBITDA (x) Growth metrics (%) Revenue EBITDA Net profi t EPS 35.1 11.9 27.9 27.9 11.1 62.2 58.0 58.0 7.7 (4.0) (10.9) (10.9) 2.2 (26.2) (35.3) (35.3) 11.6 34.0 51.0 51.0 33.0 40.1 4.0 13.9 10.1 38.0 43.2 2.9 8.8 5.9 25.9 31.1 2.3 9.9 6.3 14.0 18.1 2.0 15.3 8.7 18.3 20.4 1.7 10.1 6.9 FY09 31.5 6.5 8.3 5.2 0.2 6.8 7.4 23.9 FY10 27.7 9.6 10.7 7.4 0.0 10.8 11.4 32.8 FY11 33.0 8.5 9.7 6.1 0.1 9.6 10.2 41.2 FY12E 30.5 6.1 6.8 3.9 0.1 6.2 7.2 47.7 FY13E 32.0 7.4 8.2 5.2 0.1 9.4 10.1 54.9

Financial summary (Rs mn) (YE March)

FY09 43,259 40,428 31,685 4,656 4,087 2,831 962 210 3,583 127 263 3,719 1,172 (29) 2,518 2,253 6.8 331 FY09 FY10 48,059 43,467 32,992 5,357 5,118 4,592 789 214 5,166 98 250 5,318 1,472 (36) 3,810 3,560 10.8 331 FY10 FY11 51,768 47,360 36,808 5,563 4,990 4,408 810 210 5,008 165 402 5,245 1,729 57 3,572 3,171 9.6 331 FY11 FY12E 52,922 49,669 39,168 5,822 4,679 3,253 711 344 3,620 280 1,065 4,405 1,345 57 3,117 2,052 6.2 331 FY12E FY13E 59,039 54,680 43,120 6,410 5,151 4,359 732 256 4,835 196 250 4,889 1,564 25 3,349 3,099 9.4 331 FY13E Balance sheet Equi ty ca pi ta l Res erves a nd s urpl us Total Equity Mi nori ty Interes t Secured l oa ns Uns ecured l oa ns Total borrowings Deferred ta x l i a bi l i ty Total capital Ca s h Inventory Debtors Other current a s s ets Tota l current a s s ets Current l i a bi l i ti es Provi s i ons Current l i a bi l i ti es & Prov. Net current Assets Gros s bl ock Les s : cumul a ti ve depreci a ti on Net block Goodwi l l CWIP Inves tments Total assets FY09 331 7,567 7,897 159 1,688 127 1,814 (224) 9,647 4,571 11,194 9,521 2,203 27,489 19,714 2,645 22,360 5,129 3,986 1,839 2,148 675 132 1,562 9,647 FY10 331 10,521 10,852 139 306 45 352 (202) 11,140 4,689 6,579 10,060 6,921 28,249 19,830 2,645 22,475 5,774 3,890 1,821 2,069 764 193 2,339 11,140 FY11 331 13,286 13,617 218 1,280 101 1,381 (152) 15,064 4,980 8,224 11,705 10,401 35,309 23,075 3,157 26,232 9,077 4,410 1,987 2,422 916 36 2,613 15,064 FY12E 331 15,436 15,767 161 1,430 117 1,547 (152) 17,323 4,787 10,731 13,049 2,684 31,251 17,399 2,540 19,939 11,311 4,850 2,331 2,519 916 36 2,540 17,323 FY13E 331 17,818 18,149 136 1,580 135 1,715 (152) 19,848 3,260 18,902 16,175 2,952 41,289 25,071 2,716 27,787 13,502 5,335 2,587 2,748 916 40 2,642 19,848

Income Statement

Note: pricing as on 14 February 2012; Source: Company data, quant Global Research estimates

February 15, 2012

Voltas: onerous contract resulted in loss of 1.16 bn

Ratings and other definitions

Stock rating system
BUY. We expect the stock to deliver >15% absolute returns. ACCUMULATE. We expect the stock to deliver 6-15% absolute returns. REDUCE. We expect the stock to deliver +5% to -5% absolute returns. SELL. We expect the stock to deliver negative absolute returns of >5%.

Institutional Equities Research coverage universe distribution of ratings

60% 49% 50%

40%

30%

Not Rated (NR). We have no investment opinion on the stock.

23% 20% 19%

Sector rating system

Overweight. We expect the sector to relatively outperform the Sensex. Underweight. We expect the sector to relatively underperform the Sensex. Neutral. We expect the sector to relatively perform in line with the Sensex.

10%

9%

0% BUY ACCUMULATE REDUCE SELL

We, Arafat Saiyed and Amber Singhania, hereby certify all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report."
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February 15, 2012

Voltas: onerous contract resulted in loss of 1.16 bn

612, maker chambers IV, nariman point, mumbai 400 021, india phone 91 22 4088 0100, 3025 0100 fax 91 22 4088 0198, 3025 0198
February 15, 2012 6