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Voltas: Research meeting extracts
Jun 11, 2009

Yesterday, we had a research meeting with the management of Voltas, a company fast changing its perception into that of a core engineering and project oriented company. Enumerated below are excerpts from that meeting. On the electro-mechanical projects and services (EMPS) business: Voltas expects a renewed thrust from the government on infrastructure and is upbeat about the prospects such a development would hold for its EMPS business. It now considers this segment big enough to be called the core of its business. The segment, at the end of FY09, had an order book of Rs 47 bn (consisting of Rs 10 bn of domestic orders) which gives it comfortable revenue visibility for atleast the next 12 to 15 months.

The company’s MEP (mechanical, electrical, plumbing) foray into the domestic and international markets has yielded good results so far and the management remains optimistic about further bagging large orders for the entire gamut of HVAC, electrical and plumbing together as a single package.

The major opportunities for the EMPS business going forward are the large number of airports that are expected to come up, the healthcare sector where the company expects major upgradation initiatives by existing hospitals and a large number of new hospitals to come up, and bundled MEP orders. The company in September 2008 had acquired a 51% stake in Rohini Industrial Electricals which it feels will further lend support for future large projects in the MEP space.

Among the competitive advantages the company enjoys in this business is the fact that it has successfully executed a number of large projects in the past and as such has a long track record that customers can rely upon. Its early mover advantage has also ensured that it has a long list of past customers that continue to place repeat orders with Voltas. Also in its major overseas market of the Middle East, it has worked with most major consultants, and that has helped build relationships with them that can be leveraged going forward.

It is operations are currently in the Qatar and Abu Dhabi (UAE) markets while it looking to exit Dubai due to dearth of opportunities there. The Saudi Arabia market is something that the management is enthusiastic about and plans to enter it in a big way.

Voltas’ cold storage business is looking to get a piece of the agriculture and retailing businesses going forward where a supply chain of international standards is expected to be built in the years to come. The company is looking to get into the entire supply chain from warehousing to the final retailing of farm based products.

Overall, the company is making an attempt to move out from its traditional profile of being only a project executor/contractor to higher value jobs of ‘design and build’.

On the engineering products and services (EPS) business: Voltas’ EPS business continues to be heavily reliant on the capital expenditure in the economy. After a lull in FY09, the management expects this segment to pick up pace by the second half of FY10.

Its business in this segment has gone from a 40:60 mix of equipment it manufactures versus equipment it trades to a mix of 80:20. This is mainly due to shrinkage in its textile machinery business wherein it acts as an agency for textile machinery from principals like LMW. The textile machinery business is one sub segment of the EPS business that is still in the midst of a sharp slowdown. Though this is a high margins business for the company, it still is an area of concern due to demand that is yet to pick up. The rest of the businesses within the segment rely on activity in the areas of infrastructure, construction, manufacturing, warehousing, and mining, where a revival is being witnessed and things are expected to further pick up going forward.

On the unitary cooling products (UCP) business: This segment, wherein 70% of the business comes from room airconditioners and 30% from refrigeration units, is seeing good growth due to a recent preference for splits as compared to window ACs. The fact that split air conditioners fetch higher realisation only helps. The company’s focus on providing energy efficient ACs has turned in very good results.

The challenges for this business include branding and marketing in an extremely competitive environment, low penetration (especially rural) that needs to be worked upon, and being able to constantly offer value for money products.

What to expect?
At the current price of Rs 138, the stock is trading at a multiple of 12.1 times our estimated FY12 earnings. Even though the company turned in a healthy performance during FY09 , the recent upsurge in the stock’s price has made us wary of its valuation.

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