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Research meeting extracts: Voltas - Views on News from Equitymaster
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Research meeting extracts: Voltas
Sep 15, 2004

Background
Voltas is a diversified Tata Group Company with its presence in engineering as well as consumer durable segments. The operations of the company can be broadly classified as electro-mechanical division, unitary division, and engineering agency division. Electro-mechanical operations primarily involve all aspects of construction like electricals and air conditioning, barring the civil structure. Besides, it is one of the emerging major in water management systems. The company also has a track record of having executed large-scale contracts both in the domestic and international markets (viz. Hong Kong and Bahrain Airports). The Engineering Agency division comprises of sale of textile equipments, forklift trucks for mining and construction. The Unitary division is into manufacture and sale of air conditioners (both retail and institutional), visi-coolers and refrigerators. Voltas has a 50-50 joint venture with Fedders of USA for manufacturing of A/Cs.

Takeaways from the management meeting
The sales side first…

Electro-mechanical: The South East Asian region is likely to witness large infrastructure spending in the future. Since the order inflow of electro-mechanical division is dependent on infrastructure projects (globally and locally), the company is expecting a growth of around 15% CAGR in the topline in next two to three years. Of the order book of Rs 8 bn, in 1QFY05 alone, orders worth Rs 3.4 bn was added. While the orderbook execution time stand at 18 months, it stands at 1.2 times the division’s FY04 revenues.

Engineering and agency services: Capacity addition plans laid out by textile companies are the major positive for this division. Voltas is the sole selling agent of Lakshmi Machine Works (domestic market leader in the spinning equipments) for spinning and weaving machines and has tie-ups with Terrot (Germany) and Heliot (France) for knitting machines. With the complete rage of textile machines and large distribution network, Voltas is one of the most preferred players in the market. This is one of the most profitable business divisions for the company (6% of FY04 sales and 52% of FY04 EBIT). There exist a possibility of higher growth in this division as compared to others in the future.

Unitary Cooling: With the launch of the 0.6 and 0.8 tonne air conditioners, the company has increased its market share from 10% in FY03 to 12% in FY04 and is planning to take it to 15% in next 12 to 18 months. Considering a very low penetration level of air conditions in India (estimated at 1.2%), the company believes this segment could grow at a faster rate as the income level of the people increases. However, the outlook for the refrigeration business is cautious.

The margins side:
Electro-mechanical: Voltas is bidding for contracts in combination with the civil contractor (civil construction is the larger part of the contract, so margins are higher). Also, considering the level of competition from other international players, margins are likely to remain at around 5% levels in the future, in line with the international trends.

Engineering and agency: Since the company is into distribution of equipments through its network and has the after sales servicing licence, margins from this business are likely to sustain at the current levels (around 30%). The overall profitability therefore, is highly dependent on this division.

Unitary cooling: Given the intensity of competition in air conditioners and refrigerators, margins are likely to be depressed. Also, due to the expiry of contract with LG for supply of refrigerators, capacity utilization stands at just 50%. Consequently, overall margins are lower and the scenario is not likely to change in the medium term.

Our view:
The company has the past track record of diversifying into unrelated business. However, the management looks more focused towards its engineering operations only off late. The stock currently trades at Rs 145 implying a price to earnings multiple of 9.7 times FY05 earnings. The market capitalisation to sales, based on our FY05 estimates, stands at 0.4 times, which is also lower on a relative basis.

However, the valuation has to be viewed in the context of a diversified business mix and volatility in earnings owing to the seasonality of the unitary division (Voltas still continues to have presence in segments like chemical trading and agro products). Overall, considering the solid track record of the company on the project execution front in international markets, we foresee engineering agency business to remain a key growth driver in the long-term. To that extent, we remain positive on the company.

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