Voltas: Buy

Investors with a long-term perspective can consider buying the stock of Voltas. At the current price of Rs 106, the stock discounts its expected FY13 earnings by 13 times. This is at the lower-end of its historical valuation band.

The company's prospects are likely to improve hereon, on the back of improving order flows in its Electro Mechanical and Projects (EMP) segment, and sales pick-up in its unitary cooling division.

Voltas reported higher revenues and margins in the EMP segment in the December 2011 quarter compared to the dismal September quarter.

With Qatar starting preparations for the FIFA soccer world cup it is hosting in 2022, the company's new joint venture in Saudi Arabia and Oman ready to bid for orders and Dubai also seeing revival in infrastructure investments, Voltas may see new orders. In the December quarter, the EMP segment reported order inflow of Rs 960 crore, almost double that of the same period last year. The other major segment, unitary cooling, is also seeing a pick-up in air-conditioner sales in the southern markets of India over the last two months.

EMP segment is reviving

Voltas derives 65 per cent of its revenues from the EMP segment; a third of this comes from countries in West Asia. This segment had suffered a setback in the September 2011 quarter when a lacklustre growth in sales and rising costs had caused profits to drop by almost 90 per cent.

Reviving from this, the segment's revenues in the December quarter grew eight per cent sequentially. Even on a year-on-year basis, sales growth was at a robust 19 per cent. But, there was loss at the operating level in the December quarter. This was due to the accounting for cost-overruns at the Sidra Hospital project, Qatar. The overruns were of a non-recurring nature due to design changes in the project and initial execution delays.

Without this extraordinary loss, the EMP segment would have reported an operating profit growth of 32 per cent, year-on-year . Operating profit margin (before extraordinary loss) would have been 7.2 per cent, up from 6 per cent in December 2010 and barely 0.7 per cent in September-2011 quarter. With the headwind out of the way, profit growth and margin should be healthy, going forward.

Besides, the order flows in the EMP segment have improved. In the December-2011 quarter, the order book stood at Rs 5094 crore, compared to Rs 4697 crore in the same period last year. The order book, as of end-December, was a healthy 1.65 times the segment's revenues of FY11.

Improving Air-conditioner demand

After two quarters of lacklustre growth, the unitary cooling division reported a 19 per cent increase in revenues in the December-2011 quarter, thanks to the increased sales volumes of room air-conditioners.

With the intense summer heat showing no signs of letting up, air-conditioner makers are likely to do better business this year compared to last year when there was an extended winter and a relatively mild summer.

Also, Voltas has increased prices across product ranges in the air-conditioners segment in January and this is expected to improve revenues and protect profit margins.

The operating profit margins of this segment were 6 per cent in the December-2011 quarter. Though this is almost three percentage points lower over the same period last year, it is higher by three percentage points compared to the September-2011 quarter.

Balance-sheet strength

Voltas has reported a sharp increase in loan funds to Rs 285 crore, as of September 2011, from Rs 88.3 crore a year ago. The extended working-capital cycle in the projects division could have caused this. Yet, the company's debt-to-equity ratio is still low at 0.2:1.

Risks to investment in the stock of Voltas include slowdown in order flows and entry of new players in the EMP segment which could put pressure on margins.

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