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Firstcall India Equity Advisors Pvt Ltd

VOLTAS LTD

BUY Target Price: Rs.198.00

CMP: Rs.165.00 Market Cap.:Rs.54565.50mn. Date: 11th December, 2009

Key Ratios:

Particulars FY09 FY10E FY11E

OPM (%) 9.30 11.18 10.63

NPM (%) 6.22 7.19 6.80

ROE (%) 34.65 30.61 25.61

ROCE (%) 39.49 40.48 35.09

P/BV(x) 2.09 5.19 3.86

P/E(x) 6.04 16.97 15.09

EV/EBDITA(x) 4.04 12.57 12.57

Debt-Equity(x) 0.25 0.12 0.08

Key Data:

Sector Engineering

Face Value Rs.1.00

52 wk. High/Low Rs.182/31

Volume (2 wk. Avg.)

193600

BSE Code 500575

SYNOPSIS

• Voltas Limited, a TATA group company is the India's premier air conditioning and engineering services provider.

• Voltas with its business and geographical diversification has the potential to ensure revenue growth despite slowdown in few sectors.

• The company’s strong balance sheet should help in improving the position of receivables and pace of execution of orders on hand.

• Voltas is also well equipped and well placed to mark its entry into Metro Rail with various cities like Mumbai, Delhi, Hyderabad etc., announcing large ticket metro projects.

• The international division of the MEP segment has a very strong presence in Gulf cooperation countries (GCC).

• The top line and bottom-line of the company are expected to grow at a CAGR of 20.44% and 20.18% respectively over FY08 to FY11E.

Share Holding Pattern:

V.S.R. Sastry

Vice President

Equity Research Desk

91-22-25276077

[email protected]

Dr. V.V.L.N. Sastry Ph.D.

Chief Research Officer

[email protected]

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Table of Content

Content Page No.

1. Investment Highlights 03

2. Company Profile 08

3. Peer Group Comparison 17

4. Key Concerns 17

5. Financials 18

6. Charts & Graph 21

7. Outlook and Conclusion 23

8. Industry Overview 24

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Investment Highlights

• Results Update (Q2FY10)

For the quarter ended on September 30, 2009 (Standalone) the company has registered a 8.16 % (YOY) growth in the net sales and stood at Rs.10042.50 mn from Rs.9284.90 mn of the corresponding period of the previous year. The operating profit for the quarter stood at Rs.1250.00 mn which is marginally increased from Q1FY09.Operating profit margins stood at 12.45% which are a little higher than in the previous year’s 10.17%.The company reported net profit of Rs.806.40 mn.EPS for the quarter stood at Rs.2.44 per equity share of Rs.1.00.

Quarterly Results – Standalone (Rs in mn)

As at Q2FY09 Q2FY10 %Change

Net Sales 9284.90 10042.50 8.16%

Net Profit 621.90 806.40 29.67%

Basic EPS(Rs) 1.88 2.44 29.79%

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• Margins (%):

Operating Profit Margins (OPM %)

Net Profit Margins (NPM %)

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• Strong Order book The company has a strong order backlog worth around Rs.43590 mn out of which about Rs.12000mn is domestic and rest is Middle East. The present Order Book in International Business stands at approximately Rs. 35000mn and the execution period of Orders on hand extends up to September 2010, with possibly some overlap beyond that period. Primarily it is equally divided between UAE, that is, Abu Dhabi and Qatar and apart from that there are some small orders from Singapore. The company also has inquiries for about six new hospitals in the UAE and Qatar and is in the process of a very prestigious Medical Center, Medical Hospital and Research Center in Qatar. Last quarter, it has booked significant orders of airports worth Rs.3000mn resulting in order book of Rs12000mn in electromechanical segment. The Company’s domestic Electro-mechanical business ended the year with an all-time high order book.

• Order inflow to improve for the MEP segment:

Crude prices have moved up considerably from its bottom of less than US$32 in December 2008 to its current levels of more than US$75. High crude prices and the willingness of various countries like Saudi Arabia, Qatar, Kuwait etc. to diversify their economy and reduce their dependence on crude, a lot of projects are likely to take off again and result in increased order inflow for Voltas.

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• Unitary cooling segment:

Both in terms of revenue and EBIT margin, the unitary cooling division has outperformed expectation in H1FY10. A part of the improved EBIT (9.4% in H1FY10 v/s 6.8% in H1FY09) was due to lower raw material cost. However, given the current healthy demand and no signs of pricing pressure, we believe that the EBIT margin of 7-7.5% is sustainable in the near future.

• Growing MEP business

There something has been successfully growing its MEP business and the response from customers has been very positive. MEP business comprises about 25% of the order book. In international business the business grows recognition at Middle East Awards 2008 with 2 key awards being bagged by the company. The first one for the MEP Project Manager of the Year and the second one for health and safety. These are very prestigious awards and help in pertaining the brand value of Voltas.

• High dividend payout

The Company has paid decent dividends since ages. In the current financial year ended March 2009, it has 160 percent dividend payout, its highest ever payout.

• Completes prestigious 'F1 Yas Marina Grand Prix Circuit' project, at Abu Dhabi

The execution of the turnkey engineering solutions for the multi-million dollar, Formula One Yas Marina Grand Prix Circuit project, located on Yas Island, Abu Dhabi, in record time to international standards. The first Abu Dhabi Formula One Grand Prix is being held at the Yas Marina Circuit from October 30, 2009 to November 01, 2009.Cebarco-WCT WLL are the main contractor for the project, whose primary responsibility was for the execution of civil works, while Voltas was associated for the entire mechanical works.

• Low exposure to the Dubai market

As far as the market for Voltas is concerned, it has a very low exposure to the Dubai market and has a larger presence in Abu Dhabi, Qatar, Kuwait etc. We

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expect order inflows to pick up considerably over the next 6-9 months, especially from Qatar, Kuwait and Abu Dhabi. In the medium term, Saudi Arabia has the potential to become a very lucrative market for Voltas. The market potential of Saudi Arabia for Voltas is more than Qatar, Kuwait and UAE put together. Saudi Arabia has given out construction contracts worth US$35bn in 9MCY09 and for the first time surpassed UAE. Most of the orders given out have been government orders. The company is currently in the process of finalizing a local partner in Saudi Arabia, after which it will actively start bidding in the country. We expect order inflow from Saudi Arabia to start flowing in FY11.

• More focusing on cooling business

Unitary cooling products, commercial cooling products business has done significantly better in this quarter and the factory’s capital utilization has improved significantly. Looking at the markets slowdown in air conditioners, they are focussing particularly on the commercial cooling business and in a limited way it is showing up in the results. The company continues to believe that this business has tremendous potential for future growth due to low penetration levels and most of the external credit to disclose the business will be back on the path of high growth.

• Benefit from Govt. measures

There are some kinds of delays in execution of projects and there is a general liquidity concern in the Engineering sector. The recent actions of Reserve Bank of India are in liquidity and breaking down the borrowing costs order well for the future. Similarly the stimulus package announced by the Central Government is in the right direction in the company’s opinion. The main concerns is on speed of implementation, the company is cautiously optimistic about the future outlook of the business. Similarly there have been various measures taken for textile industry which is expected to have positive impact on Voltas engineering products & services segment. The measures such as sanctioning of additional funds of Rs 14bn for TUFS, providing Rs 11bn for refund of CST and excise duty, Service tax on foreign agents’ commission will now be refunded unto 10 per cent of FOB value of exports instead of 2 per cent allowed earlier.

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• Acquisition of Rohini Electricals

In order to accelerate the presence in the Industrial segment, the Company acquired a 51% stake in Rohini Industrial Electricals Private Limited in September 2008 which has now increased to 67.33%. The Company’s scope of electro-mechanical offerings has consequently widened to include electrical and instrumentation contracts for projects in the domains of power, steel, cement, oil & gas, pharma, textile and other industries, catering to both domestic and overseas markets. Rohini has done significantly better than in the last year and the profit numbers are also better. They have order book of about Rs.1250mn and they are expecting some very large orders shortly so that order book also will go up very sharply. The total turnover of Rohini was about Rs.1980mn in FY08.

• Transfer of chemical trading biz

The company has proposal for transfer of chemicals trading business to DKSH India, a wholly-owned subsidiary of DKSH Holding, Zurich for a lump sum consideration of Rs 200 million.

• Acquisition of Saudi JV partner The legal process involved in connection with the transfer of 51% shareholding of SECL for Engineering Services WLL (Saudi Ensas), a joint venture company in Kingdom of Saudi Arabia (KSA), from the local partner in favor of Voltas has been completed.

• Textile processing The textile machine division (TMD) of Voltas Limited has entered into an alliance with M/s Thies of Germany, whereby it would sell and service Thies products in India. The alliance will tap into the market potential of the processing segments, which offer unique opportunities for India to augment its share in the international textiles trade.

Company Profile

Voltas Limited a Tata Group company, is India’s premier air conditioning and engineering service provider. It offers solutions for a wide spectrum of industries in areas such as heating, ventilation & air conditioning, refrigeration, electro-

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mechanical projects, water handling, textile machinery, machine tools, mining & construction equipments and materials handling. Voltas has executed projects in more than 30 countries worldwide and is ISO 9001:2000 certified. At present Voltas has ~30% market share in the domestic electromechanical projects and is one of the most preferred vendors in the Middle East Market.

Business Area

Voltas' operations have been organized into four independent business-specific clusters.

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1. Electro-Mechanical Projects & Services

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The electromechanical division undertakes HVAC (Heating, Ventilation and Air conditioning) projects in the domestic market and MEP (Mechanical, Electrical and Public health) projects for the international market and is the major contributor to the revenues of the company. In international market company caters majorly to Middle East markets (Dubai, Saudi Arabia, Bahrain, Muscat and Oman). The domestic segment will be driven by current expansion in the servicessector including IT/ ITES, pharmaceuticals, biotech, healthcare, banking, retailing and leisure.The ongoing economic buoyancy in geographies where the Company operates has offered opportunities for rapid growth of integrated engineering services. In order to cater to these, the domestic Air Conditioning and Refrigeration business underwent a migration from HVAC to MEP business. This migration reflects wider scope of the services being offered, encompassing Mechanical, Electrical and Public Health (MEP), of which Heating, Ventilation and Air conditioning (HVAC) are a sub-category. Accordingly, the new business also received its ISO 9001:2000 certification for its ‘Electro-mechanical and Refrigeration Projects’, confirming the robustness of its projects.

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The Company sustained its thrust in international Electro-mechanical business

leading to significant growth in revenues, generated by execution of large orders in

hand. The Electro Mechanical segment saw a sharp rise in turnover (Revenue) from

Rs. 16410mn to Rs. 25460mn, an increase of 55% in FY09.While the domestic turnover

increased by 18%, the International turnover almost doubled due to strong order

book. The Earnings before interest (Earnings) from this segment was Rs.1930mn, as

compared to Rs. 1220mn in the previous year.

Opportunities and outlook In the domestic market, the concept of MEP has been well received by consultants and customers. In future, it is likely that in many projects, services such as electricals, fire detection and protection, Integrated Building Management Systems, Public Health Engineering and other specializations will be outsourced to a single agency. The projects could also include provision for facilities such as District Cooling and BOOT solutions particularly, in SEZs and large commercial complexes. In addition, the Government’s renewed focus on National infrastructure development, especially in the area of upgradation and modernization of airports, establishment of SEZ and medical tourism, will lead to tremendous scope for expansion in this business. These offer an opportunity to demonstrate the engineering capabilities of the Company and move up the value chain. The Company is gearing up to handle these challenges with changes in organization structure and investments in Design Centre and training.Development of Cold chain is becoming an imperative\ to deal with worldwide food shortage and price increases arising from global warming, increase in consumption pattern and populations and depletion of arable areas. It is expected that this area will receive increased attention from the Government and international development bodies. The Government has already initiated a large number of schemes to attract investments in the food sector largely towards automation of processes; hence the requirement for food processing as a distinct line of business. The Company has taken initiatives to provide integrated solutions for meeting cold storage and food processing industry needs. 2. Engineering Products & Services The company, through its engineering agency business is a major distributor of material handling equipments, mining equipments, textile machinery and machine tools in the Indian markets. Manufacturing business contributed 80% of total segment turnover and the rest contributed by the Agency business. This segment provides total solution in the concept of commissioning, to training and maintenance. It represents over 40 of the world’s leading manufacturers. Apart

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from distribution, the company also manufactures equipments like fork lifts and cranes, which contributes ~20% of division revenues.

Demand was strong for mining equipment, driven by investments in the expansion of mining capacity in coal, steel, limestone, cement and other minerals, including zinc and bauxite. This yielded large volumes of business for equipment like mining excavators, dump trucks, crushing and screening plants. The Company’s Mining and Construction Equipment business achieved satisfactory sales of these products to mining customers, accompanied by value-added services such as extended maintenance contracts. In view of the economic downturn this segment suffered a setback. The turnover

was marginally lower which was supported by a change from pure commission

business to stock and sale. This segment ended with a Revenue of Rs. 5420mn and

Earnings of Rs. 630mn in current financial year ended.

Textile

Textile Machinery business has seen a significant slowdown due to factors low demand from westernmarkets, restricted availability of power coupled with high prices of cotton. By 2012, investment in the textiles and clothing industry is estimated to touch US$ 38.14 billion. Even the Government has increased the plan allocation for textiles by 66.27 per cent in 2007–08 over that of 2006–07, making it one of the only two ministries that have nseen such a high level of increase in budgetary support.

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Mining, Construction and Material Handling Business

Mining and Construction equipment segment is growing at a very slow pace, in the recent past however the growth has been negative. The fall in commodity prices globally, depreciation of Indian rupee and appreciation of Chinese currency are some of the reasons which will improve Voltas position against the imported machines. Voltas is in process to expanding its product portfolio with new technological inputs.Material handling division deals with the manufacturing of forklift trucks, container handling equipment, and storage retrieval system for Cargo complexes. Voltas has acquired the top slot in manufacturing of forklift trucks with a market share of 36%. Any sizeable investment in auto, retail, F&B, airports & ports can lead to a drastic growth in this division. Opportunities and outlook The textile industry is undergoing severe pressure on its margins, affecting the bottom line of many textile mills. The adverse factors are exchange rates, interest rates and the worsening power situation in many textile-producing states. The cost of production has gone up substantially in almost all textile mills and cannot be absorbed in the selling price of the final products; consequently, the mills are deferring investments in modernization and creation of new capacities.This situation is likely to continue for the next couple of years. Nevertheless, the Company’s Textile Machinery business has geared itself to tap the existing market by offering better services and additional machines in the post-spinning area, which is likely to help in sustaining the Company’s position despite adverse market conditions. To mitigate the risk of slowdown in one of the business under this segment, as is presently under way in\ the automotive sector, the operations of the Company’s Machine Tools business are being reorganized into four main operational groups. This change will help betterfocus on the market and the capability to comprehensively\ address business imperatives right from talent acquisition up to delivery of goods. A specialized Design Center at Pune was inaugurated for application engineering in which the customer can participate. The financial year 2008-09 is expected to be significantly better owing to the re-orientation and sharpened focus. The prospects for the Company’s Mining and Construction Equipment business are strong, as the] Government is committed to sustained development of the infrastructure sector, with a huge investment of over Rs16 trillion planned over the next 10 years. The industry is expected to grow at 25% to 30% per annum over the next few years, offering opportunities bin a variety of equipment categories.

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In the Company’s Materials Handling business, more robust prospects are awaited in industrial sectors, with theexpectation of investments in manufacturing capacities. Many projects are likely to come up in automobiles, engineering, steel, petrochemicals, retail and other areas, offering good prospects for various types of materials handling and warehousing equipment. 3. Unitary Cooling Products This division manufactures and sells air conditioners, commercial refrigerators and water coolers. The division contributes ~25% to total revenues, however PBT margins are lowest at ~6%.This division is witnessing a significant slow down in the demand and there has been significant piling up of inventory. The RAC market is moving from window a/c’s to split air conditioners which provides a higher revenue stream.

Commercial Cooling products did well with improved quality and design of the

products manufactured at the new plant in Pant Nagar. While the Segment

Revenue grew by 11% and touched Rs. 9140mn, the Earnings increased by 26% to

Rs. 680mn for FY09. Sales of room air conditioners outperformed the industry growth

and were 8%.

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Air Conditioners

Voltas is a leader in the Indian AirPconditioning market and is the second largest player after LG having market share of ~16%. During FY08 Voltas registered a growth if ~41% on yoy basis while industry has grown by ~28%.The market for theairconditoners has hardly grown in the past and there are concerns on negative growth in this segment. Rupee depreciation has also negatively impacted the cost of imported inputs. In addition to this there has been significant built up of inventory due to early monsoon, which in turn is putting mpressure on working capital and margins. This business has very high potential of growth and once the macro conditions improve, this segment will be the immediate beneficiary of the same. Commercial Refrigerators & Water Coolers

Voltas is one of the prominent player in the domestic commercial refrigeration market estimated to be ~Rs18bn and is growing at ~35P40% annually. The growth in organized retail has boosted the demand of commercial refrigeration. Voltas hasclosed down its loss making refrigeration unit at Hyderabad and the unit has been transferred to Uttaranchal. The plant was setup in Joint venture with Fedders Corporation (USA) for manufacturing on commercial refrigerators, AirPconditioning equipment and water coolers (Universal comfort Products Limited). During Q1FY09, Voltas has purchased 50% stake in JV from Fedders for a consideration of Rs31mn, accordingly UCPL ceases to be JV and has become wholly owned subsidiary of Voltas. Opportunities and outlook The market for air conditioners is expected to continue growing at over 20% in volume and the product mix is likely to shift in favour of splits over window air conditioners.Encouraged by the widespread consumer acceptance of energy-efficient air conditioners largely due to lower operating costs, the Company is broadening its offerings and consolidating its lead in this segment. It has introduced a new range of air conditioners for the premium customer segment and is taking steps to tie up with organized retail channels that provide a new shopping format and experience to customers. The Company is also expanding its distribution to smaller towns and semi-urban areas, to tap growing disposable incomes. With all these measures, the Company expects to maintain a high rate of growth.

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4. Other business

The Company’s Chemicals Trading business benefited from several opportunities during the year under review. All major agency lines like Aqualon, Hercules, Huntsman Tioxide and OCI Corporation, Korea performed well. With the economic boom and growth in consumer industries, the Company saw good growth in chemicals supplied to the personal care, paint, construction chemicals and plastics industries. Subsidiaries

Indian 1. Universal Comfort Products Limited

2. Rohini Industrial Electricals Limited 3. Simto Investment Company Limited 4. Auto Aircon (India) Limited Foreign

1. Metrovol FZE, Dubai

2. Weathermaker Limited, Dubai 3. VIL Overseas Enterprises B.V., Netherlands 4. Voice Antilles N.V., Netherlands Antilles 5. Saudi Ensas Company for Engineering Services WLL, Saudi Arabia Joint Ventures

1. Universal Comfort Products Private Limited (UCPL

2. Saudi Ensas Company for Engineering Services WLL

3. Universal Voltas Air-conditioning & Refrigeration Co., Abu Dhabi, UAE

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4. Lalbuksh Voltas Engineering Services & Trading Company LLC, Ruwi, Sultanate of Oman

5. Universal Weathermaker Factory LLC, Abu Dhabi 1. Universal Comfort Products Private Limited (UCPL

Universal Comfort Products Private Limited (UCPL), a joint venture company between Voltas and Fedders is engaged in the business of manufacturing air conditioners\ and has its plants at Dadra and Pantnagar in Uttarakhand. The existing paid-up capital of UCPL of Rs. 2764.20 lakhs is held in equal proportion of Rs. 1382.10 lakhs each, by Voltas and Fedders. Fedders have agreed to divest and offered their entire shareholding in UCPL to Voltas Limited for a consideration upto Rs. 750 lakhs (including refund of share application money), subject to requisite approvals/clearances in that behalf. Upon transfer of shares, UCPL would cease to be a joint venture company and become a wholly owned subsidiary of the Company. In view of substantial volume growth in Unitary Products business and the cost increases in imported products, UCPL is expected to be a significant source of procurement for the Company. 2. Saudi Ensas Company for Engineering Services WLL

Saudi Ensas Company for Engineering Services WLL (Saudi Ensas), a joint venture company incorporated in Jeddah, Kingdom of Saudi Arabia (KSA), has a paid-up capital of SR 2.600 million.The Company along with its subsidiary holds 49% of the capital and the balance 51% is held by the local partner. Saudi Ensas is engaged in the execution and operations/maintenance of electro-mechanical installations in KSA and has for the past few years incurred losses and its liabilities are in excess of its assets. As part of rehabilitation/ financial restructuring, the local partner has agreed to transfer its entire 51% shareholding in Saudi Ensas to Voltas for ‘Nil’ consideration. The transfer of shares is subject to statutory approvals and legal process in KSA and India. Upon completion of the legal process, Saudi Ensas would cease to be a joint venture company and become a wholly owned subsidiary of the Company.

Peer Group Comparison

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Name of the

company

CMP(R.s)

(As on Dec 11,2009)

Market

Cap.

(Rs. Mn.)

EPS

(Rs.)

P/E

(x)

P/BV

(x)

Dividend

(%)

Voltas 165.00 54565.50 7.64 21.60 7.48 160.00

Thermax 580.15 69128.5 22.43 25.88 7.19 250.00

Blue Star 367.95 33092.0 21.07 17.46 9.01 350.00

Whirlpool 136.00 172.54.6 7.51 18.11 12.63 0.00

Key Concerns

• An economic downturn may adversely impact on operating results.

• The management of human resources is the primary challenge facing the electro-mechanical business, both domestic and international.

• The MEP business also has to contend with currency fluctuations.

• Uncertainty with regard to cost of third-country purchases.

• There is severe volatility in the metals market, particularly for steel, copper and aluminium as well as PVC, with unpredictable forward movements causing difficulty in factoring them for pricing purposes.

• Competition from Chinese players.

Financials

Results update

Profit & Loss Account 12 Months Ended on March 31st (Standalone)

Value(Rs. in million) FY08A FY09A FY10E FY11E

Description 12m 12m 12m 12m

Net Income 30,445.40 40,638.50 44,702.35 53,195.80

Other Income 430.1 491.2 524.23 576.36

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Total Income 30,875.50 41,129.70 45,226.58 53,772.16

Expenditure -27,638.00 -37,349.10 -40,227.64 -48,115.60

Operating Profit 3,237.50 3,780.60 4,998.94 5,656.56

Interest -26.5 78.6 -30.12 -41.15

Gross Profit 3,211.00 3859.20 4,968.82 5,615.41

Depreciation -135.6 -185.9 -240.16 -297.13

Profit before Tax 3,075.40 3673.30 4728.66 5318.28

Tax -991.7 -1,147.40 -1513.17 -1701.85

Profit after Tax 2,083.70 2525.90 3,215.49 3,616.43

Net profit 2,083.70 2525.90 3,215.49 3,616.43

Equity Capital 330.7 330.7 330.70 330.70

Reserves 5,052.50 6959.20 10,174.69 13,791.11

Face Value 1 1.00 1.00 1.00

Total No. of Shares 330.70 330.70 330.70 330.70

EPS(Rs) 6.30 7.64 9.72 10.94

Quarterly ended Profit & Loss Account (Standalone)

Value(Rs. in million) 31-Mar-09

31-June-

09 30-Sep-09

31-Dec-

09E

Description 3m 3m 3m 3m

Net Income 12626.2 11,789.30 10,042.50 9,896.13

Other Income -4.40 117.00 138.7 140.23

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Total Income 12621.8 11,906.30 10,181.20 10,036.36

Expenditure -11,677.40 -10,754.20 -8,931.20 -8,802.61

Operating Profit 944.4 1,152.10 1,250.00 1,233.75

Interest 5.5 -2.3 -8.90 -9.11

Gross profit 949.9 1,149.80 1,241.10 1,224.64

Depreciation -52.00 -38.8 -43.20 -47.12

Profit before Tax 897.9 1,111.00 1,197.90 1,177.52

Tax -269.3 -374.1 -391.50 -376.81

PAT 628.6 736.9 806.40 800.72

Net Profit 628.6 736.9 806.4 800.72

Equity Capital 330.7 330.7 330.7 330.70

Face Value 1.00 1.00 1.00 1.00

EPS(Rs) 1.90 2.22 2.44 2.42

Key Ratios

Particulars FY09 FY10E FY11E

Equity Capital (Rs.mn.) 330.70 330.70 330.70

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EBDITA Margin (%) 9.30% 11.18% 10.63%

Net Profit Margin (%) 6.22% 7.19% 6.80%

P/E (x) 6.04 16.97 15.09

ROE (%) 34.65% 30.61% 25.61%

ROCE (%) 39.49% 40.48% 35.09%

EV/EBDITA(x) 4.04 12.57 12.57

Book Value (Rs.) 22.04 31.76 42.70

P/BV (x) 2.09 5.19 3.86

Debt-Equity ratio(x) 0.25 0.12 0.08

Charts

A) Net sales & PAT Chart

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B) EV/EBITDA chart

C) P/E Chart

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D) Debt- Equity ratio chart

1 Year Comparative Graph

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Outlook and Conclusion

• At the current market price of the stock Rs.165, the stock trades at a P/E of 16.97 x and 15.09 x for FY10E and FY11E respectively.

• The EPS of the stock is expected to be at Rs.9.72 and Rs.10.94 for the earnings of FY10E and FY11E respectively.

• The topline and bottom-line of the company are expected to growth a CAGR of 20.44% and 20.18% respectively over FY08 to FY11E.

• Price to Book Value of the stock is expected to be at 5.19 x for FY10E and 3.86 x for FY11E.

• The company’s strong balance sheet should help in improving the position of receivables and pace of execution of orders on hand.

• The current order book of the company in the project businesses continues to be very comfortable at Rs. 43590.00 mn providing strong visibility for the next 1-2 years.

• Material Handling Business has some positives in terms of lower commodity prices, lower value of Rupee vis-à-vis US$, etc. There is hope that the Budget and various other actions on the part of the Government will boost capital formation. This should result in revival of the business and improvement in overall margins.

• The overall situation in Textile Machinery market will turn the corner post mid 2009-10 but it is likely to be a slow recovery. The Company, in the meantime, is strengthening its market standing through customer relationship building/servicing.

• Voltas with its business and geographical diversification has the potential to ensure revenue growth despite slowdown in few sectors.

VOLTAS BSE SENSEX

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• In the domestic market, Voltas has undertaken a wide range of projects like IT parks, Airports, Hospitals, Commercial complex, Malls etc. With the acquisition of Rohini Electricals, Voltas is well equipped to target industrial MEP as well.

• Voltas is also well equipped and well placed to mark its entry into Metro Rail with various cities like Mumbai, Delhi, Hyderabad etc., announcing large ticket metro projects.

• We recommend ‘BUY’ in this particular scrip with a target price of Rs.198.00 for Medium to Long term investment.

Industry Overview

Engineering Sector: Market & Opportunities

Engineering

sector

Heavy Engineering Light engineering

Transport

Capital

Other

machinery/

equipment

Low-tech items like

castings, forgings

and

Fasteners

Highly sophisticated

Microprocessor-

based

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India's engineering industry is highly competitive with a number of players in each segment. The engineering sector has been growing, driven by growth in end user industries and the new projects being taken up in the power, railways, infrastructure development, and private sector investments fields amongst others. The industry attracted FDI inflows of US$ 1,196.7 million from August 1991-July 2006 India's exports of engineering goods are valued at US$ 27 billion during 2006-07 which represents a 6 per cent growth over the exports for 2005-06 (US$ 20 billion). The engineering sector accounted for 14 per cent of the country's total exports. It is also noteworthy that 40 per cent of India's engineering export is from the small and medium enterprises (SME) sector. According to Engineering Exports Promotion Council (EEPC), engineering exports could touch US$ 30 billion by 2008-09. In such a scenario, India, driven by the engineering sector, will emerge as a key global manufacturing hub. Industry demand is driven by investments in core ssectors

The demand from this sector depends largely on GDP growth, which in turn is a function of expenditure in core segments like power, railways, and infrastructure development, private sector investments, and the speed at which projects are implemented. The power sector is the largest contributor to the revenues of engineering companies. Engineering majors like Bharat Heavy Electricals Limited (BHEL) and ABB Limited derive a significant chunk of their revenues (69 per cent and 60 per cent, respectively) through the supply of equipment to the power sector. Infrastructure is another key area of operation. Larsen & Toubro Limited, for example, garners around 35 per cent of itssales from infrastructure activities like engineering, design and construction of industrial projects, social and physical projects like housing, hospitals, information technology (IT) parks, expressways, bridges, ports, and water/effluent treatment projects. The industrial segment contributes to around 30 per cent of the total revenues of the engineering sector. While India’s engineering industry has capabilities in manufacturing the range of machinery required by the different user sectors, the rapid rise in demand has led to a large part of the machinery requirements being met through imports. This indicates the size of opportunity for investment in the engineering and capital goods sector in India. The engineering industry has attracted FDI inflows of US$ 1,196.73 million from August 1991-July 2006.

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Indian Engineering goods are gaining acceptance in overseas markets

India’s exports of engineering goods are valued at US$ 27 billion during 2006-07 which represents a 36 per cent growth over the exports for 2005-06 US$ 20 billion). The engineering sector accounted for 14 per cent of the country’s total exports. It is also noteworthy that 40 per cent of India’s engineering export is from the small and medium enterprises (SME) sector. A key driver for increased engineering exports is the trend towards shifting of global manufacturing bases to countries like India that offer lower costs and good engineering talent. This trend is expected to continue and boost exports of engineering goods from India over the next 5 years. According to Engineering ExportsPromotion Council (EEPC), engineering exports could touch US$ 30 billion by 2008-09. In such a scenario, India, driven by the engineering sector, will emerge as a key global manufacturing hub. The nature of Indian engineering exports is also changing with time. India is fast moving from exporting low value goods to developing countries to more sophisticated goods targeted at developed countries. Capital goods account for 27 per cent of total engineering exports. Exports to European Union countries and North America accounted for 19 per cent and 17 per cent respectively, of total engineering exports in 2005-06. Engineering goods worth US$ 3.34 billion were exported to USA alone in April – Feb 2006-07. Engineering Products & Services

In this segment the major contributor to the revenues is by the mining & construction equipment business. The Indian market for mining and mineral processing equipment is estimated at $2.2 billion. Over 80 percent of the mining activities in India are in coal. Considering India’s limited reserve of petroleum & natural gas, ecological concerns regarding hydropower and low base of nuclear power, coal will continue to occupy the centerPstage of India's energy scenario. Increased mining activity at Coal India coupled with replacement demand for aged heavy engineering and mining machinery is expected to boost demand for mining equipment. The growth prospects for the company’s Mining business looks to be strong, since the Government is committed to sustained development of the infrastructure sector, with a huge investment of over Rs.16 trillion planned over the next 10 years. We believe that the industry is expected to grow at 25 to 30% per annum over the next few years. The global textiles and apparel trade is estimated at USD 450 billion and is expected to touch US$ 700 billion by 2010. Of the India’s, USD 52Pbillion textile and apparel industry, the domestic industry accounts for US$ 30 billion and the remaining is accounted by exports. Total exports increased to US$

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20.25 billion in 2007–08 from US$ 14.03 billion in 2004–05. Currently, India has a 3.5–4 per cent share in the world's export of textiles and 3 per cent in clothing exports. The textile sector seems to be under pressure due to the current financial crisis. Slowdown in the exports will have an impact on this division in short term but due to sufficient measures expected to be taken by the government will help the industry to boost in the long term. Growing Demand

Capacity creation and transformation in sectors such as infrastructure, power, mining, oil & gas, refinery, steel, automotive, consumer durables are driving growth in the engineering industry. The framework below captures some of the key factors that are contributing to domestic and international demand for engineering goods from India. Restructuring of the state electricity boards in different states, growth of private sector players and focus on capacity creation have driven growth in the power sector. MEP

MEP (Mechanical, Electrical and Plumbing), an important aspect of the construction sector, forms the second largest component after civil works. The MEP players provide one-stop solutions for manufacturing, contracting, and commissioning and after-sales service. This includes HVAC (Heating, ventilation & air conditioning), electrical contracting, plumbing and water management. Economic growth of the country is dependent on its supporting infrastructure. Almost all sectors like telecom, IT/ ITES, pharmaceuticals, education, aviation, financial services, power, hospitality and retail require a conducive environment to perform efficiently and thus highlight the importance of an MEP player’s role. Key domestic players in the MEP/ HVAC industry include Voltas Ltd. and Blue Star Ltd. with a combined market share of ~60% in MEP/HVAC, packaged air conditioners (AC) and industrial air conditioning (which includes refrigeration and cold chain equipment). These companies also have a significant presence in home segment ACs with a combined market share of ~22%.In the year ‘05-06, Abu Dhabi Govt.

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decided to diversify its economy away from Oil. Contribution from Non-oil sector is targeted to increase from 38% in 2006 to 45% by 2010. An investment of ~USD168bn was planned to be spend in 5 years from 2006-11. Around 70% of total investment was planned for the construction & tourism sector, which constitutes a huge market for MEP/ HVAC players. Majority of the projects will be commissioned in next 2-3 years.

Airports

Under the 11th Plan airports are expected to attract investment of Rs129bn in a view to its contribution to economic growth and to address the need of capacity constraints. During the 11th plan airport development includes modernization and up gradation of 4 metro and 35 non metro airports and 7 new green field airport. Voltas has already done contract of Hyderabad International airport and is presently doing the contract for Visag airport. Hospitals

As per Crisil research in Healthcare Delivery In India it is estimated that India needs to add 1.66mn beds by 2026 for which around~4.78trillion of investments is required. Unitary Cooling Products

AirPconditioning

In 2007P08, the estimated total market size for airPconditioning in India was around Rs90 bn. Of this, the market for central airPconditioning, including central plants and ducted systems, was about Rs.50bn, while the market for window and split air conditioners comprised the balance Rs.40bn. The commercial airPconditioning segment catering to corporate and commercial customers amounted to around Rs.70bn. The year 2007P08 saw big growth in segments such as infrastructure, power, healthcare, telecom and hospitality. In the IT/ITES sector, there was a slowdown amongst smaller players who were adversely affected by the depreciating dollar. However, large IT/ITES companies continued with their aggressive expansion plans. Although the retail sector witnessed some setbacks, especially in the food retail segment, there was significant growth in Tier 2 cities, offering new opportunities. Based on plans announced by several players, the

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cumulative nonPresidential airconditioning mopportunity over the next 5 years is estimated to be around Rs.380bn. With investments continuing in infrastructure and a buoyant economic environment, the commercial airPconditioning industry is expected to grow significantly over the next few years. Commercial Refrigeration

The market for commercial refrigeration equipment and systems was estimated at around Rs.18bn. The commercial refrigeration segment includes a wide range of products such as cold storages, supermarket refrigeration equipment, water coolers, bottled water dispensers, deep freezers, milk coolers, bottle coolers and ice cubers. Conclusion

The Engineering sector’s future outlook is promising. Drivers like power projects, other infrastructure development activities, industrial growth and favorable policy regulations will drive growth in manufacturing. The Indian engineering industry has been witnessing significant level of capability enhancement over the years. As export markets open up, this will help India develop a strong presence in global engineering exports. Power sector contributes the largest to the engineering companies’ revenues. Major players in this sector like ABB and BHEL derive 60 per cent and 69 per cent of their revenues from supplying equipments to the power sector. Going forward, with the Government clearing the blueprint for adding 100,000 MW in the tenth (2002-07) and eleventh 2007-12) five-year plans, the potential is high for the engineering majors. Emerging trends such as outsourcing of engineering services can provide new opportunities for quantum growth.Engineering and design services such as new product designing, product improvement, maintenance and designing manufacturing systems are increasingly getting outsourced to countries like India and China. India’s engineering sector has significant potential for future growth, in manufacturing as well as services. With development in associated sectors like automotive, one of the largest evolving markets for engineering and industrial goods, and a well developed technical human resources pool, India is poised to make significant strides in all segments of engineering.

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Disclaimer:

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This document prepared by our research analysts does not constitute an offer or solicitation

for the purchase or sale of any financial instrument or as an official confirmation of any

transaction. The information contained herein is from publicly available data or other

sources believed to be reliable but we do not represent that it is accurate or complete

and it should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it’s

affiliates shall not be in any way responsible for any loss or damage that may arise to any

person from any inadvertent error in the information contained in this report. This document

is provide for assistance only and is not intended to be and must not alone be taken as the

basis for an investment decision.

Firstcall India Equity Research: Email – [email protected]

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