Voltas

Voltas's order book has expanded nearly 3x over the last 12 months to Rs56.7bn (3.3x Projects sales) and there is room for more orders. We raise Projects' FY10F earnings 21% and lower Agency business earnings 7%. We raise our FY10F EPS 3.7%, revise our target price to Rs155.60 and upgrade to Buy.

1Q09 – third consecutive disappointing quarter; forecasts at bottom?
Beginning 3Q08, Voltas's Projects business experienced execution delays by its main contractors, which hurt revenue growth and affected margins. Although this is still the case, we believe it will end soon. With a Rs56.7bn order book, which is 3.3x Projects' segment sales for the past four quarters, we believe Project revenues should comfortably show about a 35% CAGR for FY09-10. Since 3Q08, Agency business had to do more of stock-and-sell than pure commission sales, resulting in a decline in margins. Stock-and-sell involves Voltas buying the goods and stocking them before selling, unlike selling on commission. We believe reported revenue growth and margins of the Projects and Agency businesses can only improve from here on.

Products segment continues to improve margins
The Products segment's EBIT margin improved significantly to 9.5% in the seasonally strong June quarter. While such margins may not be sustained in the coming quarters, we are now reasonably sure of 6% margins for FY09-10F.

We revise our estimates for Projects and Agency segments
We raise our FY10 revenue estimate for the Projects segment by 21% on the back of a strongerthan- expected order book. We maintain our EBIT margin estimate for Projects at 8.5%. We also reduce our margin estimate for the Agency business from 19% to 15% based on higher stock-andsell and manufactured products. Overall, we raise our FY10 EPS forecast from Rs9.90 to Rs10.30. More significantly, Agency business contribution to total EBIT for FY10F is reduced from 26% to 18%.

The worst appears priced in; we upgrade to Buy from Hold
We believe all the negatives are now priced into the valuations. We upgrade the stock to Buy from Hold and revise our PE-based target price to Rs155.60 from Rs182.70, reflecting a target FY10F PE of 15.2x.