voltas ltd june09 results updated detailed report -...

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Firstcall India Equity Advisors Pvt Ltd

VOLTAS LTD

BUY Target Price: Rs.195.00

CMP: Rs.160.00 Market Cap.:Rs.52912.00mn.

Date: October 22, 2009

Key Ratios:

Particulars FY09 FY10E FY11E

OPM (%) 9.30 9.47 9.03

NPM (%) 6.22 6.20 5.85

ROE (%) 34.65 28.43 24.35

ROCE (%) 44.03 38.69 33.77

P/BV(x) 2.09 5.19 3.93

P/E(x) 6.04 18.27 16.14

EV/EBDITA(x) 4.04 13.76 13.81

Debt-Equity(x) 0.12 0.06 0.04

Key Data:

Sector Engineering

Face Value Rs.1.00

52 wk. High/Low Rs.170/31

Volume (2 wk. Avg.) 631863

BSE Code 500575

SYNOPSIS

• Voltas Limited, a TATA group company is the India's

premier air conditioning and engineering services

provider.

• The current order book of the company to be very

comfortable at Rs.46660.00 mn providing strong

visibility for the near future.

• 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.

• 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 top line and bottom-line of the company are

expected to growth a CAGR of 22.58% and 16.30%

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 07

3. Peer Group Comparison 16

4. Key Concerns 16

5. Financials 17

6. Charts & Graph 20

7. Outlook and Conclusion 21

8. Industry Overview 22

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Investment Highlights

• Results Update (Q1FY10)

For the quarter ended on June 30, 2009 (Standalone) the company has registered a 17.10 % (YOY)

growth in the net sales and stood at Rs.11789.30 mn from Rs.10067.30 mn of the corresponding

period of the previous year. The operating profit for the quarter stood at Rs.1152.10 which is

marginally down from Q1FY09.Operating profit margins are at 9.77% which are a little lower than

in the previous year’s 12.88%, primarily due to lower margins in Engineering Products and

Services Business as Margins in Electro Mechanical Projects and Services and Unitary Cooling

Products continue to remain better than in the previous year. The Company has generated

positive EVA of 25%. The company reported PAT of Rs.736.90 mn.EPS for the quarter stood at

Rs.2.22 per equity share of Rs.1.00.

Quarterly Results – Standalone (Rs in mn)

As at Q1FY09 Q1FY10 %Change

Net Sales 10067.30 11789.30 17.10

PAT 851.30 736.90 (13.44)

Basic EPS(Rs) 2.57 2.22 (13.62)

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• Margins (%):

Operating Profit Margins (OPM %)

Net Profit Margins (NPM %)

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• Segment wise Performance

Segment A-Electromechanical Products & Services the core business of the company comprises

54% of the total turnover and reflects a growth of 35%over the corresponding quarter last year.

On the contrary, Engineering Products & Services segment has reported a fall in revenues and

profits.The turnover during the quarter dropped by 16% whereas profitability has fallen by about

26%.Segment C-Unitary Cooling Products revenues surged by 3.4% at Rs.4153.70 mn.

• Strong Order book

The company has a strong order backlog worth around Rs.46660 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.

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• 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.

• 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.

• Slowdown in the textile machinery

The slowdown in the textile machinery business is continuing unabated and the trend of order

booking indicates that the situation seems to have worsen, primarily due to the slowdown of

demand for garment cidel developed markets.

• More focusing on cooling business

Unitary cooling products, commercial cooling products business has done significantly better in

this quarter and the factory’s capital utilisation has improved significantly. Looking at the markets

slowdown in airconditioners, They are focussing particularly on the commercial cooling business

and in a limited way it is showing up in the results. The company continue 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 is in liquidity and breaking

down the borrowing costs order well for the future. Similarly the stimulus package announced by

the Central Government are 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-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.

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Business Area

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

1. Electro-Mechanical Projects & Services

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.

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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.

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.

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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 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.

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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.

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.


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

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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.

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.

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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%.

Air Conditioners

Voltas is a leader in the Indian Air-conditioning 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 ~35-40% 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, Air-conditioning

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.


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

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

5. Universal Weathermaker Factory LLC, Abu Dhabi

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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. KSA provides good opportunity

to the Company’s international Electro-mechanical business and with full ownership of Saudi Enas,

the Company would be able to leverage its market reputation to gain a reasonable share of these

opportunities in the coming years.

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Peer Group Comparison

Name of the

company

CMP(R.s)

(As on Oct.

22,2009)

Market

Cap.

(Rs. Mn.)

EPS

(Rs.)

P/E (x) P/BV

(x)

Dividend

(%)

Voltas 160.00 52912.00 7.64 20.94 7.2 160.00

Thermax 572.20 68181.2 22.67 25.24 7.09 250.00

Blue Star 375.55 33775.5 20.58 18.24 9.19 350.00

Whirlpool 128.00 16239.6 5.69 22.49 11.88 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.

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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 46,734.28 56,081.13

Other Income 430.1 491.2 521.16 573.28

Total Income 30,875.50 41,129.70 47255.44 56654.41

Expenditure -27,638.00 -37,349.10 -42831.96 -51589.03

Operating Profit 3,237.50 3,780.60 4423.47 5065.37

Interest -26.5 78.6 -35.60 -43.60

Gross Profit 3,211.00 3859.20 4387.87 5021.77

Depreciation -135.6 -185.9 -250.97 -338.80

Profit before Tax 3,075.40 3673.30 4136.91 4682.97

Tax -991.7 -1,147.40 -1241.07 -1404.89

Profit after Tax 2,083.70 2525.90 2895.83 3278.08

Net profit 2,083.70 2525.90 2895.83 3278.08

Equity Capital 330.7 330.7 330.70 330.70

Reserves 5,052.50 6959.20 9855.03 13133.12

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 8.76 9.91

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Quarterly ended Profit & Loss Account (Standalone)

Value(Rs. in million) 31-Dec-08 31-Mar-09 30-June-09 30-Sep-09E

Description 3m 3m 3m 3m

Net Income 8660.1 12626.2 11,789.30 11553.51

Other Income 101.8 -4.4 117 95.60

Total Income 8761.9 12621.8 11,906.30 11649.114

Expenditure -8166.9 -11,677.40 -10,754.20 -10542.58

Operating Profit 595 944.4 1,152.10 1106.53

Interest 45.8 5.5 -2.3 -4.30

Gross profit 640.8 949.9 1,149.80 1102.23

Depreciation -43.6 -52 -38.8 -31.20

Profit before Tax 597.2 897.9 1,111.00 1071.03

Tax -173.1 -269.3 -374.1 -321.31

PAT 424.1 628.6 736.9 749.72

Net Profit 424.1 628.6 736.9 749.72

Equity Capital 330.7 330.7 330.7 330.7

Face Value 1.00 1.00 1.00 1.00

EPS(Rs) 1.28 1.9 2.22 2.27

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Key Ratios

Particulars FY09 FY10E FY11E

Equity Capital (Rs.mn.) 330.7 330.7 330.7

EBDITA Margin (%) 9.30% 9.47% 9.03%

Net Profit Margin (%) 6.22% 6.20% 5.85%

P/E (x) 6.04 18.27 16.14

ROE (%) 34.65% 28.43% 24.35%

ROCE (%) 44.03% 38.69% 33.77%

EV/EBDITA(x) 4.04 13.76 13.81

Book Value (Rs.) 22.04 30.80 40.71

P/BV (x) 2.09 5.19 3.93

Debt-Equity ratio(x) 0.12 0.06 0.04

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Charts

(a) Net sales & PAT chart (b) EV/EBITDA(x)

(c) P/E(x) (d) Debt equity ratio

21


1 Year Comparative Graph

Outlook and Conclusion

• At the current market price of the stock Rs.160, the stock trades at a P/E of 18.27 x and 16.14 x

for FY10E and FY11E respectively.

• The EPS of the stock is expected to be at Rs.8.76 and Rs.9.91 for the earnings of FY10E and FY11E

respectively.

• The top line and bottom-line of the company are expected to growth a CAGR of 22.58% and

16.30% respectively over FY08 to FY11E.

• On the basis of EV/EBDITA, the stock trades at 13.76 x and 13.81x for FY10E and FY11E

respectively.

• 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. 46660.00 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.

• We recommend ‘BUY’ in this particular scrip with a target price of Rs.195.00 for Medium to Long

term investment.

VOLTAS BSE SENSEX

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Industry Overview

Engineering Sector: Market & Opportunities

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.

Engineering sector

Heavy Engineering Light engineering

Transport

Capital goods

Other

machinery/

equipment

Low-tech items like

castings, forgings and

Fasteners

Highly sophisticated

Microprocessor-based

Process control

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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.

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.

24


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 center-stage 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 52-billion textile and apparel

industry, the domestic industry accounts for US$ 30 billion and the remaining is accounted by

exports. Total exports increased to US$ 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.

25


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. 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

Air-conditioning

In 2007-08, the estimated total market size for air-conditioning in India was around Rs90 bn. Of

this, the market for central air-conditioning, 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 air-conditioning segment catering to corporate and commercial customers

amounted to around Rs.70bn. The year 2007-08 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 cumulative

non-residential airconditioning mopportunity over the next 5 years is estimated to be around

26


Rs.380bn. With investments continuing in infrastructure and a buoyant economic environment, the

commercial air-conditioning 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.

_______________________________________________________________________

Disclaimer:

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.

27


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