Voltas is hot

INVESTMENT COUNTER/ POUND WISE

Voltas may be among the leaders in cooling system. But that is just one and a less important reason why its stock is sizzling hot.

If you think malls and multiplexs are set to boom in this country, here is an unlikely candidate you could consider to play this theme in the stock markets.

Voltas from the house of Tatas, known more for its air-conditioners and refrigerators, has a strong electro-mechanical business which includes electricals, power and lighting solutions. Being a pioneer in this business, Voltas is best placed to ride the boom in malls, multiplexes and technology parks.

Already, its international operations, which are driven by this business, are expected to grow three times by 2008. The company's huge order book ensures good revenues over the coming years.

Voltas management is bullish about future on back of strong growth in malls, IT parks, multiplexes and infrastructure projects like airports for its air conditioning solutions business, which is a part of its electro-mechanical business.

The unitary business too has a good growth potential, despite stiff competition, given the fact that there is just one per cent room AC penetration in India. The highest growth has been in the commercial AC segment at around 30 per cent, while residential air conditioning has grown by around 25 per cent.

Growth drivers

Voltas spokesperson said that the growth of electro-mechanical business is currently being driven by palaces, malls and telecom industry in UAE and Qatar.

The company is eyeing business in Macau too. It is undertaking initiatives like water management in Singapore. It would implement this Rs 300 crore project over the next four years. Going forward, it sees good growth in India, due to projects like the Hyderabad airport and the entertainment and retail sector.

Voltas expects the contribution of its electro-mechanical division to the company's total profits, to increase from 38 per cent in FY05 to 50 per cent in the coming years. It contributed to 56 per cent of revenues in FY05. This business has a current order book of about Rs 1600 crore. It plans to implement it over the next three years.

In its air-conditioning solutions, which accounts for 55 per cent of the electro-mechanical, it has seen a 45 per cent y-o-y growth in order book and plans to implement it over the next 8-12 months.

The business is expected to grow at 20 per cent y-o-y, according to company management. It expects to increase the contribution of international business to total revenues from 25 per cent to 35 per cent in coming years.

Share of engineering division is expected to rise from 32 per cent to 40 per cent and that of unitary division from seven per cent to 10 per cent, according to company spokesperson. These two divisions contributed seven per cent and 30 per cent of profits respectively, in FY05.

The company's engineering projects business is also not capital intensive and caters to the sectors of textile, machine tools and mining & construction. A company spokesperson informed that a growth of 20 per cent y-o-y has come from textile clients and about 15-20 per cent from machine tools. It has a 60 per cent market share among textile clients.

ACs/coolers set for growth

In its unitary business, manufacturing and marketing of air conditioners and coolers is set to witness a growth of 35-40 per cent y-o-y. In room air conditioners, Voltas grew by 50 per cent in H1FY06 and has a market share of 16 per cent according to company spokesperson.

LG is the largest player in room air conditioners. LG product group head-room air conditioners, Ajay Bajaj said that its market share is 37-38 per cent.

At present, LG and Samsung operate on slightly lower margins, according to analysts and thus score over Voltas. In commercial ACs, Blue Star, Voltas and Carrier together have a 70 per cent market, while LG controls about 20 per cent. Voltas also imports air conditioners and sells under the Vertis brand. Its cold storage solutions are handled by its electro-mechanical division and is considered as a growth driver.

Restructuring the future

The company undertook restructuring since 1997, which has continued upto the shifting of Hyderabad plant. The company sold its white goods business to Electrolux, transferred the chemicals plant to a subsidiary of Rallis India, sold the thermostat division to UK-based multinational and divested stakes in a couple of loss-making subsidiaries.

Following the restructuring, Voltas has been gradually evolving into an electro-mechanical and engineering projects company. The company has prepaid its debt, thereby saving on interest costs. For instance, interest outgo has decreased by 84 per cent y-o-y in September quarter FY06. The total restructuring cost was Rs 460 crore, according to company spokesperson.

It turned loss making after it stopped manufacturing refrigerators for LG and Samsung. The company spokesperson informed that of the VRS costs, which amounted to Rs 75 crore, Rs 15 crore has been reflected in H1FY06, while the rest would be reflected in H2.

The shifting of the plant to Uttaranchal will bring Rs 15 crore savings in employee costs. The company plans to invest Rs 120 crore over the next three years in the new plant, primarily from internal accruals.

Concerns

The company feels that only an economic slowdown in India or Middle East could hinder its growth. But more than that, growing competition in ACs is a matter of concern, even as the company has an order book for two years. Analysts see stiff competition from LG, Samsung, Videocon and going forward from Chinese manufacturers.

AC manufacturers operating in India are concerned about competition from cheaper Chinese products. Arvind Jain from Fortis Securities feels that Chinese ACs had about 16 per cent market share in India in H1 FY06. They offer higher discounts to dealers and may hence gain in the short-term.

But Jain does not perceive them as a threat in the long-term, where Indian players with their quality and marketing skills will do well. At present Haier is a major Chinese brand available in India.

Impressive financials

The company has posted strong September quarter FY06 numbers. The net sales have shot up 60 per cent y-o-y to Rs 476.1 crore. On the back of this, the net profit has spiraled up by 239 per cent to Rs 18.9 crore, while operating profit went up by 315 per cent to Rs 26.72 crore. 

FINANCIALS
(In Rs crore)	Sep-05	Sep-04	Change (%)
Net sales	476.1	297.33	60.13
Other income	5.41	6.49	-16.64
Operating profit	26.72	6.44	314.91
OPM %	5.61	2.17	-
Net profit	18.85	5.56	239.03
EPS (Rs)	5.7	1.68	-
P/E (FY06E)			23.6x

The strong growth in electro-mechanical division can be seen by the 89 per cent rise in revenues from that business and a 128 per cent growth in profits. Unitary business continues to be in red.

Liberal FDI policy in construction and manufacturing sector would help the company grow its electro-mechanical business in India, while strong capex cycle in sectors like steel and mining and promotion of textile export by Indian government, augur well for its engineering projects division.

Bajaj is very positive about demand triggered by overall good growth in the economy, better and more reliable power supply, rising urban temperatures and ACs graduating from luxury to a necessity.

Voltas trades at 23.6x on FY06E earnings of Rs 25.5. Its peers in the air conditioning business trade at; Blue Star (20.6x) and Videocon Appliances (2.9x on an annualised EPS of Rs 9.7).