Prabhudas Lilladher is bullish on Voltas and has recommended accumulate rating on the stock in its April 15, 2014 research report.
"We met the Voltas management of sterling Wilson(S&W) one of the leading MEP players to get insight/outlook on MEP market. Key takeaways are 1) S&W expect a meaningful recovery in domestic MEP market in FY16 only, 2) Large contracts are expected to be awarded in international markets by March '15 3) They are bidding for orders with site margin of at least 10-12%. Based on the above, the recent run up in Voltas places the stocks at valuations running ahead of fundamentals. Voltas has run up 45 % over last 3 months and is trading at 17x FY16e earnings. Given the commentary of most players of recovery only in FY16, given the margin risk in UCP segment and expensive valuation, we see limited upside for Voltas from current levels."
"The domestic market size ie ~Rs 50bn and the market is expected to grow 0‐5% in FY15 (largely inflation led) as H1 is not likely to see any improvement in the market due to election led slowdown and expect growth to pick up in H2FY15. However they expect market to grow by ~15% in FY16 led by improvement in investment cycle (provided we have a stable government at the centre) and pent up demand. Currently in MEP market ~20% of demand comes from industries, ~20% commercial real estate (Including hotels, hospitals) ~10% IT & IT enabled services,~15% infrastructure and ~35% other sectors. S&W believes the key to revival in MEP market is improved traction in industrial and commercial activity. Currently while the demand from metro cities is down significantly, B and C class cities are seeing decent demand in addition to the improvement in demand from IT/data centre segment. Currently most of the demand in demand in international market is originated at GCC countries, like Saudi Arabia (spend on social infra), Qatar (FIFA 2020). UAE has seen improvement over last few quarters (clients returning to complete stuck projects). However they expect large awards in international markets only to start by March '15."
"S&W is bidding for orders with site margins of at least 10‐12% and EBIT margin northwards of 5%. The margins have improved slightly in market over last year as large players ( Voltas, Blue star and S&W) are shying away from low margin and orders with unfavourable commercial terms. In addition, most players are following stringent risk management in taking new orders (client background, project clearance status etc). The situation in the market still continues to be stretched due slow moving economy and consequent increase in the working capital cycle. However they believe high working capital for companies is not a structural issue and should normalize once market improves. The stock is trading at 17x FY16e earnings. Given the fact that the ordering in domestic and international market is likely to pick up meaningfully only in FY16, with the potential margin risk in UCP segment and expensive valuations, we see limited upside for Voltas from current levels. We expect Voltas to be a market performer," says Prabhudas Lilladher research report.
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