Voltas: Promising outlook

Voltas’s electro-mechanical project business is expected to see good times ahead.

The outlook on Voltas’s electro-mechanical project (EMP) business — comprising 65 per cent of the total sales — has turned positive. The company is optimistic about the order inflow in this segment, as activity is picking up in the Middle East (about 60 per cent of the total EMP revenues). It is partly due to high crude oil prices resulting in higher infrastructure spending and commercial activity. The domestic EMP market, driven mainly by commercial real estate, is also recovering, albeit slowly.

International orders — 70 per cent of the total order backlog (Rs 5,000 crore) — mainly consist of the Middle East market, catering to Abu Dhabi, Dubai and Qatar. Voltas is also trying to increase exposure in Saudi Arabia and Oman. The company recently formed a 50:50 joint venture (JV) with Saudi Arabia-based Olayan Financing Company, which will be operational from April 2011.

Saudi Arabia is a lucrative market for Voltas due to its strong gross domestic product growth. The EMP market is almost the size of the GCC market and a lot of investments in infrastructure are planned. The JV will take up EMP projects and sub-contract the same to Voltas for design, supply of equipment and project execution.

This will boost the order inflow from the region over the next few years. Meanwhile, its financial performance in the second half of FY11 is expected to be better than the first half. EMP division is likely to see a better order inflow, execution and revenues, but the profitability will take time to recover due to the lag effect of the slowdown, competition and high input costs. Other segments— namely unitary cooling products and engineering (35 per cent of the total sales) — will do well, thanks to robust growth drivers (rising income and strong economic and industrial activity). The management foresees a bull phase for EMP starting FY12 that is sustainable over the next five-seven years. The stock’s valuation of 15 times and 13 times of the FY12 and FY13 average estimated earnings, respectively, looks cheap.