Voltas

OVERVIEW:

Voltas Ltd. is a Tata group company engaged in cooling products and engineering services provider. Voltas is India’s premier in air conditioning projects in India and also it is India’s largest exporters of electro-mechanical projects. Voltas Limited offers engineering solutions for a wide spectrum of industries in areas such as heating, ventilation and air conditioning, refrigeration, electro-mechanical projects, textile machinery, mining and construction equipment, materials handling equipment, water management & treatment, cold chain solutions, building management systems, and indoor air quality. Voltas has completed projects in more than 30 countries worldwide and is ISO 9001:2000 certified. In Middle-east countries, it is considered as top rated company.


INVESTMENT RATIONALS

Financial Analysis: Net sales for 9M FY11 stands at Rs. 3506 cr against Rs. 3302 cr. YoY growth was 6%. Consolidated net sales went up by 5.3% to Rs 1,039 crore from Rs 987 crore (YoY). Operating profit margin came in at 7.6% as against 9.1% on year-on-year basis. Company reported consolidated net profit of Rs 70.5 crore for the quarter ended December 2010, down 6.8% as compared to Rs 75.7 crore in same period the previous year. Due to increase in metal prices, margin was increased. Total expenditure has increased by small margin of 0.7%. Going forward, we expect 15% CAGR in revenue in FY11-12; however margin is expected to be in slightly in pressure due to raw material prices. Earning is expected to be over 15% CAGR in next two years due to good performance in Engineering Business. Most of these below expected performance are already in price and downside looks minimal provided that raw material prices don’t increase substantially


Stable Order Book: Total order book by the end of Dec, 2010 stands at Rs47bn against Rs. 50bn, decrease of 6% YoY. Order inflows stands @ 5 bn from 4.15 bn on YoY. An increase of 20%. Order inflows in the quarter is Rs5bn which is 41% lower QoQ. Last year, Rohini Industrial Electricals incurring a loss of Rs 90 million against a profit of Rs. 40 Million. Electro-mechanical is expected to do well in next few quarters but overall margin is expected to make it flat. Company is expected to do well slowly and gradually by handling raw material cost effectively and execution in several of their projects. Overall, Next two quarters is going to be challenge for the company but outlook for next two years is expected to be robust both in top line as well as bottom-line.


Increase in Revenue in FY12-13: Voltas has a JV with Riyadh based Olayan Financing company for electro-mechanical projects in Saudi Arabia. It is planned to roll-out in Q1FY12. Voltas also had investment in Rohini Industrial Electricals Ltd to diversify its business to reduce risk. Company also has agreement with Mustafa Sultan Enterprises for electromechanical (MEP) projects in Oman. Mining, Construction and cooling products activities will do well in the future.


VALUATION: cooling products is doing well and expected to continue its performance in future. Only concern in Margin pressure and slow execution in Electro-mechanic segment. At the CMP of Rs150, the stock is trading at P/E of 15.6 & 13.5 of FY11 & FY12 respectively. Since next 2 quarters could be more likely to be flat although management is hopeful for better result in Q4FY11.  We recommend BUYING @ CMP (150-140) for Target 260 in 24 Months and add a Value pick in Indian Consumption story through Engineering.

PNB: Punjab National Bank

Punjab National Bank (PNB) is currently witnessing a credit growth of ~27-28% (CD ratio of ~75%); this is much ahead of the industry estimates. For the full year FY11, the bank expects to clock credit growth of 24-25%, which is again much ahead of industry.Insurance vertcle of the bank is also seeing a pick up. Margins not to breach 3.5%: PNB reported margins of 4.1% in Q2FY11 and 4.0% for H1FY11. While the management believes that these levels of margins are unsustainable, the bank should close the year with a margin of ~3.6% for the full year. Moreover, the management is confident of maintaining 3.5% margins (historically has been around these levels), going forward. Asset quality to remain stable: Asset quality of the bank is likely to remain stable and the management does not expect any significant slippages. Meanwhile, the credit costs are likely to remain stable at the current levels. Investors are recommended to accumulate the stock for a target of Rs1475..

HCL TECH

Deal pipeline stronger, margin improvements on the cards: The management guided for deal pipeline in December 2010 much stronger than December 2008 (when the company closed deal worth US$1 bn), acompanied by improved deal win rates without offering the pricing discount as a strategy. The management is cognizant of the fact that the margins have declined by almost 600 bps in the last five quarters. We expect EBITDA margin to witness an uptick in Q2FY11 despite an increase by 50bps in S&M. According to the management, the margin has bottomed out and the exit margin for Q4FY11 would be same as Q4FY10 (18.5%). Hence, FY11 expects a margin decline of ~200bps over FY10. However, the margin would continue to see an expansion in FY12. HCL Tech increased its focus on profitability and expected to improve margin by increasing utilization, improving, revenue productivity, rationalizing cost by increasing focus on fresher recruits (setting up new training facility for fresher). The management highlighted their focus on FCF generation. For FY10, the company has FCF/EBITDA ratio in line with top three and expect ratio to be in 45-60% range. View & Valuations: We continue to believe that HCL Tech would continue stronger-than-peer top-line growth, along with margin improvement in H2FY11. The accelerated bottom-line growth could deliver positive surprise for the consensus.