Voltas is a market leader in the domestic air conditioning space. The Unitary Cooling Products (UCP) division dealing in air conditioning products contributes dominantly to the company’s overall revenues. The other two divisions are the Electro-Mechanical Projects (EMP) division and the Engineering Products Solutions division.
Growth in Unitary Cooling Products segment to continue: Voltas has maintained 20%+ market share in the domestic air-conditioning (AC) market, despite stiff competition from MNC players. Its ‘numero uno’ position is owing to its (1) wide distribution network (over 10,000 touch-points), (2) wide portfolio of 50+ models (new launches scheduled in 4QFY2016), (3) strong post-sale support (inc. 5-year warranty on compressor), and (4) strong advertising focus (Top 5 Media spender amongst AC players). With economic indicators turning favorable and summers ahead, the company’s competitive positioning should help UCP segment to report 12.2% top-line and 10.0% EBIT CAGR, respectively, during FY2015-18E.
Gradual recovery in the EMP business: Voltas’ EMP business is adversely affected due to the prevalent weak awarding environment, slow execution and cost
over-runs. In run-up to Qatar World Cup 2022 and Dubai Expo 2020, we expect international awarding activity to gradually catch-up from FY2017E onwards. Surge in order book should translate to uptick in execution (we expect 7.3%
top-line CAGR during FY2015-18E). With legacy projects nearing completion and contribution of high margin projects kicking-in, we expect segment margins to expand from 1.0% in FY2015 to 5.0% in FY2018E.
Balance Sheet strength: Voltas pursues an asset light business model, and in the due course of business, it resorts to outsourcing and strategic tie-ups, thereby enables it to control its operating costs and generate high profitability. As a result, we expect Voltas to revert to it its earlier trend of higher RoEs. Given the asset light business model, the company has been generating strong cash flows (it generated Rs618cr of cash flows from business during FY2013-15). As of 2QFY2016-end, Voltas is a debt free company (on net basis), with cash balance of Rs247cr.
Attractive Valuations: At the current market price of Rs304, Voltas is trading at FY2017E and FY2018E P/E multiple of 22.1x and 18.1x, respectively. With economic cues turning favorable, and given Voltas’ strong market positioning within the AC space, coupled with an expected gradual recovery in its EMP segment, we expect the company to report 9.5% top-line and 13.1% bottom-line CAGR during FY2015-18E. Considering high contribution of UCP segment (72% of FY2015 EBIT) to overall profitability, and limited left-over legacy orders in the EMP segment, we have compared Voltas to Hitachi (which is trading at FY2018 P/E multiple of ~36.0x). We assign Voltas a 21.0x P/E multiple to our FY2018E EPS estimate of Rs16.8 to arrive at a price target of `353. Given the upside, we initiate coverage on Voltas with a Buy rating.

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