Voltas’ Q1 FY14 earnings fell 48% (42% below HSBCe) as the its primary projects (EMP) segment revenue fell 6% y-o-y with an Ebit loss of Rs 265. The problems were compounded by a sharp spurt in interest expenses (48% y-o-y) due to the interest subvention scheme in its unitary cooling (UCP) division. Earnings could have been worse, if not for the sharp improvement in Ebit margins at its UCP (49% of sales, 160bp margin expansion) and engineering products division (EP&S, 7% of sales, 960bp margin expansion).
Domestic business remains weak and looks unlikely to improve given the poor macro conditions. However, management said it had learned from its past mistakes in the Middle East projects business, and this could help the company to recover, albeit at a slow pace. While margins are likely to stay low (5-7%), moving into execution of fresh orders will help reduce the earnings drag (Voltas is negotiating new orders in the Middle East). Hence, while we have cut our EPS forecasts by 13% over FY13-16 and are 22-23% below consensus.
We retain neutral rating with a target price of R74, down 13%. We retain our target PE of 10.9x (1 SD below the long-term mean). Our revised outlook of limited prospects for EPS downgrades suggests stock is unlikely to trade meaningfully below its current valuation.