Facebook Pixel Code

Management warnings could hurt Voltas stock

Voltas management warned about further decline in the business climate for them during an analyst meet held recently.

Voltas management warned about further decline in the business climate for them during an analyst meet held recently. The company sees further downside on its margin as well as revenue growth in each of its business segments. Most disheartening, in our view, is the worsening of profitability of most new business initiatives including the water treatment business.

Profit margin could decline further contrary to expectation. Voltas has cut margin guidance for the unitary cooling business to 7% from 8% earlier owing to rising cost and thrust on market share gain amidst subdued industry. Voltas also expects its MEP margin to be around 5% compared to earlier expectation of 6% margin. The company indicated it may achieve even lower than5% EBIT margin in FY13 owing to further delay in execution of Sidra hospital project in Qatar to Jun13 from Dec12.

Company is in consolidation mode as new initiatives failing. Voltas had forayed into industry electrification and water treatment a few years back to expand its growth prospects. Industrial electrification business has been losing money for nearly two years now. Water treatment business is now turning for the worse due to execution related issues. Hence Voltas has decided to consolidate its business even at the cost of growth.

Voltas is trading at a PE of 15.6x FY14e and PB of 2.4x FY14e, which is quite high in our view given weak earnings outlook. We forecast a modest recovery in revenue along with 6.3% EBITDA margin, which is on the higher side compared to management guidance. Worsening of ROE and cash flow could drive de-rating, in our view.

We have an underperform rating on the stock. Our price objective of Rs96/share is based on a PER of 11x FY14E EPS of Rs8.69. Historically the stock has traded at much higher multiples. However, we see a structural decline in ROE of the company to around 16% from 35%+ earlier owing to change in business mix in favour of business with higher receivables. Given the muted recovery in ROE we expect the stock to derate.

BofA ML

Get live Share Market updates, Stock Market Quotes, and the latest India News and business news on Financial Express. Download the Financial Express App for the latest finance news.

First published on: 28-09-2012 at 01:14 IST
Market Data
Market Data
Today’s Most Popular Stories ×