Sensible Cool Company - Voltas

Voltas is a brand name that almost all of us can quickly recognise, recall and relate to with ease because of its strong presence in the consumer durable business of air-conditioners, water dispensers and water coolers. But is this the only business that the company is into or there is a much bigger picture beyond it? In a bid to get more insights into the Voltas business and understand its growth prospects, we met M M Miyajiwala, Executive Vice President - Finance.

Before we go forward just to clarify Voltas’ consumer durable segment contributes only 26 per cent to Voltas’ turnover while it’s the electro-mechanical projects and services (EMPS) segment that is a major contributor at 61 per cent. The balance 13 per cent comes from engineering products and services (EPS). This we believe is not known and could also be the reason that Voltas might not have been able to properly project its business to investors and people at large. Hence isn’t commanding the valuation it actually should. But in totality Voltas brings a unique business proposition to the table that is a combination of projects, products, and agency services. With these segments the company has charted a consistent graph and grown every single year both in the topline and bottomline in the last ten years. Growing at a three-year CAGR of 23 per cent both in topline and bottomline this growth looks sustainable going forward and hence it makes sense to enter the scrip at its current levels.

Electro-mechanical projects and services in simple words is basically a segment wherein Voltas undertakes works related to air-conditioning, electrification, and plumbing. These are also called MEP works which are for buildings, offices, hotels, airports, malls, etc. Voltas, with these services, caters to projects mostly in the Middle East and India. Around 60 per cent of this segment revenue is from the international market while the rest is domestic.

There are reasons why we believe that this segment will continue to do well. One should note that MEP is an important part of any project and forms almost 25-30 per cent of the total project cost. That is a sizeable chunk indeed. In that Voltas has carved a niche for itself. “We are looking at high profile iconic kind of projects and pick-up jobs wherein the competition tends to be less and which satisfy three things viz. cash flows, profits, and turnover,” explains Miyajiwala. The advantage here is that these projects are not only bigger but the margins are better and it helps Voltas set higher benchmarks for bagging future projects. Some of Voltas’ MEP works include the Bahrain Airport, Emirates Palace, Emirates Mall, Formula 1 Track in Abu Dhabi and the Hong Kong Airport.

Further, though there is a lull in real estate and construction activities in the Middle East countries due to lack of private projects, it’s their governments that are pumping money into new projects. Abu Dhabi, Saudi Arabia, and Qatar are already witnessing huge investments. Elaborates Miyajiwala: “In each of these territories there are over USD 100 billion worth of contracts of which we believe the MEP work (opportunity) could be at least USD 10 billion in the MEP segment.” On the domestic front the opportunities are good, but India has mostly been an HVAC (i.e. heating ventilation and air-conditioning projects of much bigger space) market with a total market size of Rs 4,000-5,000 crore. Voltas and Blue Star are leaders and command a market share of 25-30 per cent each. However, considering the benefits of MEP such as one-stop solution and one window responsibility,[PAGE BREAK]

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such projects are catching up in India too. Voltas has already done MEP work for the airports of Hyderabad, Kolkata, and Chennai. Thus, going forward the size of MEP projects will increase and this augurs well for companies such as Voltas.

Unitary Cooling Product (UCP) is a segment that derives its revenues from sales of air-conditioners, commercial coolers, deep freezers, bottle coolers, water coolers, and dispensers. About 70 per cent of the UCP revenue comes from air-conditioners, while the balance is derived from water coolers and dispensers etc. The air-conditioning market is of the size of Rs 5,000 crore and the leaders in this include Voltas with 18 per cent market share, LG with 24 per cent, and Samsung with 17 per cent. Says a confident Miyajiwala, “We have had around 14-15 competitors over the last four to five years and even if new competition comes in it won’t make that much of a difference as the world leaders are already here in India.”

Factors such as low penetration of air-conditioners (a little over 2 per cent), rising disposable income, energy efficient products bringing down usage cost by 30 per cent, increasing heat levels making air-conditioners a necessity rather than a luxury product will drive the market in the coming years.  Moreover, Voltas is also a leader in the water cooler and dispenser business and commands a market share of up to 50 per cent. Besides, Voltas has built its image as a technology leader. This could be seen from the fact that they were first to launch star-rated machines and power savers.  This, coupled with the value proposition and after-sales service the company provides, has been paying rich dividends considering the fact that the segment has grown for Voltas at three-year CAGR of 25 per cent.

The engineering products and services (EPS) segment is more of an agency business. Miyajiwala states, “Volta's major skill is basically in providing engineering skills and in the EPS segment we offer services beyond the factory gate.” Thus EPS includes sales and services for textile machinery of LMW, construction and mining equipment of Terex, and material handling equipment of Bucyrus. Voltas only manufactures forklifts. Though this segment’s revenues declined 14 per cent in FY10, considering the pick-up in the overall economic activity, infrastructure projects, revival in capex cycle, demand for construction, mining and material handling equipment is bound to move forward. Besides, textile sector revival will only add to this growth, thus enabling the segment to bounce back this fiscal.

That apart, Voltas’ total order book as on date stands at Rs 5,500 crore. This provides good revenue visibility for the company. Voltas is also almost a zero debt company with debt of a mere Rs 19 crore. Voltas also has 32 acres of land at Hyderabad but the management declined to comment on the estimated value of the same.

On the financial front, for FY10 Voltas’ topline grew by 11 per cent to Rs 4,823.60 crore (Rs 4,361.72 crore) while profits increased by 51 per cent to Rs 384.56 crore (Rs 254.54 crore) on lower input cost. However, for FY11 Voltas could post revenues of around Rs 5700-5900 crore and profits of Rs 425-450 crore. At these estimates Voltas is available at a PE of 15x, EV/EBDITA of 10x, and PEG of 0.65x, which looks fair. With the growth Voltas has shown, it should command PE of 20x and hence an upside potential of 30 per cent or target price of Rs 283 in one year cannot be ruled out.