[T.S.R:18341] Voltas-BUY

Voltas:** (VOLT IN, mcap US$630mm, BUY)
**Nitin Bhasin,

*We find Voltas a better proxy to participate in the Indian investment
cyclical recovery than the pure construction companies on account of: (a)
low/ nil leverage providing balance sheet capacity to fund working capital
for growth from infra segments; (b) nil requirement of investments in asset
development; (c) free cash flow generation history; and (d) superior
management quality. Whilst the acquisition of Rohini Electricals (and
moving up the value chain for an integrated MEP offering) and recent demand
decline in the highly competitive Room AC market (Voltas is the 2nd largest
player) have impacted the recent fiscal financial performance, we highlight
Voltas as the top pick in the E&C sector based on:

*Superior strengths in the EMP project management segment:* Our primary
data across the MEP industry highlight that Voltas' project management
capabilities are superior to that of peers in terms of execution,
experience in large infra projects and most importantly, team stability. As
investments in buildings remain low, Voltas, over the last two years, has
used its international experience and talent pool to bid for, win and
execute large infrastructure HVAC or MEP jobs (airports, metros). Whilst
infrastructure jobs have higher execution and capital requirements, we
believe Voltas' balance sheet gives it the strength to build market share
in this segment which has higher potential for integrated MEP jobs.

*Comfort of Unitary cooling products:* Voltas' profitable market share
increase (to 19% from 16%) in Room ACs over FY08-FY11 (a 24% revenue CAGR
and 40% EBITDA CAGR resulting in doubling of RoCE to 64%) via its focus on
the high-demand but cost conscious mass market is a notable success. Its
super brand status, its expanding reach and its outsourced production model
leave it well placed to compete and capture the secular growth opportunity
in a relatively under penetrated segment. Whilst we expect some market
share loss and profitability decline in this segment for Voltas due to
rising competitive intensity, we believe its wide retailing/brand/logistics
reach provide it with pockets of opportunity wherein it can witch from
tier-I and tier-II cities to new centres of demand.

Near-term pressure on earnings, lower working capital turnover and lower
RoCE can impact valuations. However, we expect the core business valuations
to recover with the improvement in business environment and with a gradual
recognition of Voltas' superior balance sheet strength versus the
limitations of its fragmented competitors. On our revised FY13 EPS
estimates, Voltas is trading at a P/E of 13x. We expect Voltas' core
business valuations to recover faster than that of peers with improvement
in the business environment. Our core business valuation for Voltas is
Rs111.

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