Monday 6 November 2006

Change of price target

Voltas Ltd

Buy
Absolute performance

Keep the faith

n/a

We expect a strong 2H06 from Voltas to make up for the relatively

weak 1H06. The outlook for its high-margin engineering agency
business appears buoyant. Hence, we retain our FY07 and FY08
forecasts and stay at Buy with a new target price of Rs134.

Neutral

Short term

Key forecasts

Market relative to region

Consumer Durables & Apparel

India
Price

Rs99.95

FY05A

FY06A

FY07F

FY08F

FY09F

13866.6

18531.4

23461.8

28910.0

35169.9

EBITDA (Rsm)

444.9

1007.3

1932.9

2545.8

3071.6

Rs134.00

Reported net profit (Rsm)

504.2

704.9

1550.8

1868.8

2162.1

Market capitalisation

Normalised net profit (Rsm)

453.8

966.8

1550.8

1868.8

2162.1

1.37

2.93

4.69

5.65

6.54

Rs33.03bn (US$737.14m)

Dividend per share (Rs)

0.50

0.60

0.80

1.00

1.20

Dividend yield (%)

0.50

0.60

0.80

1.00

1.20

Normalised PE (x)

72.8

34.2

21.3

17.7

15.3

EV/EBITDA (x)

73.4

32.4

16.8

12.7

10.5

Price/book value (x)

17.1

13.7

9.02

6.41

4.81

ROIC (%)

12.6

42.7

63.5

52.3

44.0

Revenue (Rsm)

Normalised EPS (Rs)

1. Post-goodwill amortisation and pre-exceptional items

Source: Company data, ABN AMRO forecasts
Accounting Standard: Local GAAP

year to Mar, fully diluted

We retain our forecasts for FY07 and FY08

1H06 (March year-ending) has seen marginal 4% growth in Voltas's
electromechanical business, due mainly to postponement of billing as projects have
not progressed enough for revenue recognition. The company is working on some
large projects in the Middle East; the Rs3.65bn Burj Towers and the Rs5bn mall in

Target price

Avg (12mth) daily turnover

Rs53.43m (US$1.18m)
Reuters

Bloomberg

VOLT.BO

VOLT IN

Asset allocation
Equities

Underweight

Cash

Overweight

Bonds

Overweight

Price performance (1M)

Price (Rs)

-9.1

7.7

33.8

24.9

95.1

Nov 03

100
80

forecast of 30% for this division. The high-margin engineering agency division has

60

performed more strongly than we expected, growing at 84% yoy in 1H, while we

40

have built in 40% growth for FY07F. Its key agency account, Lakshmi Machine Works

20

The macro outlook in the Middle East and the domestic market remains strong for

117.7

-7.2

healthy revenue growth of 30%. Hence, we maintain our full-year sales growth

Macro environment looks strong for all its segments

45.9

29.5

Rel sector %

this division's growth back on track. The domestic market has continued to show

the agency business, which is the main reason we maintain our FY07-08 forecasts.

77.2

-3.4

Rel market %

120

further. We see a very strong chance for a positive surprise in full-year revenue from

(3M) (12M)

103.5

Absolute %

Bahrain. These projects should see substantial billing during 2H06, which should put

(LMW), has guided for a stronger 2H, which should boost revenue in this segment

(from Rs131.68)

Nov 04

Nov 05

0
VOLT.BO

Sensex

Stock borrowing: n/a

Volatility (30-day): 51.16%
Volatility (6-month trend):
52-week range: 115.90-44.60

Voltas. In our opinion, the Middle East capex cycle looks sustainable for the next four

Sensex: 13130.79

to five years, while the domestic market also looks buoyant, with the thrust on

BBG AP Eng & Mach: 144.70

airports, SEZs and the boom in IT, ITeS and retail space. Similarly, LMW is guiding

Source: ABN AMRO, Bloomberg

for sustained 30% revenue growth for the next two to three years. Similarly, forklift
demand and fresh Coal India orders could also push the agency business. The unitary
cooling segment should see the benefits of last year's restructuring trickling in during
FY07 before becoming more pronounced in FY08.
Maintain Buy with a new target price of Rs134
We maintain our Buy on Voltas with our post-split target price of Rs134 (from
Rs131.68), which provides 34% potential upside from current levels. We maintain our
FY07 and FY08 forecasts and introduce our FY09 forecasts. We have arrived at our
target price using a DCF with a WACC of 11.5%.
Researched by
ABN AMRO Institutional
Equities Team

Priced at close of business 2 November 2006. Use of %& indicates that the line item has changed by at least 5%.

Mafatlal Chambers C Wing, Ground Floor, N.M. Joshi Marg, Lower Parel (E),
Mumbai 400 013, India. Tel : +91 022 6754 8411 Fax : +91 022 6754 8420

www.abnamrobroking.co.in

I N V E S T M E N T

V I E W

Keep the faith

We expect a strong 2H from Voltas to make up for a relatively weak 1H. The
macro environment looks extremely strong for all its business. We maintain
our Buy rating with a new post-split target price of Rs134.

We retain our forecasts for FY07 and FY08

We retain our forecasts for FY07 and FY08. We expect the electromechanical division
to meet our expectations in FY07 and the engineering agency business to outperform
our expectations. We have toned down our expectations for the cooling business, but
we expect that to be made up by higher growth in the engineering agency business.
We believe the following will ensure that Voltas meets our full-year expectations.
Sales

The electromechanical division requires Rs9bn of revenues to meet our full-year

forecast of Rs14.6bn. This is 60% growth over 2H06. Of this Rs9bn, we expect the
domestic business to contribute about Rs3bn, so the international business would
need to generate Rs6bn in 2H, which we believe is possible. Just two of the large
projects the company is working on Burj Towers in Dubai and the mall in
Bahrain amount to Rs8.7bn. Management has stated that substantial billing of
these projects will occur in 2H. Apart from this, the company is also working on
other projects, such as the Intercontinental in Dubai.

The company has already generated Rs1.8bn of revenue in the engineering

agency and products, which is 84% growth yoy. We had earlier estimated only
40% growth, which means the company only needs a further Rs1.7bn of revenue
this year to meet our target. Obviously there is scope for upside to this number
because 2H is seasonally stronger than 1H. One of the key agency accounts for
the company, LMW (NR), has guided for a stronger 2H. Similarly, the company
should see stronger pickup in forklift volumes in 2H. Hence we raise our 2H
revenue forecast for this segment to Rs2.4bn, which is still a conservative 60%
growth over 2H06, although it appears 2H growth could be better than the 84%
growth seen in 1H.

The unitary cooling business has contributed Rs3.6bn to revenues in 1H, meaning
it would need to generate only Rs1.7bn more to meet our earlier forecasts. We
now believe it could exceed this figure and increase our forecast to Rs2bn, which
is similar to the Rs2.1bn achieved by the company in 2H06.

Margins

To meet our full-year EBIT forecast for the electromechanical business, the
company would need an 8.7% EBIT margin in 2H. The company has already hired
people for its Burj Towers and Bahrain projects, for which billing will occur only in
2H. This will present the company with some leverage in 2H, which should enable
it to achieve higher EBIT margins in 2H.

We conservatively estimate engineering agency and product margins at 25%,

although this could clearly surprise on the upside.

For the unitary cooling business, we have assumed a nominal 2% EBIT margin.

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I N VE S T M E NT

V IE W

PAT

The company has reported a PAT of Rs68m in 1H07, which includes a write-off of
Rs60m due to provisions related to AS15. If this is added back, it effectively
provides a normalised PAT of Rs528m, or EPS of Rs1.6 for 1H07.

We have assumed the tax in 2H06 to be in the same rate as in 1H06, at 28%, to
arrive at an EPS of Rs3.1 for 2H, which gives us a full-year EPS of Rs4.70.

Table 1 : Forecast revisions

1H07

2H07F

2H07F

Old

Revised

Rs m

FY07F

FY08F

FY09F

Revenues
Electromechanical projects and services

5,678

9,006

9,000

14,678

18,355

22,944

Engineering agency and products

1,840

1,699

2,400

4,240

4,778

5,973

Unitary cooling products

3,660

1,724

2,000

5,660

6,030

6,633

238

320

320

558

614

675

16

(16)

16

11,399

12,766

13,720

25,120

29,777

36,225

1,537

Others
Less intersegment
Net sales
EBIT
Electromechanical projects and services
EBIT margins
Engineering agency and services
EBIT margins
Unitary cooling products
EBIT margins
Others

218

785

785

1,003

1,230

3.8%

8.7%

8.7%

6.8%

6.7%

6.7%

457

534

600

1,057

1,338

1,613

24.8%

31.4%

25.0%

24.9%

28.0%

27.0%

38

123

40

78

181

199

1.0%

7.1%

2.0%

1.4%

3.0%

3.0%

64

66

66

130

143

157

26.9%

20.6%

20.6%

23.3%

23.3%

23.3%

Total

777

1508

1491

2,268

2,892

3506

EBIT margins

6.8

11.8

10.9

9.7

9.7

9.7

Unallocatable expense

121

110

231

200

300

Interest

18

18

36

22

27

Extraord exp

10

50

60

648

1412

2,061

2,670

3,180
1,017

EBIT margins

PBT
Tax
PAT
Exception provisions (AS15)

180

390

570

801

28%

28%

28%

30%

32%

468

1,023

1,491

1,869

2,162

527.7

1,023.1

1,550.8

1,868.8

2,162.1

1.6

3.1

4.7

5.7

6.6

2 0 0 6

60.0

Normalised PAT
EPS Rs

60.0

Source: Company data, ABN AMRO forecasts

The reasons above give us confidence that the company will meet our FY07 EPS
forecast of Rs4.7. We have left our FY08F numbers unchanged and have assumed
conservative revenue growth for FY09F of 22%. We await details of the companys
strategy plan for growth before revisiting these numbers.

Macro environment look strong for all Voltas segments

The macro environment for the company still appears strong. The Middle East capex
cycle looks sustainable for the next four to five years in our view. The domestic
market also looks extremely positive. On the infrastructure side, we see significant
thrust on airports and SEZs. Similarly, we see strong growth in the services sector in
retail, IT and ITeS, healthcare etc. Rising income levels should also see demand for
unitary cooling products increase significantly.

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I N VE S T M E NT

V IE W

LMWs guidance buoys outlook for agency business

LMWs current order book stands at Rs45bn (a 65% yoy increase), which is 3.5x of
FY06A sales of Rs13bn. LMWs management has guided for sustained 30%revenue
growth over the next two to three years. Management also expects the current textile
capex cycle to continue well into 2010. This provides excellent visibility for Voltas in
terms of growth potential for its textile machinery sales. LMW is also focusing on
spare sales for the existing base in India and plans to route these sales through
Voltas.

Maintain Buy with a post-split target price of Rs134

We maintain our Buy on Voltas with a post-split target price of Rs134, which provides
34% potential upside from current levels. Voltas implemented a 10:1 stock split in
September 2006. The stock is trading at 18x for FY08F, based on our conservative
growth forecasts for FY08, which could change after we get a clear picture of
managements specific plans to achieve fivefold growth in the next five years.
We derive our target price for the stock using a DCF with a WACC of 11.5%, based
purely on the operational cash flows of the company. We continue to ignore the
underlying value of the companys assets (which we believe have significant unlocked
potential), as we do not have complete clarity on them.

Key risks to our target price

We believe the following are the key risks to our target price:

Slowdown in the Middle East, which would affect international orders for Voltas;
and

slowdown in domestic service sectors such as IT, ITeS, retail etc.

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F O R E C A S T S

&

A S S U M P T I O N S

Key assumptions
Table 2 : Voltas revenue assumptions
(Rs m)

FY03

FY04

FY05

FY06

FY07F

FY08F

FY09F

Electromechanical projects and services

6,471

7,342

8,037

11,295

14,678

18,348

22,934

Change

59.1

13.5

9.5

40.5

30.0

25.0

25.0

% of turnover

52.6

55.2

55.8

59.3

58.4

59.1

60.8

649

837

1,591

2,528

4,240

5,724

7,155

11.9

29.0

90.1

58.9

67.7

35.0

25.0

5.3

6.3

11.0

13.3

16.9

18.4

19.0

4,182

4,232

4,265

4,723

5,660

6,339

6,973

Engineering agency and services

Change
% of turnover
Unitary cooling products
Change

17.7

1.2

0.8

10.7

19.8

12.0

10.0

% of turnover

34.0

31.8

29.6

24.8

22.5

20.4

18.5

Others

1,019

888

547

507

558

614

675

Change

-17.5

-12.9

-38.4

-7.3

10.0

10.0

10.0

8.3

6.7

3.8

2.7

2.2

2.0

1.8

17

27

12

16

12,304

13,299

14,414

19,042

25,120

31,024

37,738

30.8

8.1

8.4

32.1

31.9

23.5

21.6

FY03

FY04

FY05

FY06

FY07F

FY08F

FY09F

314

206

439

695

1003

1229

1537

-23.9

-34.3

113.1

58.3

44.3

22.6

25.0

4.8

2.8

5.5

6.2

6.8

6.7

6.7

52.8

34.7

44.2

46.3

44.2

38.8

40.1

% of turnover
Less intersegment
Net sales
Change
Source: Company, ABN AMRO forecasts

Table 3 : Voltas EBIT assumptions

(Rs m)
Electromechanical projects and services
Change
EBIT margins
% of EBIT
Engineering agency and services

216

275

369

698

1057

1603

1932

Change

36.1

27.4

34.3

88.9

51.5

51.6

20.5

EBIT margins

33.3

32.9

23.2

27.6

24.9

28.0

27.0

% of EBIT

36.3

46.3

37.2

46.5

46.6

50.6

50.4

Unitary cooling products

Change

-12

60

-79

-10

78

190

209

-143.9

-582.9

-231.5

-87.1

-864.7

143.8

10.0
3.0

EBIT margins

-0.3

1.4

-1.8

-0.2

1.4

3.0

% of EBIT

-2.1

10.1

-7.9

-0.7

3.4

6.0

5.5

77

53

265

118

130

143

157

89.0

-31.2

399.1

-55.3

10.0

10.0

10.0

7.6

6.0

48.3

23.3

23.3

23.3

23.3

13.0

8.9

26.6

7.9

5.7

4.5

4.1

2 0 0 6

Others
Change
EBIT margins
% of EBIT
Source: Company, ABN AMRO forecasts

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DISCLAIMER APPENDIX
This document is not for public distribution and has been furnished to you solely for your information only and must not be reproduced or re-distributed to any
other person. Persons into whose possession this document may come are required to observe these restrictions. This material is for the personal information of
the authorized recipient and we are not soliciting any action based upon it. This report is not to be construed as an offer to sell or the solicitation of an offer to buy
any security in any jurisdiction where such an offer or solicitation would be illegal. It is for the general information of clients of ABN AMRO Asia Equities (India)
Limited (AAAEIL). It does not constitute a personal recommendation or take into account the particular investment objectives, financial situation or needs of
individual clients. We have reviewed the report and in so far as it includes current or historical information, it is believed to be reliable though its accuracy or
completeness cannot be guaranteed. Neither AAAEIL nor any person connected with it accepts any liability arising from the use of this document. The recipient of
this material should rely on their own investigations and take their own professional advice. Price and value of investments referred to in this material may go up
or down. Past performance is not a guide for future performance.. Opinions expressed are our current opinions as of the date appearing on this material only.
While we endeavor to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance or other reasons that prevent
us from doing so. Prospective investors are cautioned that any forward looking statements are not predictions and may be subject to change without notice. Our
proprietary trading may make investment decisions that are inconsistent with the recommendations expressed herein. AAAEIL has two independent equity
research groups : Institutional Equities (IE) and Retail Broking Services (RBS). This report has been prepared by the IE and is being distributed to RBS clients after
the report has been distributed to IE clients. We and our affiliates, officer, directors and employees worldwide may (a) from time to time have long or short
positions in and buy or sell securities thereof, of company (ies) mentioned therein or (b) be engaged in any other transactions involving such securities and earn
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borrower to such company (ies) or have other potential conflict of interest with respect to any recommendation and related information and opinions. The analyst
for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or
their securities and no part of his or her compensation was, is or will be directly related to specific recommendations and related information and opinions. No part
of this material may be duplicated in any form and / or re-distributed without AAAEILs prior written consent.

VO LT AS

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VOLTAS LTD: KEY FINANCIAL DATA

Income statement
Rsm
Revenue
Cost of sales

FY05A

FY06A

FY07F

FY08F

FY09F

13866.6

18531.4

23461.8

28910.0

35169.9

-11753

-15768

-19632

-24316

-29886

-1668.9

-1756.0

-1896.5

-2048.2

-2212.1

EBITDA

444.9

1007.3

1932.9

2545.8

3071.6

DDA & Impairment (ex gw)

-104.8

-110.9

-143.9

-150.6

-161.9

EBITA

340.1

896.4

1789.0

2395.1

2909.7

Operating costs

Goodwill (amort/impaired)
EBIT
Net interest

n/a

n/a

n/a

n/a

n/a

340.1

896.4

1789.0

2395.1

2909.7

-67.8

-14.0

-17.7

-21.8

-26.6

Associates (pre-tax)

n/a

n/a

n/a

n/a

n/a

Forex gain / (loss)

n/a

n/a

n/a

n/a

n/a

50.4

-261.9

0.00

0.00

0.00

Exceptionals (pre-tax)
Other pre-tax items
Reported PTP
Taxation

253.9

296.4

296.4

296.4

296.4

576.7

916.9

2067.7

2669.7

3179.5
-1017.4

-72.5

-212.0

-516.9

-800.9

Minority interests

n/a

n/a

n/a

n/a

n/a

Exceptionals (post-tax)

n/a

n/a

n/a

n/a

n/a

Other post-tax items

0.00

0.00

0.00

0.00

0.00

Reported net profit

504.2

704.9

1550.8

1868.8

2162.1

50.4

-261.9

0.00

0.00

0.00

453.8

966.8

1550.8

1868.8

2162.1

Normalised Items Excl. GW

Normalised net profit
Source: Company data, ABN AMRO forecasts

year to Mar

Balance sheet
Rsm

FY05A

FY06A

FY07F

FY08F

FY09F

Cash & market secs (1)

1456.6

1086.2

1117.3

1226.1

1348.8

Other current assets

7366.3

8253.3

10307.2

12673.8

15422.3

Tangible fixed assets

824.3

1348.2

1594.5

1593.8

1682.0

0.00

0.00

0.00

0.00

0.00

601.9

610.3

610.3

660.3

1260.3

10249.1

11298.0

13629.4

16154.1

19713.3

n/a

n/a

n/a

n/a

n/a

Trade & oth current liab

7465.3

8430.8

9612.8

10745.6

12695.0

Long term debt (3)

1064.0

720.1

620.1

520.1

420.1

n/m

n/m

n/m

n/m

n/m

8314.0

8884.0

9966.1

10998.9

12848.3

Intang assets (incl gw)

Oth non-curr assets
Total assets
Short term debt (2)

Oth non-current liab

Total liabilities
Total equity (incl min)
Total liab & sh equity
Net debt (2+3-1)

1935.1

2414.0

3663.3

5155.2

6865.0

10249.1

11298.0

13629.4

16154.1

19713.3

-392.5

-366.1

-497.2

-706.0

Source: Company data, ABN AMRO forecasts

-928.7
year ended Mar

Cash flow statement

Rsm

FY05A

FY06A

FY07F

FY08F

FY09F

EBITDA

444.9

1007.3

1932.9

2545.8

3071.6

Change in working capital

-0.02

78.5

-871.9

-1233.8

-799.1

Net interest (pd) / rec

-67.8

-14.0

-17.7

-21.8

-26.6

40.7

-160.5

-516.9

-800.9

-1017.4

Taxes paid
Other oper cash items

27.9

193.5

296.4

296.4

296.4

Cash flow from ops (1)

445.7

1104.8

822.7

785.6

1524.9

Capex (2)

296.9

-634.9

-390.1

-150.0

-250.0

0.00

0.00

0.00

0.00

0.00

-24.1

-8.39

0.00

-50.0

-600.0

272.8

-643.2

-390.1

-200.0

-850.0

0.00

0.00

0.00

0.00

0.00

231.7

-344.0

-100.0

-100.0

-100.0

Ordinary dividend paid

-188.9

-226.4

-301.5

-376.9

-452.2

Preferred dividends (4)

n/a

n/a

n/a

n/a

n/a

Other financing cash flow

-219.7

-261.5

0.00

0.00

0.00

Cash flow from fin (5)

-176.9

-831.8

-401.5

-476.9

-552.2

n/a

n/a

n/a

n/a

n/a

541.7

-370.3

31.1

108.8

122.7

742.6

469.9

432.6

635.6

Disposals/(acquisitions)
Other investing cash flow
Cash flow from invest (3)
Incr / (decr) in equity
Incr / (decr) in debt

Forex & disc ops (6)

Inc/(decr) cash (1+3+5+6)
Equity FCF (1+2+4)
Lines in bold can be derived from the immediately preceding lines.
Source: Company data, ABN AMRO forecasts

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year to Mar

N OV EM B ER

2 0 0 6

VOLTAS LTD: PERFORMANCE AND VALUATION

Standard ratios
Performance

Voltas

Larsen & Toubro

FY05A FY06A FY07F FY08F FY09F

Crompton Greaves

FY07F

FY08F

Sales growth (%)

8.92

33.6

26.6

23.2

21.7

FY07F FY08F FY09F

23.8

28.0

19.7

26.0

21.0

FY09F
21.9

EBITDA growth (%)

35.9 126.4

91.9

31.7

20.7

38.5

27.9

19.4

31.0

21.6

22.7

EBIT growth (%)

74.7 163.5

99.6

33.9

21.5

38.5

26.6

19.1

35.9

24.2

25.3

Normalised EPS growth (%)

55.9 113.1

60.4

20.5

15.7

30.9

17.9

10.6

19.4

22.4

24.0

EBITDA margin (%)

3.21

5.44

8.24

8.81

8.73

8.77

8.76

8.74

9.59

9.63

9.70

EBIT margin (%)

2.45

4.84

7.63

8.28

8.27

7.88

7.79

7.75

8.06

8.27

8.51

Net profit margin (%)

3.27

5.22

6.61

6.46

6.15

6.70

6.31

5.87

6.13

6.20

6.31

Return on avg assets (%)

5.14

9.06

12.5

12.6

12.1

9.20

9.49

9.11

11.7

11.4

11.6

Return on avg equity (%)

23.7

44.5

51.0

42.4

36.0

22.9

22.8

22.0

32.1

31.1

30.3

ROIC (%)

12.6

42.7

63.5

52.3

44.0

21.8

21.0

19.3

24.8

24.5

25.1

ROIC - WACC (%)

1.20

31.3

52.1

40.8

32.6

9.44

8.67

6.98

12.3

12.1

12.6

year to Mar

year to Mar

year to Mar

Valuation
EV/sales (x)

2.35

1.76

1.39

1.12

0.91

2.01

1.60

1.35

2.02

1.67

1.36

EV/EBITDA (x)

73.4

32.4

16.8

12.7

10.5

22.9

18.3

15.5

21.0

17.3

14.1

EV/EBITDA @ tgt price (x)

98.7

43.6

22.7

17.1

14.1

20.6

16.5

14.0

23.4

19.3

15.6

EV/EBIT (x)

96.0

36.4

18.2

13.5

11.0

25.5

20.6

17.5

25.0

20.2

16.0

EV/invested capital (x)

24.6

18.3

11.2

7.73

5.66

6.38

5.03

4.24

7.60

6.22

5.12

Price/book value (x)

17.1

13.7

9.02

6.41

4.81

6.37

5.58

4.85

9.22

7.29

5.72

Equity FCF yield (%)

2.25

1.42

1.31

1.92

3.86

-0.67

-2.43

-0.61

0.39

2.38

2.86

Normalised PE (x)

72.8

34.2

21.3

17.7

15.3

30.7

26.1

23.6

32.1

26.2

21.1

Norm PE @tgt price (x)

97.6

45.8

28.6

23.7

20.5

27.7

23.5

21.2

35.8

29.2

23.6

Dividend yield (%)

0.50

0.60

0.80

1.00

1.20

1.18

1.47

1.47

0.75

0.84

0.84

year to Mar

Per share data

Tot adj dil sh, ave (m)

year to Mar

FY05A FY06A FY07F FY08F FY09F

Solvency

330.5 330.5 330.5 330.5 330.5

year to Mar

FY05A FY06A FY07F FY08F FY09F

Net debt to equity (%)

-20.3

-15.2

-13.6

-13.7

-13.5

Reported EPS (INR)

1.53

2.13

4.69

5.65

6.54

Net debt to tot ass (%)

-3.83

-3.24

-3.65

-4.37

-4.71

Normalised EPS (INR)

1.37

2.93

4.69

5.65

6.54

Net debt to EBITDA

-0.88

-0.36

-0.26

-0.28

-0.30

Dividend per share (INR)

0.50

0.60

0.80

1.00

1.20

Current ratio (x)

1.18

1.11

1.19

1.29

1.32

Equity FCF per share (INR)

2.25

1.42

1.31

1.92

3.86

Operating CF int cov (x)

6.97

91.4

76.6

73.6

96.7

Book value per sh (INR)

5.85

7.30

11.1

15.6

20.8

Dividend cover (x)

2.40

4.27

5.14

4.96

4.78

year to Mar

year to Mar

Priced as follows: VOLT.BO - Rs99.95; LART.BO - Rs1337.10; CROM.BO - Rs238.70

Source: Company data, ABN AMRO forecasts

VOLTAS LTD: VALUATION METHODOLOGY

Economic Profit Valuation

INR m

Discounted Cash Flow Valuation

INR m

Adjusted Opening Invested Capital

3087.1

Value of Phase 1: Explicit (2007 to 2009)

1402.7

%
3

NPV of Economic Profit During Explicit Period

3000.3

Value of Phase 2: Value Driver (2010 to 2018)

13528.7

30

NPV of Econ Profit of Remaining Business (1, 2)

10372.7

23

Value of Phase 3: Fade (2019 to 2026)

14160.3

32

NPV of Econ Profit of Net Inv (Grth Business) (1, 3)

28017.3

63

Terminal Value

15384.0

35

Enterprise Value

Enterprise Value

44475.8

100

44477.4

100

Plus: Other Assets

0.0

FCF Grth Rate at end of Phs 1 implied by DCF Valuation

9.1

Less: Minorities

0.0

FCF Grth Rate at end of Phs 1 implied by Current Price

8.3

109.8

44367.7

100

70%

134.2
99.95

40%

1,500

25 30%

1,000

#REF!

15

18

20

23

6.0%

453.60

584.00

690.42

886.35

1046.20

7.0%

387.54

490.35

572.85

722.08

841.74

8.0%

332.42

413.67

477.80

591.84

681.76 10%

9.0%

286.27

350.63

400.61

488.03

555.85

10.0%

247.50

298.59

337.65

404.88

456.21

2007

2008

2009

(2010 - 2018)

50.9

39.4

21.3

25.1

8.9

9.3

9.1

8.1

10.4

8.5

7.4

8.5

Performance Summary
Invested Capital Growth (%)
Operating Margin (%)
Capital Turnover (x)

20%
500

Phase 2 Avg

2025

2023

2021

0
2019

0%
2017

No of Years in Fade Period

Sensitivity Table

2,000

50%

2015

Current Share Price

2,500

60%

2013

Per Share Equity Value

WACC

Returns, WACC and NPV of Free Cash Flow

330.5

2011

No. Shares (millions)

2009

Equity Value

2007

Less: Net Debt (as at 03 Nov 2006)

Phase 1 NPV of FCF (RHS)

Phase 2 NPV of FCF (RHS)

Phase 3 NPV of FCF (RHS)

Total Business ROIC

Growth Business ROIC

Remaining Business ROIC

WACC

Source: ABN AMRO estimates

1. In periods following the Explicit Period i.e. Phase 2 and Phase 3
2. Remaining Business is defined as Capital as at the end of Phase 1 and capex = depreciation thereafter
3. Net Investment is defined as capex over and above depreciation after Phase 1

VO LT AS

LTD

N OV EM B ER

2 0 0 6

Strategic & competitive overview

Voltas Ltd
Company description

Buy

Price relative to country

Voltas is India's premier air conditioning and engineering services provider. It offers engineering
services for a wide spectrum of industries in areas such as heating, ventilation and air conditioning
(HVAC); refrigeration; climate control; electromechanical projects; textile machinery; machine
tools; mining and construction; materials handling; water management; building management
systems; pollution control; and chemicals. The company is also a major player in the constructionrelated projects business in the Middle East and East Asia. Voltas is part of the US$14.5bn Tata
Group, one of India's largest conglomerates.

450
400
350
300
250
200
150
100
50
Nov Feb Jun Sep Jan Apr Aug Dec Mar
03 04 04 04 05 05 05 05 06

Strategic analysis

Average SWOT company score:

Strengths

Others
2%

UCC
32%

EMP
50%

The unitary cooling business is still vulnerable to competition. Voltas still has a significant
commitment to that business in terms of capital and manpower.

Opportunities

The Indian MEP projects market should be a growth driver in the long term. Voltas is already
making a name for itself in MEP in the Middle East export market. A resurgent textile and mining
sector is good for the engineering services division.

Threats

International players yet to enter the Indian air-conditioning projects market. In the international
market, project execution risk is a permanent feature.
Scoring range is 1-5 (high score is good)

Oct
06

1H06 revenue mix

Strong engineering skills with several years of experience in both domestic and international
markets. Voltas also has a large dossier of references it can use to win more projects.

Weaknesses

Jul
06

EAP
16%

Source: Company

Market data
Headquarters
Voltas House 'B", T.B. Kadam Marg,
Mumbai 400 033, India
Website
www.voltas.com
Shares in issue
330.5m
Freefloat
72%
Majority shareholders
Tata (28%)

India
Country view

Neutral

Country rel to Asia Pacific

The market looks expensive, but we believe it will remain supportive when regional funds seek a
domestically-driven home with continuing robust earnings growth. The ABN AMRO Indian PMI
suggests the economy is still powering ahead despite the global headwinds, thanks to its
domestically-oriented economic structure. At the sector level, we still like autos, software and
construction-related stocks.

210
190
170
150
130
110

The country view is set in consultation with the relevant company analyst but is the ultimate responsibility of the Strategy Team.

90
Nov Feb Jun Sep Jan Apr Aug Nov Mar
03 04 04 04 05 05 05 05 06

Competitive position

Average competitive score:

Supplier power

3+

Limited in all the segments of business. High-quality engineers required for the projects business
have reasonably high bargaining power.

5
4

4+

Relationship with global consultants and a dossier of reference sites are major barriers to entry in
the project business. Few barriers to entry in the whitegoods business.

Customer power

3+

Buy

High in the whitegoods business due to high competition. In the projects business, there is a limited
number of high-quality, low-cost providers, thus limiting customer power.

Substitute products

Oct
06

Broker recommendations

2-

Barriers to entry

Jul
06

Hold

Sell

Source: Bloomberg

3+

No alternative to players such as Voltas, which offer low-cost, high-quality engineering expertise in
the projects business.

Rivalry

2-

Very high competition in the whitegoods business. The domestic air-conditioning business is
oligopolistic. The international projects business is reasonably competitive.
Scoring range 1-5 (high score is good)

Plus = getting better

VO LT AS

LTD

Minus = getting worse

6

N OV EM B ER

2 0 0 6