The 5% premium is justified, in our view, as we expect a cyclical recovery to drive high earnings growth. During the past business cycle, Voltas traded, on average, at a one-year forward PE of 15x during the first 18 months of the business cycle upturn. The stock is now trading at a FY15e PE of 16.0x; we expect to it to come down to 14.5x over the next 12 months. We met Voltas Middle East mechanical, electrical and plumbing peer Drake and Scull International. We learn that ordering for mega events (the FIFA World Cup in Qatar and the Dubai World Expo) will begin only in CY15-16. However, DSI is more confident of support infrastructure orders that have shown signs of acceleration.
We remain upbeat of 27% EPS CAGR (FY14-16e). Our strong earnings growth expectation is driven by 110-bps projected operating margin expansion during FY15 and an additional 40 bps during FY16 as loss-making orders are flushed out and contingency costs during an up-cycle fall meaningfully. An order inflow revival during late FY15/FY16 should act as medium-term catalyst for earnings and stock price.