Fading order visibility

Voltas profit after tax missed our and the Street’s estimates by a wide margin. The principal reason for this miss was poor Ebit (earnings before interest and taxes) margins in the Electro Mechanical Projects (MEP) segment (at roughly 1.0%) due to cost overrun in its international projects. While some of these issues are likely to be sorted in the medium term, uncertainty over orders and margin recovery plague earnings visibility.

Management also re-iterated concerns on: (i) weak international order inflow pipeline and that the Abu Dhabi airport order being the only big ticket project visible; (ii) continued challenges in the Saudi and Qatar markets due to visa restrictions impacting profitability, and (iii) new projects continue to be bid at 4-5% margin levels in the MEP segment, while electrical (Rohini) and water segments are facing execution challenges. We now build in further cut in margin in MEP segment over FY13-15F (forecast) along with higher working capital intensity; accordingly our earnings estimates are down 4%-7% over FY13-15F .

Catalyst: Domestic and Middle East capex revival; strengthening of crude oil prices

Valuation: We now value Voltas at 12x (times) in line with mid-cycle multiple (previously 14.0x) and average of FY14F/FY15F EPS (earnings per share) to arrive at our TP (target price) of R111. We reiterate our Neutral call.

Q2FY13 results: Revenue growth in line: Net sales at R11.6bn (+5% y-o-y) beat our estimates by 7%, though marginally lower than consensus expectations. On the back of

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