Sidra Medical project is 93% complete, but the main contractor is delaying execution for payments. This could lead to project execution getting delayed beyond Mar14. While Voltas won Rs 850-900 crore of international orders in 2Q FY 14 at decent margins, the impact of the same will take time to show.
When the company talks about better margins on new orders it is due to internal measures and not because the external environment has changed. Measures taken are (1) new leaders inducted in several geographies (2) commercial activities strengthened (3) central project review cell constituted and (4) cost management measures taken.
Voltas reports primary sales to dealers and not secondary retail sales. Dealers built up inventory in 4QFY13 in anticipation of 1Q demand and earlier than expected monsoons led to tepid +4% sales growth in 1Q.
Business is set for 10% volume growth over the medium term. New energy efficiency norms are expected to come through from Jan14 and this could make room ACs as expensive as split ACs. Room ACs are 18% of industry sales and Voltas’ higher exposure to room ACs makes this a definite worry. Management is taking steps to move to No 1 from No 2 in split ACs to lessen impact.
While we acknowledge that Voltas’ valuations are not expensive, we believe consensus is over-optimistic in terms of how fast EMP margins can recover (our estimates are 12-29% below consensus). We cut our target price to R73 (from R85) to factor in (1) roll forward of target P/E to Dec14E and (2) 3-32% EPS cuts over FY14E-16E.