We maintain our ?underperform? rating for Voltas in light of persistent concerns in key areas. Margins from the mechanical, electrical and plumbing (MEP) contracts in West Asia remain stagnant around 4-5%, new projects are getting delayed in India and demand for room Acs stays weak.

So, while FY13 is likely to be better than FY12, which was, in true sense, dismal, uncertainty about the business getting stronger beyond FY13 will likely derate the stock from a PE of 12.5x FY13e in our view.

Voltas is seeing a rise in order inflow for MEP from West Asia after three years of decline. It expects FY12e backlog to be flat y-o-y and FY13e backlog to rise 10%. However, the rise in orders is mostly being driven by the company?s decision to lower the threshold margin from 7% to 4%. While the company sees the 4% margin to be to too low, a recovery looks unlikely soon. Delay in launch of iconic projects in Saudi Arabia and UAE is suppressing margins.

Voltas expects the demand for room ACs to grow 15% in FY13e, despite the low base of FY12 in which demand fell over 25%. Growth outlook is lower than the 25%-plus growth seen during FY06-11. The company also sees its margins staying at 7-8%, which is lower than 10%-plus margins reported in FY10/11 on account of competition.

A loss of R2.6 billion reported in FY12 toward cost overrun in the R10-billion Sidra Medical project in Qatar is unlikely to be reversed. Other contractors working on the project, including OHL and Kentz, have not shown any cost overrun. We reckon that the cost overrun could be on account of the project being a first of its kind for Voltas. Compensation for cost overrun would be a positive surprise for us.

Our price objective of R96/share is based on a PER of 11x FY13E EPS of R8.75. The stock is currently trading PE of 12.8x FY13e and PB of 2.1x FY13e. Historically, the stock has traded at a much higher multiple.

However, we see a structural decline in return on equity (ROE) of the company to around 20% from the 35%-plus earlier, owing to a change in the business mix in favour of businesses with higher receivables. Given the muted recovery in ROE, we expect the stock to derate.BofAML