Company Template.dot Voltas (VOLT IN) BUY report/Kotak 18Nov09...EMP projects in Middle East and...

Company Template.dot

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Voltas (VOLT IN)

Industrials

Vantage Voltas. Voltas is a leading player in electro-mechanical projects and engineering and cooling products. We initiate coverage with a BUY rating and target price of Rs200 based on (1) a likely recovery in order inflows and industrial activity, (2) strong cash generation, (3) projects, products and services mix, (4) capability and geographical expansion. Higher crude price, sequential improvement, shelf of planned projects and orders for other contractors provide visibility on demand recovery.

EMP projects in Middle East and India, engineering and cooling products in domestic market

Voltas, a part of the Tata group, has business operations organized across three business segments – Electro-Mechanical Projects (EMP) in Middle East and India, engineering products and services, and Unitary Cooling Products (UCP). The EMP segment contributes about two-thirds of the standalone revenues and EBIT and has a current order backlog of Rs44 bn.

Higher crude price; geography and capability expansion; investment recovery to boost growth

We expect order inflows to recover on the back of (1) higher crude price reinvigorating Middle East economies, (b) expansion into newer geographies such as Saudi Arabia, Singapore etc., (2) demand recovery in IT/ITES segment in India, (3) capability expansion in areas such as water, electrical and instrumentation (with Rohini) etc. Recent evidence of orders for other EPC contractors and a large shelf of planned projects point to capex recovery in the Middle East. Voltas’ management appears confident of 20%+ growth and 8.5-9.5% margins in EMP during FY2010E and FY2011E on the back of a Rs44 bn order book and order inflows. We believe theengineering products segment and the cooling products segment are likely to grow on the back of a pick-up in industrial investment and higher income with low penetration levels, respectively.

Earnings dependence on gulf lower than perceived; led by quicker domestic execution

Voltas' earnings are less dependent on the Middle East than its order book mix appears to suggest as the domestic business has shorter execution cycles and potentially higher margins. We estimate that the Middle East is likely to contribute about 40% to Voltas' FY2010E EBIT mix. This would be even lower in FY2011E as the engineering products and services segment recovers.

Recommend BUY (target of Rs200) on back of strong cash flows and execution track record

We recommend a BUY at a target price of Rs200 (18X FY2011E P/E) based on (1) likely growth in target geographies, (2) strong cash flow generation, (3) diversified mix of projects, products and services, (4) capability and geographical expansion, and (5) execution track record. Key risks are (1) slow revival of urban development and investment activity in gulf and India, (2) margin pressure led by a reliance on main contractors and a high bought-out component in EMP.

Company data and valuation summary

Company data Stock data High Low Price performance 1M 3M 12MRating: BUY 52-week range (Rs) 180 31 Absolute (%) 8.0 27.7 169.3

Yield (%) 0.9 Rel. to BSE-30 (%) 9.6 12.3 85.8

Current price (Rs) Priced at close of:177 Capitalization Forecasts/valuation 2009 2010E 2011E

Market cap (Rs bn) 58 EPS (Rs) 6.9 9.5 10.8Net debt/(cash) (Rs mn) (2,756) P/E (X) 25.6 18.6 16.4

Free float (%) 72.4 ROE (%) 33.0 35.0 31.8Shares outstanding (mn) 331 EV/EBITDA (X) 19.7 12.6 10.7

Source: Company, Kotak Institutional Equities estimates

November 17, 2009

BUY

November 18, 2009

INITIATING COVERAGE

Sector view: Attractive

Price (Rs): 177

Target price (Rs): 200

BSE-30: 17,051

Lokesh Garg [email protected] Mumbai: +91-22-6634-1496 Nitij Mangal [email protected] Mumbai: +91-22-6634-1453 Supriya Subramanian [email protected] Mumbai: +91-22-6634-1383

Kotak Institutional Equities Research Important disclosures appear at the back

2 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Industrials Voltas

TABLE OF CONTENTS

Overview: BUY on likely recovery, diversified business mix and cash flows.................3

BUY on likely recovery, strong cash-flow generation, diversified business mix............8

Profile: Engineering projects, products and services in Middle East and India ...........13

Electro-mechanical projects: Leading player in Middle East and India.......................20

Engineering: Pick up in investment cycle to restore growth and margins .................33

Cooling products: Retain market position; growth on low penetration....................37

Risks: Slower-than-expected recovery in Middle East and India ................................40

Financials: Strong EMP execution and engg products recovery drive growth............41

Appendix A: Key takeaway from our meeting with management ............................47

Appendix B: Voltas versus Blue Star.........................................................................49

The prices in this report are based on the market close of November 17, 2009.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

Voltas Industrials

OVERVIEW: BUY ON LIKELY RECOVERY, DIVERSIFIED BUSINESS MIX AND CASH FLOWS

Exhibit 1: Forecasts and valuations, March fiscal year-ends, 2007-12E

Year end Revenues EBITDA Net profit EPS P/E EV/EBITDA EV/Sales P/BMarch (Rs mn) (Rs mn) (Rs mn) (Rs) (X) (X) (X) (X)2007 25,267 1,280 1,321 4.0 44.3 45.2 2.3 13.82008 32,029 2,531 1,760 5.3 33.2 22.2 1.8 10.12009 43,259 2,831 2,284 6.9 25.6 19.7 1.3 7.42010E 49,381 4,248 3,136 9.5 18.6 12.6 1.1 5.82011E 56,982 4,818 3,574 10.8 16.4 10.7 0.9 4.72012E 63,962 5,423 4,056 12.3 14.4 9.0 0.8 3.8

Source: Company, Kotak Institutional Equities

Initiate coverage with a BUY rating and target price of Rs200/share

We initiate coverage on Voltas with a BUY rating and a target price of Rs200/ share based on a 18X earnings multiple to our FY2011E EPS of Rs10.8. On a DCF reverse valuation, our target price implies (1) moderate revenue growth of 10% over FY2013E-21E, (2) EBIT margins of 7.8% from FY2013E-21E, (3) WACC of 12.5% and (4) terminal growth rate of 5%. Our valuation implies EV/EBITDA multiple of 12X FY2011E EBITDA of Rs4.8 bn. We recommend BUY based on (1) likely order booking recovery in international geographies (typically the Middle East, contributing about 60% of EMP revenues) on back of recovery in oil price, additional geographies and government push for urban development (2) pick up in domestic EMP order booking and execution as IT/ITES segment demand recovers, (3) strong operational cash flow generation characteristics, (4) diversified business mix of projects, products and services, and (5) strong execution track record with no dilution or corporate governance concerns.

Leading player in engineering projects, products and services

Voltas, established in 1954 as a JV between Swiss firm Volkart Brothers and Tata Sons Limited, is a leading player in turnkey MEP (Mechanical, Electrical and Public health) projects and engineering and air conditioning products. Operations of the company are organized into three business segments – Electro-Mechanical Projects (EMP), engineering products and services, and Unitary Cooling Products (UCP). Rohini Industrial Electricals Ltd is a recently acquired company with strong growth potential. Rohini has expertise in electrical and instrumentation projects across various industry verticals and can supplement Voltas skill sets in MEP projects.

Exhibit 2: Standalone business has a presence across three key strategic business units Details of key business units of Voltas, March fiscal year-ends, 2005-09

Revenues EBIT EBIT margin

(Rs mn) (Rs mn) (%) Description

Electro-Mechanical Projects (EMP)

25,464 1,934 7.6Executes EPC contracts for HVAC (Heating Ventilation and Air Conditioning) and MEP (Mechanical Electrical and Public Health)

Engineering projects and services

5,422 628 11.6Marketing, installation and maintenance of machinery on behalf of its principal in 3 verticals - mining and construction, material handling, and textile

Unitary Cooling Products (UCP)

9,138 680 7.4Manufactures and sells room AC, commercial refrigerators and water coolers. One of the pioneers of cooling appliances in India



Industrials Voltas

The EMP segment undertakes EPC contracts for HVAC and MEP projects, primarily in the Middle East and India. Voltas has executed MEP for several iconic projects, such as the F1 race track in Abu Dhabi, the Burj Dubai and Hyderabad International Airport. The engineering products and services segment provides agency services (marketing and sales, installation, service, spare parts) for the company’s Indian and international principals across industry sectors such as mining and construction, material handling, and textiles. Voltas also manufactures equipment such as forklift trucks, warehousing equipment as part of this segment. Engineering products and services revenues come from four sources – (1) commissions on the sale of equipment, (2) sale of manufactured equipment, (3) sale of spare parts, and (4) servicing and maintenance. The unitary cooling products segment manufactures and sells room ACs, commercial refrigerators and water coolers. Voltas is among top three players in the domestic AC market with about 17% market share.

EMP segment contributes about two-thirds of standalone revenues and EBIT

The EMP segment contributed 63% of the FY2009 standalone revenues of Rs40 bn. EMP share of FY2009 standalone EBIT of Rs3.3 bn stood at 59%. UCP was next with 23% revenue and 21% EBIT contribution during FY2009. Margins in the EMP and UCP business are typically lower than the engineering products and services as about 20% of the latter is agency business.

EMP: Likely order inflow recovery led by oil; geography and capability expansion

We highlight that EMP segment has delivered strong performance in terms of revenue growth and margins for 1HFY10 on back of execution of specific large projects in Middle East geography. However order inflows have been slow and thus international order book has declined sequentially over the last few quarters. Execution of domestic projects has also been affected by the recent slowdown in commercial space demand.

EMP order book provides near-term visibility in spite of slow inflow

Voltas’ EMP segment order book stood at Rs44 bn at end of 2QFY10, comprising Rs31 bn in the international segment and Rs13 bn in the domestic segment. This order book is about 1.5 times the estimated FY2010E revenues of EMP segment and is completely executable by end-FY2011E. A particular project, i.e. Rs7 bn Yas Retail project which is in abeyance, may be restructured, however repricing the order book on current exchange rates more than makes up for that. International order inflows in 1HFY10 have been slow and Voltas has announced new domestic orders worth Rs3.4 bn for airports and water management. We expect that execution in domestic projects, particularly IT parks, would pick up as the demand scenario for IT/ITES industry has recovered. The company is positive on the growth opportunity in water management and oil & gas, and may look for inorganic opportunities to build a water management portfolio.

Domestic/International mix of EMP is more balanced versus visible order book mix

We highlight that while the order book mix is about 80:20 in favor of international MEP projects, but the revenue mix is more likely to be 2/3:1/3 in favor of international projects. In terms of total EBIT the skew may be even lower as we believe that smaller domestic projects with lower outsourcing may have higher margins in percentage terms versus larger international projects with higher proportion of outsourcing.


Voltas Industrials

Recovery likely on back of crude; geography and capability expansion

We believe that international order booking would pick up based on (a) large shelf of planned projects (more than US$600 bn) in target geographies of Middle East, (b) recovery in crude price which adds to surplus of governments promoting these projects, (c) evidence of order inflows for other contractors, such as Hyundai, from Middle East, (d) expansion in target geographies to include Saudi Arabia, largest economy in the region – may additionally have a local JV to accelerate order booking. Capability expansion such as (a) water, (b) electrical and instrumentation projects for industrial plants with the help of Rohini, (c) bigger scope of domestic EMP jobs from just HVAC earlier and (d) inorganic growth opportunities would further augment the business prospects. We expect that execution in domestic projects, particularly IT parks, would pick up as the demand scenario for IT/ITES industry has recovered.

Management confident of maintaining growth trajectory and recent high margins

Voltas’ management seems confident of 20%+ growth and 8.5-9.5% margins in the EMP segment in FY2010E and FY2011E on the back of a Rs44 bn order book, which is completely executable by end-FY2011E. Management believes that slow orders inflows are also partly driven by being selective versus just external environment and remains confident on order inflows in the future.

We believe that growth rate in FY2011E would be affected by slow order booking in FY2010E, as even if a project is won it would take time to ramp up in terms of revenue and margin contribution. We are building in 13% revenue growth and 8.8% margins versus likely 20% revenue growth in FY2010E with 9.5% segmental EBIT margins.

Engineering products: Pick up in investment cycle to restore growth and margins

We highlight that revenue and EBIT contribution of engineering products segment has declined by about 25% on a yoy basis during 1HFY10. We believe that as the investment cycle picks up engineering products segment would report strong revenue growth as well as margins. We believe in pick up of investment cycle based (a) sequential improvement in performance of several capital goods product companies, (b) recovery in Index of Industrial Production numbers, (c) strong financial closure data for FY2009 highlighting intention to add capacity and banking system’s ability to finance it and (d) subjective commentary from several companies highlighting a recovery. Engineering products segment would additionally benefit from scale up in coal mining related to thermal power generation capacity addition.

UCP: AC business to grow on low penetration and higher disposable income

Room AC constitutes 75% of revenues of the UCP segment. Voltas is among the top three players in the room air conditioning market in India with about 17% market share. We estimate that Room AC business for the company will show strong growth on the back of low penetration levels of about 2% as (1) the power availability situation in the country improves and (2) cost of ownership and operation versus household income goes down. EBIT margins in the segment are also likely to expand on account of (1) changing mix of the industry towards split AC, and (2) possible realizations of benefits of manufacturing at Pantnagar plant that are yet to be achieved.

Financials: Strong EMP execution and engineering products recovery drive growth

We believe that Voltas’ consolidated revenues and earnings would grow at a CAGR of 14% and 21% respectively over FY2009-12E. Revenue growth would be led by (1) EMP order book of Rs44 bn and incremental inflows, (2) revival in engineering, and (3) growth in cooling products. Earnings growth exceed revenue growth on back of (1) low margins in FY2009, and (2) margin expansion across segments over FY2009 levels as demonstrated in 1HFY10. The company has robust financials with (1) cash position of Rs4.6 bn and low D/E, (2) low to negative working capital requirement, and (3) high quality of income (cash flow generation/net income) of about 1.1X over FY2007-09.


Industrials Voltas

On the consolidated basis, we estimate the EPS to grow at 21%, in line with standalone EBIT growth. Our estimates for consolidated EPS stand at Rs9.5 and Rs10.8 for FY2010E and FY2011E respectively.

Strong cash position, cumulative operational cash flow exceeds reported earnings

Voltas has a strong cash position of Rs4.6 bn at end-FY2009. Gross debt stood at Rs1.8 bn, which translates into a low 0.2X D/E ratio at end-FY2009. We estimate that the company will generate Rs3.5-4.5 bn cash from operations each year over FY2010E-11E. We highlight that cumulative operational cash flows of voltas exceeded cumulative reported profits after tax for the period between FY2005-09. We highlight that over FY2005-09, Voltas generated cumulative profits of Rs6.85 bn and cumulative operating cash flow generation was Rs7 bn.

Maintains low capital engagement philosophy with low fixed and working capital

Voltas is extremely cautious of capital engagement in its businesses in the form of both fixed capital as well as working capital. Voltas has maintained negative working capital across most of the last seven-eight years apart from FY2009 when credit slowdown affected collections in the domestic market.

Key risks: Slower-than-expected economic recovery in Middle East and India

Key risks to Voltas’ performance are (1) slow revival of urban development in the Middle East and India, (2) reliance on main contractors and high bought out component in EMP may lead to low barriers to entry, and (3) longer-than-expected slowdown in industrial activity which would adversely impact engineering products. Revival of urban construction activity may slow down due to (1) volatile crude oil prices in case of the Middle East or (2) slow economic recovery, rising interest rates and volatile property prices in case of India. Other risks are (1) dependence on principals for continued business in the engineering products and services segment and (2) increasing competition in the unitary cooling products segment.

Credit crisis took toll on valuation, potential upside on reversion to healthy levels

We highlight that valuation premium of Voltas over Sensex has contracted in the period post credit crisis. we highlight that trading premium over Sensex has shrunk from 25% in the Oct05-Oct08 has to 9% during Oct06-Oct09.

Similarly, we highlight that trading discount of Voltas over sector leaders such as BHEL and L&T has widened to 25% over last three years (Oct06-Oct09) versus an average of 11% over the three year period preceding the credit crisis i.e. Oct05-Oct-08. In our view, a discount to sector leaders is justified on account of (1) smaller sized sub-contractor player versus main EPC contractors, (2) lower entry barrier, and (3) business more vulnerable to margin pressures. However, we believe that the discount should narrow down from its current levels. Reversion of relative valuation to historical levels would deliver incremental upside.

Hyderabad land likely to be monetized once real estate market picks up

Voltas is likely to monetize its 32 acres of land in Santnagar, five km from the old Hyderabad airport, once the real estate market turns around. Monetization may happen sooner to fund acquisition in water management business. We estimate the value of real estate to be about Rs3.2 bn, which would imply about Rs10/ share. Voltas has already leased out extra space in its corporate complex in Mumbai to Tata Teleservices and Nielson and has been receiving rental income for the same. The Ballard Estate building has been rented out to SBI.

We have arrived at an estimate of Rs3.2 bn using Rs10 mn/acre which in turn implies selling price of about Rs5,000-6000 Rs/sq. ft. ( about Rs2,250/ sq. ft. land cost + construction + tax and developer margins)


Voltas Industrials

Exhibit 3: Key consolidated financials and estimates for Voltas, March fiscal year-ends, 2007-12E (Rs mn)

2007 2008 2009 2010E 2011E 2012EBalance sheetShareholders funds 4,237 5,772 7,897 10,015 12,437 15,193 Minority interest 4 5 159 159 159 159 Loan funds 1,116 737 1,814 814 814 814 Total source of funds 5,358 6,515 9,871 10,988 13,410 16,167 Net block 1,473 1,701 2,148 2,361 2,599 2,861 CWIP 128 197 132 132 132 132 Net fixed assets 1,601 1,898 2,280 2,493 2,732 2,994 Investments and goodwill 1,248 2,585 2,238 2,238 2,238 2,238 Cash balances 1,677 3,002 4,571 5,781 7,906 10,339 Net current assets excluding cash 553 (1,160) 558 252 311 373 Total application of funds 5,358 6,515 9,871 10,988 13,410 16,167 Profit modelTotal operating income 25,267 32,029 43,259 49,381 56,982 63,962 Total operating costs (23,988) (29,499) (40,428) (45,133) (52,164) (58,539) EBITDA 1,280 2,531 2,831 4,248 4,818 5,423 Other income 703 483 945 807 922 1,070 PBDIT 1,982 3,013 3,775 5,055 5,740 6,493 Financial charges (99) (90) (110) (82) (82) (82) Depreciation (156) (167) (210) (227) (251) (278) Pre-tax profit 1,728 2,757 3,456 4,746 5,406 6,133 Taxation (407) (997) (1,172) (1,610) (1,832) (2,077) Adjusted PAT 1,321 1,760 2,284 3,136 3,574 4,056 Minority interest & associate profits (1) 1 (31) — — —PAT for equity holders 1,319 1,761 2,253 3,136 3,574 4,056 Extraordinary items, net of tax 696 316 261 — — —Reported PAT 2,017 2,076 2,545 3,136 3,574 4,056 Cash flow statementOperating profit before working capital changes 1,593 2,099 2,572 3,445 3,907 4,416 Change in working capital / other adjustments (586) 1,713 (1,718) 306 (59) (62) Cashflow from operating activites 1,007 3,812 854 3,752 3,849 4,354 Fixed assets (122) (464) (591) (440) (490) (540) Investments (786) (1,337) 347 — — —Cash (used) / realised in investing activities (908) (1,802) (244) (440) (490) (540) Dividend paid (410) (523) (619) (1,019) (1,152) (1,299) Interest charges (99) (90) (110) (82) (82) (82) Cash (used) /realised in financing activities (375) (1,008) 700 (2,101) (1,234) (1,382) Cash generated /utilised 379 1,325 1,569 1,211 2,125 2,433 Cash at beginning of year 1,298 1,677 3,002 4,571 5,781 7,906 Cash at end of year 1,677 3,002 4,571 5,781 7,906 10,339 Key ratios (%)EBITDA margin 5.1 7.9 6.5 8.6 8.5 8.5PAT margin 5.2 5.5 5.3 6.4 6.3 6.3RoE 38.0 35.2 33.0 35.0 31.8 29.4RoCE 31.1 30.6 28.4 30.6 29.7 27.8Net debt / equity (X) 0.3 0.1 0.2 0.1 0.1 0.1EPS (Rs) 4.0 5.3 6.8 9.5 10.8 12.3



Industrials Voltas

BUY ON LIKELY RECOVERY, STRONG CASH-FLOW GENERATION, DIVERSIFIED BUSINESS MIX We initiate coverage on Voltas with a BUY rating and a target price of Rs200/ share based on the FY2011E

earnings multiple. We ascribe a P/E multiple of 18X to our FY2011E EPS of Rs10.8 for the company. We

recommend BUY based on (1) likely order booking recovery in international geographies on back of recovery

in oil price, additional geographies and government push for urban development (2) pick up in domestic EMP

order booking and execution as IT/ITES segment demand recovers, (3) strong operational cash flow

generation characteristics, (4) diversified business mix of projects, products and services, and (5) strong

execution track record with no dilution or corporate governance concerns.

We value Voltas at Rs200/ share based on 18X FY2011E earnings.

We have ascribed a target price of Rs200/ share based on 18X P/E multiple to FY2011E EPS of Rs10.8. Our valuation implies EV/EBITDA multiple of 12.3X to our FY2011E estimated EBITDA of Rs4.8 bn. We recommend BUY based on on (1) likely order booking recovery in international geographies on back of higher oil price, additional geographies and government push for urban development (2) pick up in domestic EMP order booking and execution as IT/ITES segment demand recovers, (3) strong operational cash flow generation characteristics, (4) diversified business mix of projects, products and services, and (5) strong execution track record with no dilution or corporate governance concerns.

Reverse DCF implies moderate long term assumptions

Our target price of Rs200/ share for Voltas implies (1) moderate revenue growth of 10% over FY2013E-21E, (2) EBIT margins of 7.8% from FY2013E-21E, (3) WACC of 12.5%, and (4) terminal growth rate of 5%.

Exhibit 4: Target price implies 10% revenue growth and 7.8% EBIT margins over FY2013E-21E for DCF DCF valuation of Voltas, March fiscal year-ends, 2010E-21E (Rs mn)

2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021ERevenues 49,381 56,982 63,962 70,358 77,394 85,134 93,647 103,012 113,313 124,644 137,109 150,819 Growth (%) 14.2 15.4 12.2 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 EBIT (excl financial income) 4,444 5,032 5,657 5,453 5,998 6,598 7,258 7,983 8,782 9,660 10,626 11,689 Growth (%) 47.9 13.2 12.4 (3.6) 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 EBIT margins 9.0 8.8 8.8 7.8 7.8 7.8 7.8 7.8 7.8 7.8 7.8 7.8 Effective tax rate 33.9 33.9 33.9 34.0 34.0 34.0 34.0 34.0 34.0 34.0 34.0 34.0 EBIT*(1-tax rate) 2,937 3,326 3,741 3,599 3,959 4,355 4,790 5,269 5,796 6,376 7,013 7,714 Growth (%) 47.8 13.3 12.5 (3.8) 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 Depreciation / amortisation 227 251 278 303 333 366 403 443 487 536 590 649 Change in working capital 306 (59) (62) (640) (704) (774) (851) (936) (1,030) (1,133) (1,246) (1,371) Capital expenditure (440) (490) (540) (640) (704) (774) (851) (936) (1,030) (1,133) (1,246) (1,371) Free cash flow 3,030 3,029 3,417 2,622 2,884 3,173 3,490 3,839 4,223 4,645 5,110 5,621 Growth (%) NM (0.0) 12.8 (23.3) 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 Years discounted — — 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 Discount factor 1.0 1.0 0.9 0.8 0.8 0.7 0.6 0.6 0.5 0.5 0.4 0.4 Discounted cash flow 3,030 3,029 3,107 2,167 2,167 2,167 2,167 2,167 2,167 2,167 2,167 2,167

WACC calculation Terminal value Calc NPV Capital StructureRisk-free rate (Rf) 7.5% 10-year G-Sec yield Cash flow in terminal year 5,621 Net debt 18.7%

Beta (B) 122.1% 2-year W. Beta against BSE 30 g 5.0% Equity 81.3%

Equity risk premium 6.5% Capitalisation rate 7.5%

Expected market Return (Rm) 14.0% Terminal value 78,691

Cost of Equity (Ke) 15.4% Ke = Rf + B * (Rm-Rf) Discount period (years) 10.0

Cost of Debt (Kd) (Post-tax) 8.0% Estimated gross cost of debt Discount factor 0.4

WACC 12.5% Discounted value 30,339

Calculated WACC 14.0%

NPV Calc Sensitivity to growth and WACC assumptions

NPV % of val 197 4.0% 4.5% 5.0% 5.5% 6.0%

Sum of free cash flow 28,669 44.0 11.5% 208 216 225 235 247

Terminal value 30,339 46.6 12.0% 196 202 210 218 228

Enterprise value 59,008 90.6 12.5% 185 191 197 204 212

Add Investments 2,238 3.4 13.0% 176 181 186 192 198

Net debt (3,898) 6.0 13.5% 168 172 176 181 187

Net present value-equity 65,144

Shares o/s 331

NPV /share(Rs) 197

Source: Kotak Institutional Equities estimates


Voltas Industrials

Historical P/E multiple shows premium to Sensex and discount to sector leaders

Average premium of 9% over Sensex over the three years; premium has contracted from pre credit crisis levels and may revert back

The company is currently trading at 9% premium to Sensex, which is same as its average historical premium over last three years. The average premium was in mid-20% before the sharp onset of credit crisis in October, 2008. The premium trend possibly reflects the cyclical nature of Voltas’ business. In our view, the company will revert closer to the premium that it used to trade before the credit crisis as the economy recovers and industrial activity picks up. We believe the premium to Sensex in a growing economy is justified due to the longevity of revenue visibility and alignment with strong investment theme.

Exhibit 5: Voltas has historically traded at 9% average premium to Sensex over the past three years PE Chart of Sensex and Voltas based on 12-month rolling forward EPS, Nov-2006 to Nov-2009

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Source: Kotak Institutional Equities

Trading discount versus BHEL and L&T is likely to narrow down from current levels

We highlight that over the past three years, i.e. Nov-2006 to Nov-2009, Voltas has been trading at an average discount of 25% to L&T and BHEL. Currently, the discount is broadly inline at 30% to L&T and 21% to BHEL.

In our view, the discount to sector leaders is justified on account of (1) smaller sized sub-contractor player versus main EPC contractors, (2) lower entry barrier, and (3) business more vulnerable to margin pressures. However, we believe that the discount should narrow down from its current levels. Voltas traded at an average discount of 17% to BHEL and L&T before the financial meltdown but trading discount widened during the slowdown period. BHEL, being a public sector company, had a much smaller contraction in its P/E multiple compared to peers during the slowdown.


Industrials Voltas

Exhibit 6: Voltas has traded at an average discount of 25% to sector leaders BHEL and L&T PE premium of Voltas versus L&T, BHEL and Sensex based on a 12-month rolling forward EPS, Nov06 – Nov09

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(%) Premium to L&T Premium to BHEL Premium to Sensex

Source: Bloomberg, Kotak Institutional Equities

Trading at discount to historical EV/EBITDA multiple

Voltas is currently trading at 11.7X rolling forward EV/EBITDA, about 11% lower than the last three-year and five year average of 13X.

Exhibit 7: Voltas has historically traded at an average EV/EBITDA of 13X over the past three years EV/EBITDA chart for Voltas based on 12-month rolling forward EBITDA, Nov-2006 to Nov-2009

0

10

20

30

Nov

-06

Feb-

07

May

-07

Aug

-07

Nov

-07

Feb-

08

May

-08

Aug

-08

Nov

-08

Feb-

09

May

-09

Aug

-09

Nov

-09

(X)


Domestic institutions hold Voltas but FII ownership is insignificant

We highlight that Voltas is an over-owned stock in the institutional category of investors, particularly among MFs, which may make it susceptible to sharp corrections in case of disappointments.


Voltas Industrials

Exhibit 8: Several institutions hold sizeable chunks of free float of the company Over/under ownership of Voltas of various investors versus BSE 200 benchmark

BenchmarkFIIs MFs Insurance LIC BSE 200

Voltas — 0.4 0.3 0.2 0.1Overweight/Underweight — 0.3 0.2 0.1 NA

% of portfolio


Recent outperformance underscores stock reverting to historical discount

Voltas’ stock has outperformed the Sensex and its peers over the past 12 months. However, if we put this perspective with the relative performance over the past two years to capture the entire period of global slowdown, the stock has slightly underperformed the Sensex.

Exhibit 9: Voltas has outperformed the Sensex and most peers over the last one year Absolute and relative stock price performance of Voltas and peers

Absolute Relative to BSE-30Price performance 1M 3M 12M 24M 1M 3M 12M 24MVoltas 8.0 27.7 169.3 (16.3) 9.6 12.3 85.8 (5.1)BHEL (9.0) 4.3 76.1 (16.8) (7.4) (11.0) (7.4) (5.6)L&T (2.0) 17.2 109.6 (23.4) (0.4) 1.9 26.1 (12.2)CG 11.6 50.8 211.5 0.1 13.2 35.5 128.0 11.3 Siemens (3.9) 32.0 101.9 (41.3) (2.3) 16.6 18.4 (30.1)Blue Star (12.3) 2.7 80.3 (14.9) (10.8) (12.6) (3.2) (3.7)


Better asset turnover leads to stronger RoE inspite of lower margin and leverage

We highlight that Voltas has higher RoE than industrial leaders, such as BHEL and L&T on account of better asset turnover. Voltas’ majority of revenues come from MEP and HVAC project businesses, which require low capital employed.

Asset turnover and RoE higher than industry leaders but trails Blue Star

If we also compare Voltas to Blue Star, its closest competitor in terms of business mix, the latter is clearly ahead in terms of both PAT margins as well as asset turnovers.

Exhibit 10: Voltas has higher RoE than industrial leaders but lower than closest competitor DuPont analysis for Voltas and its peers, March fiscal year-ends, 2008-09 (Rs mn)

Voltas BHEL L&T CG Thermax Blue Star2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009

Sales 32,029 43,259 193,046 262,123 293,504 404,799 68,323 87,373 35,254 35,007 22,216 25,523PAT 1,760 2,284 28,589 31,263 22,715 29,355 4,098 5,625 2,907 2,889 1,741 1,803Average asset 5,936 8,193 98,735 119,788 191,349 288,698 20,289 23,595 6,758 8,780 3,010 3,454Average equity 5,005 6,835 97,812 118,565 96,462 133,856 11,353 15,664 6,747 8,760 2,383 3,153PAT margin (%) 5.5 5.3 14.8 11.9 7.7 7.3 6.0 6.4 8.2 8.3 7.8 7.1Asset turnover (X) 5.4 5.3 2.0 2.2 1.5 1.4 3.4 3.7 5.2 4.0 7.4 7.4Leverage (X) 1.2 1.2 1.0 1.0 2.0 2.2 1.8 1.5 1.0 1.0 1.3 1.1RoE (%) 35.2 33.4 29.2 26.4 23.5 21.9 36.1 35.9 43.1 33.0 73.1 57.2 l


Monetization of Hyderabad land parcel may provide additional upside

Voltas is likely to monetize its 32 acres of land in Santnagar, five km from the old Hyderabad airport, once the real estate market turns around. This would provide an additional upside to the stock. Monetization may happen sooner to fund acquisitions in the water management business. We estimate the value of real estate to be about Rs3.2 bn, which would imply about Rs10/ share. We have estimated a value of about Rs2,000 per sq. ft, i.e. Rs100 mn per acre for our calculation. Voltas has already demonstrated real estate monetization by leasing out extra space in its corporate complex in Mumbai to Tata Teleservices and Nielson and renting the Ballard Estate building to SBI.


Industrials Voltas

Exhibit 11: Voltas trades at discount to KIE sector average on a P/E basis Voltas valuation compared to KIE industrial sector coverage universe, March fiscal year-ends, 2009-12E

Shares Market Target Implied FY2011E multipleso/s Cap price P/E EV/EBIDTA P/B P/E multiple at current price (X)

Rating CMP (mn) (Rs bn) (Rs) (x) (x) (x) 2009 2010E 2011E 2012EElectrical equipmentBHEL ADD 2,276 490 1,114 2,425 21.4 14.3 5.8 35.6 24.6 20.1 17.3ABB REDUCE 761 212 161 660 21.7 13.7 4.6 29.5 35.3 25.0 20.2Suzlon ADD 73 1,497 109 90 34.0 9.2 1.5 48.3 (30.4) 27.5 10.4Siemens ADD 570 331 189 515 22.7 12.0 5.1 32.0 25.0 25.1 21.6Crompton Greaves BUY 410 367 150 400 16.9 9.9 4.6 26.7 19.8 17.4 15.5Electrical equipment aggregate 1,724 21.5 12.6 4.5 34.0 28.2 20.9 16.7Engineering & constructionL&T ADD 1,656 586 970 1,725 23.3 14.5 3.8 33.0 29.0 22.4 18.0BGR Energy Systems ADD 502 72 36 530 16.1 2.1 4.3 31.3 20.7 15.3 12.6Voltas BUY 177 331 58 200 18.5 12.3 5.3 25.6 18.6 16.4 14.4Engg & construction aggregate 1,006 22.3 14.3 3.8 33.0 27.9 21.4 17.3DefenseBharat Electronics ADD 1,609 80 129 1,625 12.9 7.1 4.8 17.1 13.7 12.7 11.5KIE sector aggregate 2,859 21.2 12.9 4.3 32.2 26.8 20.5 16.6

EV/EBIDTA (X) P/B (X) EV/sales (X)2009 2010E 2011E 2012E 2009 2010E 2011E 2012E 2009 2010E 2011E 2012E

Electrical equipmentBHEL 27.3 17.2 13.4 11.0 8.6 6.8 5.4 4.4 3.9 3.1 2.5 2.0ABB 20.4 22.5 15.9 12.6 7.7 6.5 5.3 4.3 2.3 2.3 1.8 1.4Suzlon 8.1 12.9 8.2 5.8 1.3 1.2 1.2 1.1 0.9 1.0 0.8 0.7Siemens 17.7 13.6 13.5 11.2 8.3 6.8 5.6 4.7 1.8 1.8 1.6 1.3Crompton Greaves 15.3 11.9 10.2 8.9 8.2 6.1 4.7 3.7 1.7 1.6 1.3 1.1Electrical equipment aggregate 18.6 15.8 12.2 9.8 6.3 5.2 4.4 3.6 2.2 2.1 1.7 1.4Engineering & constructionL&T 23.1 17.6 14.0 11.5 6.4 4.4 3.7 3.1 2.8 2.4 1.9 1.5BGR Energy Systems 17.7 12.0 9.5 8.0 6.4 5.1 4.0 3.2 1.9 1.4 1.1 0.9Voltas 19.7 12.6 10.7 9.0 7.4 5.8 4.7 3.8 1.3 1.1 0.9 0.8Engg & construction aggregate 22.9 17.4 13.8 11.3 6.4 4.4 3.7 3.1 2.8 2.4 1.8 1.5DefenseBharat Electronics 9.5 7.7 7.0 5.9 7.7 6.0 4.8 3.8 2.2 1.8 1.5 1.2KIE sector aggregate 19.4 15.8 12.5 10.1 6.4 4.9 4.1 3.4 2.4 2.2 1.8 1.4

EPS (Rs) RoE (%) RoCE (%)2009 2010E 2011E 2012E 2009 2010E 2011E 2012E 2009 2010E 2011E 2012E

Electrical equipmentBHEL 63.9 92.5 113.1 131.9 26.4 30.9 30.1 28.2 26.4 30.7 29.9 28.1ABB 25.8 21.6 30.4 37.8 29.5 19.9 23.4 23.7 29.2 19.8 23.3 23.6Suzlon 1.5 (2.4) 2.6 7.0 2.9 (4.6) 4.8 12.1 5.8 2.9 6.6 9.2Siemens 17.8 22.8 22.7 26.3 29.2 30.5 25.0 24.0 40.7 54.3 55.3 55.9Crompton Greaves 15.3 20.7 23.7 26.5 35.9 35.3 30.5 26.8 26.6 29.5 28.3 26.3Electrical equipment aggregate 17.5 21.1 28.5 35.5 19.9 20.2 22.8 23.8 15.6 15.9 18.4 19.8Engineering & constructionL&T 50.1 57.1 74.0 91.8 21.9 18.5 18.5 19.2 11.8 12.6 13.4 14.2BGR Energy Systems 16.0 24.3 32.9 39.7 22.3 27.6 29.7 28.4 14.7 17.0 18.4 18.4Voltas 6.9 9.5 10.8 12.3 33.0 35.0 31.8 29.4 28.4 30.6 29.7 27.8Engg & construction aggregate 30.3 35.8 46.8 58.0 21.9 18.8 18.8 19.5 11.9 12.7 13.6 14.4DefenseBharat Electronics 94.1 117.7 126.2 140.0 21.4 22.8 20.9 20.0 50.0 50.7 41.8 37.1KIE sector aggregate 24.4 29.3 38.4 47.5 20.7 19.9 21.1 21.9 14.8 15.3 16.8 17.8

Note: (1) FY2009 refers to Y/E Dec 2008, and so on for ABB and Y/E Sep 2008, and so on for Siemens. Voltas not included in sector aggregates



Voltas Industrials

PROFILE: ENGINEERING PROJECTS, PRODUCTS AND SERVICES IN MIDDLE EAST AND INDIA Voltas, a part of the Tata group of companies, is a leading player in turnkey electro-mechanical projects, and

engineering and cooling products. Voltas has three broad business segments—electromechanical projects,

engineering projects and services, and unitary cooling products. Rohini Industrial Electricals Ltd is a recently

acquired subsidiary with expertise in electrical and instrumentation projects.

Voltas, established in 1954 as a JV between Swiss firm Volkart Brothers and Tata Sons Limited, is a leading player in turnkey MEP (Mechanical, Electrical and Public health) projects, and engineering and cooling products. Operations of the company are organized as three business segments—Electro-Mechanical Projects (EMP), engineering products and services and Unitary Cooling Products (UCP).

Exhibit 12: Standalone business across three business units Voltas' business mix grouped under various heads

Electro-Mechanical Projects (EMP)

Domestic

International

Engineering products and services

Mining and construction equipment

Material handling equipment

Textile machinery

Pollution control equipment

Unitary Cooling Products (UCP)

Room airconditioners

Commercial refrigerators

Water coolers

Others

Agro and industrial products

Source: Company

Diversified business mix of projects, products and services

The EMP segment undertakes EPC contracts for HVAC (Heating Ventilation and Air Conditioning) and MEP (Mechanical Electrical and Public health) projects, primarily in the Middle East and India. Engineering products and services segments provide agency services—marketing, installation and maintenance—for its Indian and international principals in three product lines—mining and construction equipment, material handling equipment, and textile machinery. The unitary cooling products segment manufactures and sells room ACs, commercial refrigerators and water coolers.

EMP contributes to about two-thirds of standalone revenues and EBIT

The EMP segment is the main stay of the business as it contributed 63% of the FY2009 standalone revenues of Rs40 bn. The EMP share of FY2009 standalone EBIT of Rs3.3 bn stood at 59%. UCP comes next with 23% revenue and 21% EBIT contribution in FY2009. Margins in the EMP and UCP businesses are lower than those in engineering products and services as about 20% of the latter is agency business.


Industrials Voltas

Exhibit 13: Electromechanical projects contributed 63% to revenues and 59% to EBIT in FY2009 Segment-wise distribution of Voltas standalone revenue and EBIT, March fiscal year-ends, 2009

Revenues (Rs40 bn)

Electro-mechanical

projects63%

Unitary cooling

products23%

Others1%

Engineering projects

13%

EBIT (Rs3.3 bn)

Electro-mechanical

projects59%

Unitary cooling

products21%

Others1%

Engineering projects

19%

Source: Kotak Institutional Equities, Company

30% CAGR of standalone revenues from FY2005 to FY2009

Voltas’ standalone revenues have grown at 30% CAGR over FY2005 to FY2009, fuelled by 33% CAGR in EMP revenues led by the strong international business. Engineering products and services revenue grew at 36% CAGR over the same period despite the slowdown in FY2009. This segment registered 53% CAGR from FY2005 to FY2008 to constitute 19% of standalone revenue by FY2008 but shrunk to 13% of standalone revenue in FY2009 as the segment was severely hit by the economic downturn. Universal cooling products have registered 21% CAGR over the four-year period and shrunk from 30% of revenues in FY2005 to 22% of revenues in FY2009.

Exhibit 14: 30% CAGR of standalone revenues over FY2005-09 led by strong growth in EMP Segment-wise revenue of Voltas, March fiscal year-ends, 2005-09

0

10,000

20,000

30,000

40,000

50,000

2005 2006 2007 2008 2009

(Rs mn)

0

10

20

30

40(%)Electromechanical projects (LHS) Engineering products (LHS)

Unitary cooling products (LHS) Growth in total revenues (RHS)


Revenue and EBIT mix shifted in favor of EMP as product businesses contracted

In FY2009 we see a shift in the revenue mix as we see the EMP segment share of revenue going up to 63% of standalone revenue from 53% in FY2008 on the back of huge order inflows from the Middle East. The engineering products and services segment, badly hit by the economic downturn, lost about 6% in its share of contribution to standalone revenues over the same period.


Voltas Industrials

Exhibit 15: Revenue mix changed in favor of EMP as product businesses contracted Segment wise distribution of Voltas standalone revenues, March fiscal year-ends, 2007-11E

FY2007Revenues (Rs25 bn)

EMP55%

UCP25%

Others2%

EPS18%


EMP53%

UCP27%

Others1%

EPS19%


EMP63%

UCP23%

EPS13%

Others1%


Engineering products and services has contributed proportionately higher to the standalone EBIT compared to the revenue share of the segment in standalone revenues as bulk of this segment is an agency business. The EBIT contribution of engineering segment has come down substantially over FY2007 to FY2009 as (1) the segment contracted during the economic slowdown, and (2) profitability in EMP and UCP segments increased.

Exhibit 16: EBIT mix changed sharply as engineering products revenues and margins contracted Segment wise distribution of Voltas standalone EBIT, March fiscal year-ends, 2007-11E

FY2007EBIT (Rs1.7 bn)

EMP39%

UCP5%

EPS56%


EMP42%

UCP18%

Others1%

EPS39%


EMP59%

UCP21%

EPS19%

Others1%


36% CAGR in EBIT driven by revenue growth and margin expansion in EMP

The standalone EBIT of the company grew faster than revenues as the overall EBIT margins improved from 6.7% in FY2005 to 8.1% in FY2009. EMP once again led the pack with the segment EBIT growing at 46% CAGR over the same period. The UCP segment has also come to profitability since FY2007. Engineering products and services EBIT over FY2005 to FY2009 has grown at a modest 12%, primarily on account of slowdown in business in FY2009.


Industrials Voltas

Standalone EBIT margins have improved over time, except in engineering products

Voltas’ standalone EBIT margins have improved from 6.7% in FY2005 to 8.1% in FY2009, primarily driven by margin improvement in EMP and UCP. EMP margins have increased on the back of a boom in construction activity in target geographies. UCP segment has been profitable since FY2007 and has shown significant margin improvement to reach 7.25% in FY2009 as the company shifted manufacturing from Dadra and Hyderabad plants to Pantnagar plant. Engineering products and services segment blended EBIT margin has declined from 25% to 12% over the same period due to a contraction in industrial activity and possibly higher contribution of in-house manufactured products to sales which is lower margin than agency business.

Exhibit 18: EBIT margins are up on increasing profitability in EMP and UCP segments Standalone segment-wise EBIT margins of Voltas, March fiscal year-ends, 2005-09 (Rs mn)

(10)

0

10

20

30

40

2005 2006 2007 2008 2009

(%)Electromechanical projects Engineering products

Unitary cooling products Segment


Exhibit 17: Standalone EBIT has increased 36% over FY2005-09 led by electromechanical projects Standalone segment-wise EBIT of Voltas, March fiscal year-ends, 2005-09 (Rs mn)

(1,000)

0

1,000

2,000

3,000

4,000

2005 2006 2007 2008 2009

(Rs mn)Electromechanical projects Engineering products Unitary cooling products



Voltas Industrials

Capital employed increased in engineering products as agency business reduced

Capital employed in engineering products as percentage of sales has increased to 24% at end-FY2009 versus 14% at end-FY2008. The increase was primarily on account of increasing inventory in the mining and construction business. Capital employed in the EMP segment as percentage of EMP revenues reduced to 1% at end-FY2009 compared to 10% at end-FY2008 possibly because the company secured large international projects and related advances. Overall capital employed as percentage of revenue increased to 21% at end-FY2009 compared to 19% at end-FY2008.

Exhibit 19: Capital employed has increased in engineering segment during downturn Segment-wise capital employed as % of revenues, March fiscal year-ends, 2007-09

0

10

20

30

40

50

2005 2006 2007 2008 2009

(%)Electromechanical Projects Engineering products and services

Unitary Cooling Products Overall


The management mentioned that they intend to operate EMP with negative capital employed. Voltas reported absolute capital employed in EMP of negative Rs841 mn at end-1HFY10 compared to Rs370mn at end-FY2009. Management also highlighted that receivables in domestic EMP have gone up in 1HFY10 although more than compensated by international businesses.

Manufacturing facilities in Pantnagar and Thane

Voltas has ISO9001:2000 certified manufacturing plants in Pantnagar and Thane, and a total workforce of about 800 people in manufacturing. Voltas and its subsidiaries make room ACs, commercial refrigerators and water coolers for UCP business, and forklift trucks, cranes and warehousing equipment for engineering products business.

Full scale benefits of Pantnagar plant are yet to be achieved

The management explained that the main reasons for shifting the manufacturing plant to Pantnagar were (1) lower wage levels, (2) lower power tariff, (3) excise exemption, and (4) income tax benefit. While lower labor costs and income tax benefits have been realized, full potential benefits of power tariff and excise exemption are still to come. State-provided electricity cost is lower in Uttaranchal than in Andhra Pradesh, however, limited power availability forces Voltas to use alternate sources, which drives up costs. Full potential costs savings should be realized once the state supply ramps up. Voltas enjoys perpetual excise exemption on Pantnagar manufacturing. However, benefits achieved have been subdued on account of lower excise tariff after government stimulus. Incorporation of GST will potentially annul the excise benefits altogether.


Industrials Voltas

Key subsidiaries are RIEL, UCPL and Weathermaker

Exhibit 20: RIEL is the most significant subsidiary in terms of revenue and PAT contribution Revenue breakup of Voltas among various entities, March fiscal year-end, 2009

Revenues PAT Owned(Rs mn) (Rs mn) Country (%) Description

Rohini Industrial Electricals (RIEL)

1,910 118 India 67.3Executes electrical & instrumentation contracts for power, process, industrial and commercial projects

Univeral Comfort Products (UCPL)

1,527 (177) India 100.0Manufactures window and split AC for Voltas, was a 50:50 joint venture company between Voltas and Fedders International

Weathermaker (WML) 530 57 Isle of Man 100.0Provides air distribution systems, manufactures Galvanised Iron, Aluminium, Black Mild Steel and Stainless Steel ductwork

Metrovol FZE 388 5 UAE 100.0Trades in mechanical and industrial machinery, engineering goods and allied products

VIL Overseas (VOEBV) 56 52 Netherlands 100.0Investment in overseas ventures, undertaking turnkey projects and trading activities.

Voice Antilles NV (VANV) 33 32 Netherlands 100.0Incorporated in 1999 for investment in overseas ventures, undertaking turnkey projects and trading activities.

Saudi Ensas Company for Engg Services (SECL)

149 (146) Saudi Arabia 100.0Execution and operations / maintenance of electro mechanical installations in KSA

Simto Investment 7 7 India 95.5 Investment company hold equity of various listed companies


Voltas acquired 51% stake in Rohini Industrial Electricals Limited (RIEL) in Sept-2008, and later increased it to 67% in Aug-2009 for a total cost of Rs866 mn. RIEL, incorporated in 1983, executes turnkey electrical and instrumentation contracts. Scope of electrical work includes supply, installation, testing and commissioning of EHV/HV switchyards, interior and street lightning, CCTV and access control systems, and telephone and data cabling. Instrumentation work includes temperature, flow/level, and process control instruments. RIEL revenues have grown at a CAGR of 40% over the past five years to reach Rs1,910 mn in FY2009. RIEL reported FY2009 PBT of Rs181 mn and PAT of Rs118 mn.

Exhibit 21: RIEL revenues have grown at a CAGR of 40% over FY2005-09 Revenue of Rohini Industrial Electricals Limited, March fiscal year-ends, 2005-09 (Rs mn)

0

500

1,000

1,500

2,000

2,500

2005 2006 2007 2008 2009

(Rs mn)

0

10

20

30

40

50

60

70

(%)Revenue (LHS) Growth in total revenues (RHS)


UCPL—AC manufacturing arm of Voltas

UCPL manufactures window and split ACs for Voltas. Dadra manufacturing plant was closed in Dec-2008 on account of high input costs. Pantanagar is now the manufacturing hub for cooling appliances. UCPL reported net loss of Rs177 mn for FY2009 which includes exceptional items of Rs100 mn related to the closure of Dadra plant.


Voltas Industrials

Recent changes in subsidiary holdings—RIEL, UCPL, chemical trading business

Voltas sold its chemical business in March-2009 to DKSH India Pvt. Ltd for Rs159 mn. According to the management, the chemical business was not in line with the core focus of the company and hence they divested.

Exhibit 22: Voltas has acquired 67% stake in RIEL and sold its chemical trading business Recent changes in subsidiary holdings for Voltas

Acquired Post-deal stake Deal value(%) (%) (Rs mn) Date Description

REIL 16.3 67.3 236 26-Aug-2009Purchased 0.3 mn shares of RIEL to increase stake from 51% to 67.3%. Deal values RIEL at Rs1.4 bn.

Chemicals trading business (100.0) 0.0 159 31-Mar-2009 Voltas sold its chemicals trading business to DKSH India Pvt. Ltd.

SECL 51.0 100.0 0 04-Feb-2009Local partner transferrd 51.0% stake to Voltas. Voltas had earlier provided finance to SECL of Rs134.8 mn

UCPL 50.0 100.0 31 17-Jun-2008 Fedders (JV partner) transferred 50% stake to Voltas.


Diversified holding; promoter group owns 28% of shareholding

The promoter group owns 28% of the total shareholding, followed by individuals who own 22%. 20% of the shares are held by individuals with up to 100,000 shares each. Insurance companies come in next with 16% holding while mutual funds/UTI hold 13% of the total shares. In September 2008, Voltas ranked top in the Business Today’s list of ’India’s Most Investor-Friendly Companies’, which is an indicator of the company’s policies and practices towards investors.

Exhibit 23: Diversified shareholding, promoter group owns 28% Voltas shareholding pattern as on Sept 30, 2009

Promoter and promoter group

28%

FIIs11%

Individuals22%

Others1%

Corporate bodies9%

Insurance companies16%

Mutual funds / UTI, FIs and banks

13%

Source: Company, NSE

Exhibit 24: List of public shareholders having greater than 1% holding in Voltas as on Sep 30, 2009

# of shares as % of Name of the shareholder (mn) totalLIC of India 25.6 7.7ICICI Prudential Life Insurance Company Ltd 10.9 3.3General Insurance Corporation Of India 5.0 1.5LIC of India Market Plus- I 4.7 1.4PCA India Infrastructure Equity Open Limited 4.6 1.4The New India Assurance Company Limited 4.5 1.4Tata Trustee Co Pvt Ltd A/C Tata Mutual Fund Tata Infrastructure Fund 4.1 1.3Blackrock India Equities Fund (Mauritius) Ltd. 3.6 1.1The Oreintal Insurance Company Limited 3.3 1.0

Total 66.3 20.0 l

Source: NSE


Industrials Voltas

ELECTRO-MECHANICAL PROJECTS: LEADING PLAYER IN MIDDLE EAST AND INDIA

Voltas undertakes detailed engineering, procurement, installation, testing and commissioning of a variety of equipment for HVAC (Heating Ventilation and Air Conditioning) / MEP (Mechanical Electrical and Public health), integrated building management and other specialized systems. In MEP package, mechanical works include heating, ventilation, air-conditioning, refrigeration and lifts, electrical works include the total electrification package and public works include drainage, sanitation and plumbing. The key customers are developers of closed spaces—buildings, airports, hotels, retail establishments, malls, entertainment complexes, BPOs, IT/ITES etc.

A bulk of the EMP business is based in India and the Middle East, primarily Abu Dhabi, Qatar, Dubai and Bahrain. The company has also executed a couple of projects in Singapore and Hong Kong. The scope of the work varies amongst geographies. Most overseas projects have been turnkey MEP packages. In India, the projects used to be primarily HVAC but there is a trend in the industry to move towards integrated MEP to drive down costs.

Exhibit 25: Map of Middle East


High growth in construction activity in company’s target geographies has fuelled 33% revenue CAGR over FY2005 through FY2009. Segment EBIT margins have also improved from 5.3% to 7.6% over the same period.


Voltas Industrials

Numerous prestigious MEP and HVAC orders under its belt

Exhibit 26: Iconic international MEP projects executed by Voltas

Burj Dubai Ferrari Theme Park, Abu Dhabi

F1 Race Track, Abu Dhabi Changi Water Treatment Plant, Singapore


Voltas has secured and executed numerous prestigious orders in the EMP segment both in India and abroad. Prominent international orders include MEP for Burj Dubai (US$85 mn), MEP for Bahrain City Center (US$106 mn), EM work for Formula-1 race track in Abu Dhabi (US$80 mn) and MEP for Changi Water Reclamation Plant in Singapore (US$68 mn).


Industrials Voltas

Exhibit 27: Key large international orders secured by Voltas

Projects sizeClient (US$ mn)Burj Tower 85 Bahrain City Centre 106 Sidra Medical and Research Center NAMovenpick Deira Hotel and Centre Residence NAFerrari Experience theme park 90 Etihad Towers NAFormula 1 Race Track 80 Emirates Palace Hotel 101 Changi Water Reclamation Plant 68 Jumeirah Beach Residence 45 New Hong Kong International Airport 40 Wafi Hotel & Mall 28 Abu Dhabi Shopping Mall 18 Villaggio Shopping Mall 17 Cyberport 13

Marina Mall Extension 13 Etisalat Building 12 KCRC – Metro Rail Stations 11 Mall of the Emirates 8 Science Park Building 5 Male International Airport 4


Key domestic projects include Rajiv Gandhi International Airport in Hyderabad, Chennai International Airport, Magrapatta Cybercity in Pune, and TCS office complexes in Chennai and Hyderabad.

Exhibit 28: Key HVAC orders secured in India by Voltas

Client City Client CityINOX Leisure Ltd Ahemdabad Sahara Ganj LucknowDell Whitefield Bangalore Saifee Hospital MumbaiDell Chandigarh ITC MumbaiChennai International Airport Chennai Shoppers Stop MumbaiTCS IT Park Chennai Crossroads Shopping Mall MumbaiAmbi Mall Delhi IL&FS Head Office MumbaiScope Twin Towers Delhi Cinemax MumbaiFortis Hospital Delhi Galleria Mall Mumbai

Indira Gandhi Indoor Stadium Complex Delhi Mumbai Airport MumbaiTCS Office Complex Hyderabad Lodha Excellus MumbaiHyderabad International Airport Hyderabad Naptune Mall MumbaiIMAX 3D Theatre Hyderabad INOX Leisure Ltd PuneNSCB International Airport Kolkata Magarpatta Cybercity Pune


Voltas has established its reputation in MEP space in the Middle East market

Voltas' overseas MEP business received two key awards: for 'MEP Project Manager of the Year' and 'Health & Safety' at the MEP Middle East Awards 2008, underscoring the company’s strong reputation in the MEP business in its target geography.


Voltas Industrials

Exhibit 29: Voltas has established its reputation in MEP space in Middle East Voltas received MEP Project Manager of the Year award in MEP Middle East Awards 2008

Source: MEP Middle East Awards

Voltas has executed several iconic projects in the region, such as Burj Dubai, F1 race track and Ferrari theme park in Abu Dhabi, which has established the company among the top MEP contractors in the region.

Exhibit 30: Voltas is among the leading MEP contractors in Middle East and has executed several iconic projects Leading MEP contractors in Middle East

Company Middle-East employees

World-wide employees

Countries of operation in Middle-East Recent projects

Emirates Trading Agency (ETA) M&E

18,000 20,000 UAE, Qatar, Kuwait, IndiaBurj Dubai; Dubai Light Rail; Ethihad Airport Terminal, Abu Dhabi; Delhi airport

Thermo 16,000 16,000 UAE, Qatar Dubai International airport; Jebel Ali airport

Drake & Scull International 7,000 7,000 Dubai, Abu DhabiInfinity Tower and Tiara Towers in Dubai; Tiara Residences and Hotel (Palm Jumeirah)

State Group International 6,000 NA UAE, Qatar, Kuwait, India Palm Island and Discovery Gardens in Dubai

Voltas 5,000 10,000Dubai, Abhu Dhabi, Qatar, Saudi Arabia

Burj Dubai; Ferrari Theme Park and F1 Race Track in Abu Dhabi

Bader Al Mulla & Bros 4,400 NM Dubai, KuwaitSky Gardens and DIFC (Dubai); Avenues Mall and Al Maidan Hospital (Kuwait)

Al Habtoor 3,000 3,500 Dubai, Abu DhabiMovenpick Hotel (Dubai); Palm Jumeirah (Dubai); Sadiyaat Island (Abu Dhabi)

Cansult Maunsell 3,000 35,000 Most Middle-East countriesEtihad Towers, Abu Dhabi; Barwa City Development, Qatar

Atkins 2,500 18,000 Most Middle-East countriesBahrain World Trade Centre; DIFC, Dubai; Durrat al Bahrain

Rotary International 1,450 8,000 Dubai, Abu Dhabi, Qatar Ibis and Atlantis (Dubai)

Hyder Consulting 1,400 4,500 Abu Dhabi, Bahrain, QatarBurj Dubai and City of Arabia, Dubai; Lusail and Education City, Qatar

Source: Construction weekly online – July 2008, Kotak Institutional Equities

Order book of Rs44 bn provides 1.5 years visibility, inflows slow in FY2010

Voltas’ EMP segment order book stood at Rs44 bn, as at end of 2QFY10, down Rs12 bn yoy and Rs3.5 bn from end-FY2009. The current order book is made up of Rs31 bn in the international segment and Rs13 bn in the domestic segment. This order book is about 1.5 times the estimated FY2010E revenues of EMP segment and is completely executable by end- FY2011E. This provides some level of comfort for revenue visibility and the ability of the company to sustain as the Indian and Middle Eastern economies recover.


Industrials Voltas

We estimate order inflow to be about Rs11 bn in 1HFY10 compared to Rs21 bn in 1HFY09. Voltas has made no major additions to the international order book in 2QFY10. The Yas Retail project valued at Rs7 bn on the order book is under suspension and likely to be revised. Even on the domestic front, execution of several orders has slowed down, particularly in IT parks and malls. The company has stated that most of the international order book has very small exposure to commodity price as a bulk of the material is locked in at the start of the contract itself. Management also mentioned that international orders typically involve about 10-15% variations decided during the course of the project, which are not recorded in the order book. Variations are often high margin components for Voltas as these usually require minimal additional effort in execution.

Exhibit 31: Bulk of Rs44 bn order book is international Order book mix of EMP segment, as of end-2QFY10

Order Book Rs44 bn at end-2QFY10

Domestic29%

International71%


Voltas’ EMP segment saw extremely strong order booking in FY2008. The overall order book grew by 79% in FY2008 fuelled by a whopping 138% increase in international order backlog. International order booking, however, took a U-turn since then as Middle Eastern economies faced falling oil prices. Construction activity in target geographies was adversely impacted and as a result, the international order backlog reduced from Rs38 bn at end-FY2008 to Rs37 bn at end-FY2009. Domestic order backlog, on the other hand, increased from Rs5 bn at end-FY2008 to Rs10 bn at end-FY2009.

Exhibit 32: International order book took a U-turn in FY2009 as Middle East faced falling oil prices Order book mix of EMP segment for VOLTAS, March fiscal year-ends, 2007-09 (Rs mn)

0

10

20

30

40

50

2007 2008 2009

(Rs bn) International Domestic



Voltas Industrials

Earnings dependence on gulf lower-than-perceived on shorter execution in domestic

We highlight that earnings dependence on Middle East is lower versus what is apparent from order book mix because of lower execution cycle time and potentially higher domestic margins. International business formed 80% and 88% of the order book at end of FY2009 and FY2008 respectively; however, it only contributed 2/3 and 1/2 of revenues in FY2009 and FY2008 respectively. This is on account of shorter execution time of domestic projects on average which leads to higher turns of the domestic order book (about 3.5 in FY2009) compared to the international order book (about 0.5 in FY2009).

In terms of total EBIT the skew may be even lower as we believe that smaller domestic projects with lower outsourcing may have higher margins in percentage terms versus larger international projects with higher proportion of outsourcing. We estimate that Middle East would contribute about 40% to FY2010E EBIT mix. This estimate could be even lower going forward as the engineering products and services segment recovers in FY2011E.

Exhibit 33: Revenue dependence on Middle East is lower than perceived Geographical mix of order book and revenue for Voltas, March fiscal year-ends, 2008-09

FY2008

FY2009

Order book Rs43 bn

International88%

India12%

EMP revenues Rs17 bn

India47%Internati

onal53%

Order book Rs47 bn

International79%

India21%

EMP revenues Rs25 bn

India33%

International67%


Recent domestic orders of Rs3,000 mn for HVAC and Rs380 mn for water treatment

Voltas has recently secured HVAC orders for Kolkata and Chennai airports, combined value of Rs3,000 mn. The company has also made further strides in water treatment business by securing Rs380 mn worth of orders from Tata Steel and Kolkata Metropolitan Water and Sanitation Authority for 25MGD and 15MGD plants, respectively.


Industrials Voltas

Exhibit 34: Recent domestic orders in EMP segment

Projects sizeClient (Rs mn) Description

Tata Steel25 MGD water treatment plant at Jamshedpur. Intake water system for raw water and clarified water pump house installation

Kolkata Metro Water & Sanitation Authority 15 MGD water treatment plant and 0.75MGD UGR-cum-pump station

Kolkata's international airportHVAC, internal electrification, and plumbing & drainage system at new passenger terminal

Chennai airport HVAC, fire protection and internal electrification systems

Hindustan Zinc 2,100 Mining equipment order

380

3,000


Growth outlook: projects aplenty, execution timeframe will be the key

Voltas’ management seems confident of 20%+ growth and 8.5-9.5% margins in the EMP segment in FY2010 and FY2011 on the back of a Rs44 bn order book, which is completely executable by end-FY2011E. We share the management’s optimism to an extent and believe that the segment would grow at about 19% in FY2010E as the company executes several large orders. Growth rate in EMP in FY2011E-12E is likely to reduce as the current order book is executed. EBIT margins in EMP segment are expected to increase to 9.5% in FY2010E versus 7.6% in FY2008. The company has already achieved 10% EBIT margins in EMP segment in 1HFY10. However, going forward margins in this segment may also come under pressure as many subcontractors may find themselves bidding for a smaller pool of projects. We have a cautious outlook on growth beyond FY2011E as the business would depend heavily on pick up of ordering activity and execution speed in target geographies once the current order book expires.

Exhibit 35: Strong order book to take the company through FY2011E EMP segment revenues ane EBIT for Voltas, March fiscal year-ends, 2007-12E (Rs mn)

2007 2008 2009 2010E 2011E 2012ERevenue 13,708 16,529 25,464 30,700 34,789 37,928Revenue growth (%) 21.4 20.6 54.1 20.6 13.3 9.0Orderbook 24,000 43,000 47,180 40,196 40,980 47,518Order inflow 24,708 35,529 29,644 23,715 35,573 44,466Bill to book ration (X) 0.5 0.4 0.4 0.5 0.6 0.6Segment EBIT 710 1,218 1,934 2,916 3,044 3,319Segment EBIT margin (%) 5.2 7.4 7.6 9.5 8.8 8.8


The management expects government spending in Qatar, Abu Dhabi, KSA and Singapore to fuel international order activity. Voltas has now been accredited by the Singapore government to bid for public projects. In our view, there are plenty of planned projects in target geographies where Voltas can competitively bid. However, the execution timeframe of these projects will be crucial in the wake of recovering economies in most countries.

Qatar, Abu Dhabi and Saudi Arabia will be key to Middle East order book growth

Middle East economies have been adversely hit since mid-2008 by extremely large fall in oil price, deterioration in external financing conditions and reversal of capital inflows. The real GDP growth of the region, as a whole, is projected to decline from 6% in 2008 to 2½% in 2009. Dubai is probably the worst-hit emirate in the region and may take the longest to recover, but some of the other states are recovering quickly on the back of increased government spending and oil price recovery.


Voltas Industrials

Target markets for Voltas in the Middle East are primarily the UAE (Abu Dhabi and Dubai), Qatar, and Bahrain. Voltas’ Rs31 bn international order book at the end of 1QFY10 was roughly equally divided between Abu Dhabi and Qatar. The management has underscored that although there had been no significant order booking in 1HFY10, they see a revival in contract inquiries in Abu Dhabi and Qatar. For example, inquiries for six new hospitals in the two regions for some of which the company has already made bids.

Exhibit 36: Voltas’ target market in Middle East has planned urban projects worth US$600 bn Key economic indicators for target markets in Middle East for Voltas (US$ bn)

Qatar Saudi ArabiaNominal GDP (2008) 105 470Real GDP growth (2008) (%) 16.4 4.4Population (mn) 1.6 24.8Planned urban construction projects 45 150

Source: Saudi Arabia monetary agency, Kotak Institutional Equities

Voltas is expanding its reach to target MEP projects in the Kingdom of Saudi Arabia. We view this as positive for the company for (1) Saudi Arabia presents a massive opportunity with over US$150 bn of ongoing and planned construction projects, and (2) Voltas can leverage its experience and relationship in the region to secure sizeable projects in the medium term.

Qatar, one of the fastest-growing economies in the Middle East

Qatar has been one of the fastest growing economies in the Middle East with 2004-08 real GDP CAGR of 12.9% and nominal GDP CAGR of 34%. Nominal GDP in 2008 stood at US$105 bn, of which oil and gas sector accounted for 62%. The state has taken major initiatives, such as Qatar Financial Centre, Education City, Qatar Science and Technology Park, and Energy City Qatar, to increase the non-oil and gas components of the GDP. Qatar has also benefited from the continued monetary easing in the US because of its pegged exchange rate. The country is also utilizing the reserves, accumulated during the times when oil prices were high, to stimulate the economy.

Building and construction (an upstream activity for EMP) continues to be a major contributor to GDP and employment. Higher spending by the State on infrastructure projects, education, health, and social welfare projects, and various other hotel, commercial and residential construction projects has been the main reason for the substantial growth in this sector. The building and construction sector grew by 24% yoy in 2008. Qatar has more than US$45 bn worth of ongoing and planned construction projects in various stages of development.


Industrials Voltas

Exhibit 37: Qatar continues to invest in infrastructure and healthcare, and has US$45 bn of planned projects Upcoming and current large projects in Qatar in various stages of development

Value Estimated Project (US$ mn) completion Status Details

New Doha international airport

11,000 2015 Construction Spread over 22 sq. km. to handles 50 mn passengers, 2 mn tonnes cargo, and 320,000 aircraft p.a.

Education city 8,250 2023 ConstructionEducational facilities from school age to research level, including branch campuses of some of the world's leading universities, over 14 sq. km.

Lusail development 5,500 2018 ConstructionA new 35 sq. km. coastal city north of Doha. Project will contain 18 districts including lagoon with two marinas, 25,000 residential units, commercial districts, two golf courses, and 22 schools.

Pearl Qatar 5,000 2011 ConstructionMega housing project located on a 4 sq. km. artificial island. The development will accommodate more than 40,000 residents.

Ras Laffan C 3,900 2011 Construction Independent Water and Power Projects (IWPP) 2,730MW power and 63 mn gallons of water a day.

Qatar entertainment city 3,000 2015 ConstructionConstruction of a theme park, a 1.5 km. sea canal, a theater, hotels, a retail space, a residential community with 4,500 residential units and a snow dome.

Doha metro 3,000 2015 Concept 85 km. railway network to serve suburbs of Doha, and Lusail and Education city developments

Doha convention center 1,500 2012 ConstructionLocated in West Bay Are, Doha, project will include a 105-storey tower that comprises a hotel, serviced apartments, and retail outlets along with a 100,000 sq. mt. convention centre

Barwa city development 1,350 2015 ConstructionCovers a 2.7 sq. km. land in Musameer, just outside the heart of Doha. Development will offer 128 apartment buildings, 6,000 flats, and 1,024 studio units.

Energy city residences 1,000 2013 Design 700,000 sq. mt. of land development, including 5,000 residences, marinas, mall, and golf courses

Barwa Al-Khor - Urjuan development

1,000 2013 DesignCovers an area of 5.4 sq. km. in Al Khor area. The development will offer 24,000 luxury residential units and accommodate 60,000 people.

Ain Khaled Commercial Avenue

975 2011 Construction11 km. development, which features mixed use commercial property, including showrooms, office buildings, apartments, retail outlets, exhibition halls, restaurants etc.

Dubai - Doha Tower 650 2010 Construction84-storey tower on Doha Corniche. Dedicated for residential, hospitality and retail use. It will include 53,000 sq. mt. of offices, apartments, retail shops, hotel and a parking for 1,900 vehicles

Al Shaqab Equestrian Academy

407 2010 ConstructionFacility for Qatar Foundation for Education, Science and Community Development, an equine breeding facility, hospital, and an olympic standard indoor arena

Hamad medical city 400 2010 Construction Hamad medical city is part of the US$3.4 bn budget of Ministry of Municipal Affairs and Agriculture. Qatar National Bank 250 2013 Tenders 510 mt. high headquarter building for QNB

Hotels NA NA ConstructionQatar’s hotel room capacity is expected to increase by about 14,000 rooms. Upcoming projects include Pearl-Qatar’s Four Seasons, Qatar Airways Hotel, Hilton Doha, and Shangri-La

Source: Construction weekly online, Kotak Institutional Equities

Qatar’s 2009-10 budget continues to show the government's commitment to keeping major infrastructure and other projects on track. The State budget allocation for major public projects has declined by 6.4% to QAR38 bn (US$10 bn), significantly less than 14% overall estimated decline in revenues. Oil price assumption for the 2009-10 budget was US$40/barrel as against US$55/ barrel for 2008-09 budget. Oil price increase subsequent to the budget should provide additional funds and spending flexibility.

Exhibit 38: Crude recovery may provide Middle East states flexibility to spend on public projects Crude and natural gas price chart for last 4 years (US$)

0

25

50

75

100

125

150

Nov

-05

May

-06

Nov

-06

May

-07

Nov

-07

May

-08

Nov

-08

May

-09

Nov

-09

US$

0

5

10

15

20US$Crude EUCRBRDT Index (LHS) Natural gas NGUSHHUB Index (RHS)

Source: Bloomberg


Voltas Industrials

Saudi opportunity may accelerate with a local partner versus slower organic growth

The Kingdom of Saudi Arabia, the largest economy in the Middle East, had a nominal GDP of US$470 bn in 2008. Real GDP was up 4.4% yoy in FY2008. Urban construction projects worth more than US$150 bn are in various stages of development in the kingdom. This presents a massive opportunity in the MEP space for Voltas.

The management highlighted that it is exploring the possibility of working with a local partner to accelerate the growth versus pursuing the opportunity organically at a slower pace. In the 1QFY10 conference call, the management stated that the company lacked banking facilities in Saudi Arabia which prevented them from bidding for new projects. With the issue sorted out, the company is set to participate in the MEP activity. The management also mentioned that order activity from Saudi Arabia will pick up over the time as it is a new territory for the company. Initial orders are estimated to be around Rs1 bn, and likely to grow to Rs2-3 bn over the medium term. The management expects to see order inflow from KSA by FY2011E.

Our view is in line with the company guidance. Voltas has been present in the Middle East for more than two decades, and should be able to leverage their understanding of the region and relationships with the key players to source sizeable order inflows from Saudi Arabia in the medium term.

Exhibit 39: Construction projects worth more than US$150 bn planned in Saudi Arabia Upcoming and current large projects in Saudi Arabia in various stages of development

Value Estimated Project (US$ mn) completion Status Details

King Abdullah Economic City 50,000 2020 ConceptMassive mixed use development in Rabigh. City will include industrial zone (63 sq. km.), residential zone (51 sq. km.), sea resort (3.5 sq. km.) and sea port (14 sq. km.).

Sudair City Development 40,000 2015 DesignMixed use development includes residential, commercial, entertainment and educational facilities. Sudair City will be located north of Riyadh.

Mile Tower in Jeddah 15,000 2014 DesignMile Tower, a skyscraper in Jeddah, will be 1 mile high. Mixed use tower includes apartments, hotels, commercial shops and malls. The skyscraper will be the tallest skyscraper in the world.

Princess Nora Bint Abdulrahman University

11,500 2012 ConstructionA new university for women, over 8 sq. km. and located north of Riyadh. It will include 13 faculties, research centres, and residential areato accommodate 26,000 students.

Riyadh metro 10,000 2015 TenderFirst phase will cover 30 districts from the northern side of the ring road to the southern ring road at the Public Transport terminal. Second phase will involve a 14 km. route

Prince Abdulaziz Bin Mousaed Economic City

8,000 2022 DesignThe city will cover 156 sq. km. and will have 12 distinct components for trade and services in sectors such as agriculture and food processing, mining, education, housing, and entertainment.

Knowledge Economic City (KEC)

8,000 2020 DesignKEC in Madina, will cover 5 sq. km. The city will establish a catalyst for knowledge-based industries and accommodate up to 30,000 visitors and generate 20,000 new job opportunities.

Jizan Economic City 3,000 2020 ConstructionLocated 725 km. south of Jeddah by the Red Sea, the city comprise residential, commercial and industrial zone. The site of the city is around 117 sq. km.

Jabal Omar Development in Makkah

2,700 2011 ConstructionDevelopment covers 230,000 sq. mts. and will accomidate around 40,000 people. The development consists of 39 commercial and residential towers.

King Abdullah Financial District

1,965 2012 DesignMultilpe packages for construction of King Abdullah Financial District in Riyadh city. Includes commmercial buildings, capital exchange market tower and mixed use buldings

Makkah metro 1,800 2011 Construction The Makkah Metro will link Makkah with the holy sites at Mina, Arafat, and Muzdalifah.

Nasmat Al Riyadh 1,600 2014 DesignDevelopment will have 4,200 housing units divided into 8 modules, educational facilities, commercial outlets and entertainment facilities spread over 3 sq. km.

Shams Al-Riyadh Development 1,600 2011 DesignConstruction of 3,189 villas in different sizes. The area of development is 5 sq. km. and located in King Khalid Road in Al-Dareiyah province in Riyadh city.

Jeddah Gate Development 1,600 2020 ConstructionMassive development located in the heart of Jeddah. The project will comprise 6,000 residential units, 230,000 square metres of commercial space.

King Abdulaziz International Airport

1,500 2012 ConstructionFirst phase includes construction of new terminal complex, 400,000 sq. mts., replacing existing North and South Terminals, construction of 42 contact gates with air bridges, and new system.

IT and Communication Complex, Riyadh

1,000 2013 ConstructionSaudi Public Pensions Agency (PPA) is constructing IT and communication complex . The complex will include residential and commercial buildings, library, mosque, hotel and the related facilities

Source: Construction weekly online, Kotak Institutional Equities

Abu Dhabi and Dubai have the most projects planned, but several big ones on hold

The UAE, the second-largest economy in the Middle East, had a nominal GDP of US$240 bn in 2008. Real GDP grew by 7.4% in the year from US$200 bn in 2007. The UAE recently announced its federal budget for 2010 of US$12 bn, up 3.4% yoy. The government continues to show its commitment to infrastructure and education by allocating a total of 41% of the budget expenditure to the two sectors. UAE has about US$400 bn of ongoing and planned urban construction projects which will involve an MEP component. Abu Dhabi and Dubai make up a majority share of these construction projects. Voltas has strong presence in the region and has undertaken numerous MEP projects in both the emirates.


Industrials Voltas

However, the construction industry in the UAE, particularly Dubai, has been the worst-hit in the GCC region by the global slowdown, with more than 30% of projects either put on hold or cancelled. For example, two of the largest projects in Dubai—Nakheel Harbor and Tower (valued at US$40 bn), which boasts the iconic 1km high tower, and Palm Deira (valued at US$12.5 bn)—are on hold.

Exhibit 40: UAE has about US$400 bn of ongoing and planned large urban construction projects Indicative list of upcoming and current large projects in UAE

Value Estimated Project (US$ mn) completion Status Emirate Details

Al Zorah Development 60,000 2015 Design AjmanLocated in Ajamn, Al Zora is a 12 sq. km. development which includes residential buildings, commercial district, marina, golf course, entertainment projects, hotels, hospitals and schools.

Yas Island Development 40,000 2018 Construction Abu Dhabi25 sq. km. Island will feature attractions such as F1 racetrack, signature hotels, Ferrari theme park, water park, retail development, golf courses, lagoon hotels, marinas, polo clubs, and villas

Nakheel Harbour & Tower 40,000 2020 On Hold Dubai2.7 sq. km. development at Sheikh Zayed Road and Arabian Canal. Nakheel Tower will be more than 1 km. high. Include 40 other towers, to accomdate more than 55,000 people

Saadiyat Island Development

27,000 2018 Construction Abu DhabiTourism Development & Investment Company flagship island is 27 sq. km. Island is being developed as a major tourism and leisure destination and will accommodate 170,000 people

Shams Abu Dhabi Development

25,000 2013 Construction Abu DhabiProject covers 1.75 sq. km. and will include a canal and 147 towers to accommodate 65,000 residents. Includes five districts: Garden, Central Park, Marina, Theatre, and Gate district.

Masdar City 22,000 2022 Design Abu Dhabi6 sq. km. sustainable development to achieve a carbon neutral and zero waste community. The city is located in east-south of Abu Dhabi, will be home to 50,000 people and 1,500 businesses,

The Lagoons 18,000 NA Construction Dubai6.5 sq. km. development located on Dubai Creek with 40 km. of waterfront land. It comprises of 7 islands, and includes residential units, shopping centres, offices, hotels, and parks.

Palm Deira 12,500 2015 On Hold DubaiLargest man-made island to accommodate more than 1 mn people. It is 8 times larger than Palm Jumeriah. The project area is 12.5 km. by 7.5 km. and located alongside Dubai Deira.

Ghantoot Green City 10,000 2020 Design Abu DhabiMixed development in Ghantoot over 60 sq. km. City will have a commercial centre, hotels, office blocks, residential developments, warehousing and light industrial areas.

Al Maktoum International Airport

8,000 2020 Construction DubaiPlanned as the largest passenger and cargo hub in the world. It will include 6 runways, 3 passenger terminals, multiple concourses, 16 cargo terminals with 12 mn ton capacity

Mohammed Bin Zayed City Development

7,000 2012 Tenders Abu Dhabi349 residential towers, over 5 sq. km., with related public, commercial, retail and recreational facilities. infrastructure, landscaping and community amenities to accommodate 85,000 people.

Palm Jebel Ali 6,500 2015 On Hold DubaiMiddle-sized island of the three Palm islands (Palm Jumeirah, Palm Jebel Ali, and Palm Deria) and located in Jebel Ali coastal area of Dubai. The island is expected to accomidate 1.7 mn people


Expect moderate to slow order inflow from Bahrain

Bahrain recorded 2009 GDP of US$19 bn, registering a 6.1% yoy growth in real GDP. Bahrain has about US$20 bn of planned urban construction projects over the next 10 years. Voltas has already secured a US$106 mn Bahrain City Center project and we expect Voltas to see some order inflow as the planned projects progress. The order inflow, if any, would be chunky as there are a handful of large projects planned at this time.

Exhibit 41: Bahrain has US$20 bn worth of planned urban development projects Upcoming and current large projects in Bahrain in various stages of development

Value Estimated Project (US$ mn) completion Status DetailsDurrat Al Bahrain - Durrat Marina

7,500 2015 ConstructionA new 20 sq. km. city across 15 inter-connected islands. Mixed-use city will includes The Islands, Durrat Marina, Golf Course, Hotel Island and The Crescent.

Water Garden City 7,000 2020 Design2.2 sq. km. development in Seef District, Manama. The city will include residential units, beach park, marina, schools, commercial spaces, retail outlets, and leisure facilities.

Diyar Al Muharraq 3,200 2020 Design12 sq. km. mixed use development project located in Al Muharraq. It will offer 30,000 residential units for 100,000 residents

Marsa Al Seef 2,500 2020 Design 2.6 sq. km. waterfront project, will include residential, leisure, retail and entertainment

Source: Construction week online, Kotak Institutional Equities

Infrastructure spending in Bahrain, as percentage of total budget expenditure, has come down from its peak FY2008 levels. FY2010 planned expenditure on infrastructure is 22% of the total budgeted expenditure versus 31% of the total in FY2008. This is likely to dampen construction activity in the kingdom and hence MEP projects. Education and health care have seen a marginal increase as each constitutes slightly more than 10% of the total for FY2010.


Voltas Industrials

Order activity in Middle East urban construction is still muted

We highlight that the major EPC players—Hyundai, Samsung, SBG, ACC—have seen some big-ticket orders from the Middle East over the past four months. However, order activity in urban construction is still muted. In our view, events such as (1) Formula 1 race in Yas Marina in October, (2) planned opening of Burj Dubai in December, (3) planned opening of construction tenders for Diyar Al Muharraq (Bahrain), and (4) completion of concrete pour for Pearl Dubai and Tameer Towers, will help bring some momentum back to the construction activity in the region. We believe overall there will be few orders for Voltas in the current financial year from the Middle East, but the order inflow would improve starting FY2011.

Exhibit 42: Order activity in commercial development in Middle East is still slow Ordering activity in construction in Middle East since June 2009

Project Location Contractor Date Details

Durrat al Bahrain Bahrain Atkins Oct-09 Architectural and infrastructure design of the third phase of the project

Qatar Fertilizer Company Qatar Saiepm & Hyundai Oct-09 Qatar Fertilizer Company (Qafco) awarded US$610 mn EPC contract

King Abdullah Financial District KSA Saudi Binladin Group Oct-09 US$3.7 bn contract to design and build 30 parcels of land Pentominium Dubai Arab Construction Sep-09 US$400 mn contract to build the world’s tallest residential tower

Qatar Entertainment City Qatar HBK Consulting Aug-09 US$27.5 mn tender to HBK Contracting to complete phase 2 within 18 months

Saadiyat Island Development Abu Dhabi Halico Jul-09 US$61 mn contract to build infrastructure for the development

Kuwait Hospital Kuwait Arab Construction Jul-09 US$1.1 bn contract to build the Middle East’s largest hospital

Khalifa Port & Industrial Zone Abu Dhabi Al Habtoor Leighton Jul-09 US$381 mn contract to build port, road and infrastructure facilities

Saudi Electric Company KSA Korean Consortium Jul-09 Contract to build a 1,200MW power plant in Rabigh

Dubai Sports City UAE Al Jassmy Jul-09 US$23 mn contract to construct Champions Tower IV in Dubai Sports City

Saudi Aramco KSA Samsung, Daleim etc Jul-09 Awarded 13 EPC contracts, worth US$9.6 bn for Jubail refinery project

Masdr City Abu Dhabi Mott MacDonald Jul-09 Order to design infrastructure for carbon-neutral Masdar City project

Abu Dhabi Gas Ltd Abu Dhabi Hyundai Jul-09 GASCO awarded US$1.7 bn integrated gas development project

Dubai International Airport Dubai Al Jaber Jun-09 Dubai Aviation City Co. has awarded the main package of airport concourse 3


We observed the order inflow trend for Hyundai Engineering & Construction (HDEC), one of the leading E&C players in the region. HDEC received about US$4.5 bn worth of orders from the Middle East region in CY2008. Most of the orders were received in the first half of the year. Order inflow completely dried up between 2HCY08 and 1HCY09. In 2HCY09, we see some pick-up in the inflow as the company has received two large orders worth US$2.3 bn.

Exhibit 43: Order inflow for Hyundai E&C is much slower than CY2008, but activity seems to be improving in 2HCY09 Engineering orders received by HDEC from Middle East region since Jan-2008

ValueProject Country (US$ mn) Date Remarks

Qafco Qatar 610 Oct-09Qatar Fertilizer Company (Qafco) awarded EPC contract for fertilizer plant to a consortium lead by Italy’s Saipem and Hyundai E&C

GASCO Habshan-5 Abu Dhabi 1,700 Jul-09Package 2 of integrated gas development, to errect building structures to produce and process gas, including power supply, LNG and sulphur storage facilities.

Orders received YTD 2009 2,310

Ras Laffan Qatar 2,070 May-08Desalination and electric power plant in Ras Laffan industrial city, 80 km north of Doha, which will generating 2,728 MW and a 63 mn gallons of fresh water a day.

Mina Al-Zour refinery Kuwait 1,120 May-08HDEC received the fifth package to build the marine facilities of the new refinery from the state-owned Kuwait National Petroleum Company

Fertilizer plant Qatar 980 May-08 HDEC received an order to build a fertilizer plant in Qatar

Kahramaa power expansion Qatar 300 Mar-08220kV substation and 400kV overhead line package of Qatar Power Transmission System expansion phase V from Qatar General Electricity & Water Corporation

Orders receved CY 2008 4,470


Airport urbanization and cold storage likely to drive MEP activity in India

We expect the demand for MEP and HVAC activity to remain moderately strong in the near term on the back of order inflow from airports, hospitals, metros and cold storage infrastructure. Commercial real estate is expected to lag IT demand growth by 9-12 months. We see some early signs of revival in the IT sector, such as announcements of increments and new hiring plans by some of the IT majors but we believe the demand for new IT complexes and malls will take some time to pick up.


Industrials Voltas

Strong contender for MEP/HVAC orders for domestic airport modernization

Out of the 28 large domestic HVAC projects undertaken by Voltas, six are IT complexes, five are airports, and nine are malls or leisure centers. The ministry of civil aviation and Airports Authority of India (AAI) have set expansion plans to the tune of US$12.6 bn over 2007-2012 to alleviate the congestion at most India airports. While the airports in the four metros, Bangalore and Hyderabad have made substantial progress, majority of investments in greenfield airports and others are still to come.

Exhibit 44: Massive plans for airport capacity enhancement and modernization Airports - Indian governments investment plans of US$12.6bn over 2007-12

Estimated investment(US$ bn)

Restructuring / modernisation Delhi, Mumbai, Chennai and Kolkata 4.5

Greenfield airports Bangalore, Hyderabad, Goa, Pune, Navi Mumbai 5.7

Upgradation 25 selected airports 1.5

Modernisation / improvement 55 airports 0.7

North-Eastern airport 0.3

Total 12.6

Source: Airports Authority of India, CRISIL, Kotak Institutional Equities

Voltas has a successful track record in MEP-related jobs for airports modernization. The company has secured HVAC contracts for international airports in Chennai, Hyderabad, Kolkata and Visakhapatnam. We believe Voltas is a strong contender for imminent orders for HVAC component of further airport modernization projects.

Cold chain logistics is another growth avenue

Inadequate cold chain infrastructure for post-harvest handling is one of the major factors inhibiting the expansion of agro-food processing industries in the country. The cold storage capacity today caters to less than 10% of the produce, with over 80% designed only to handle potatoes. According to a joint report published by ASSOCHAM and KPMG in August 2009, cold storage facilities for storing agricultural produce in India fall short of by 10MT. The country has about 22MT of such facilities against the requirement of over 31MT. As a result, 40% of produce is lost in fields after harvesting. The report also highlights that the Indian export-related infrastructure for agricultural produce is grossly inadequate especially at seaports and airports. The chamber has emphasized the need for setting up and operating cold chain facilities through public private participation initiatives.

In the 11th plan, the government has proposed financial outlay of Rs2.1 bn for cold chain infrastructure and another Rs5.5 bn for integrated cold chain and strategic distribution centers. Growth of organized retailing would further necessitate investments in cold chain logistics to manage the storage and transport of perishable farm goods before they are sold to the end customer. Voltas has already marked some early success in this segment with orders from Adani Agri-fresh (Rs150 mn value), Nafed, National Institute of Biologicals, Msamb, and State Agrimarketing Boards of Punjab, Haryana and Rajasthan.

Commercial real estate demand to remain muted in India in the near term

Although we have a bullish outlook on the airport infrastructure development in the country, construction activity in IT complexes, and malls and leisure centers in expected to remain muted due to oversupply situation. Commercial demand pick-up is expected to lag IT demand growth by 9-12 months.

Rohini integration can take the subsidiary to new levels

Voltas’ management mentioned that it intends to grow RIEL top line at 30-40% CAGR over the next three years by closely integrating RIEL into its project-bidding process. RIEL can not only bid standalone but also in conjunction with Voltas and Tata projects, depending on the size and nature of the tender. Integrated bidding processes would help RIEL use the brand and trust of Voltas and the Tata group to bid, secure and execute projects that would have been hard to envisage as a standalone company.


Voltas Industrials

ENGINEERING: PICK UP IN INVESTMENT CYCLE TO RESTORE GROWTH AND MARGINS

Voltas represents its overseas / Indian principals in three key verticals—material handling equipment, construction and mining equipment, and textile machinery. Voltas does the marketing, installation and breakdown maintenance of machinery it supplies on behalf of its principal. Voltas has in-house manufacturing of several products in the material handling area, such as forklift trucks. Construction and mining equipment, and material handling equipment verticals form a bulk of the business in this segment and constituted 78% of the segmental revenues in FY2009. Engineering segment revenues come from four sources—commissions on sale of equipment, sale of manufactured equipment, sale of spare parts, and servicing and maintenance, typically equally divided between the three.

Exhibit 45: Construction & mining equipment and MHE form bulk of engineering business Sales mix of engineering products and services segment of Voltas, March fiscal year-ends, 2007-09

FY2009 - Rs5.4 bn

Material handling (MHE)32%

Textile machinery

6% Construction and mining

46%

Others14%

Pollution control

2%

FY2008 - Rs5.7 bn


Pollution control

2%

Others19%

Construction and mining

42%

Textile machinery

6%

FY2007 - Rs4.3 bn

Textile machinery

6%Construction and mining

33%

Others22%

Pollution control

2%


Source: Company

Construction and mining equipment is the largest component by revenue

Construction and mining equipment is the largest component of this segment by revenue. Voltas represents the Terex group for wheel loaders, crushing plants, excavators and loaders. The company has recently won a Rs2.1 bn order from Hindustan Zinc Ltd to deliver the world’s second-largest model of hydraulic evacuator—Terex O&K’s RH-340B.

Material handling equipment—Voltas is both principal and agent

The second-largest division is material handing equipment (MHE). Voltas has in-house manufacturing of forklift trucks and represents Atlet of Sweden for warehousing equipment. MHE profitability ratio, RoE and RoCE, are expected to be lower than other verticals as Voltas manufactures in-house some of the products it sells. The other verticals, where Voltas works as an agency, would have lower capital investment and hence would be earning better returns.

Exhibit 46: Engineering products and services segment - key verticals

Mining and construction equipment

Material handling equipment

Textile machinery

Products sold

Wheel loaders, crushing plants, evacuators, loaders,

dump trucks, spares

Forklift trucks, mobile cranes, spares

Spinning machines, knitting machines, accessories

Customer profile

Mining companies (e.g. Coal India), construction

companies (e.g. HCC)

Logistics / warehousing companies, industrial plants

Textile manufacturers

Competitive position

Competes against BEML, Caterpillar, L&T-Komatsu and

Telcon

Inhouse construction of forklift trucks and breadth of products

strengthens position

Competes with several OEMs as well as agents representing various

principals

Revenue CAGRFY2005-09

74%

31%

13%

Main principal

Terex (USA), SYM (China), NFLG (China), LeTourneau (USA), ECSO (USA), VAREL (Austraia), XCMG

(China)

Inhouse, Atlet (Sweden)

Laxmi Machine Works (India), Terrot (Germany)



Industrials Voltas

Leading textile machinery provider, 60% market share in spinning

Although textile machinery vertical has contributed flat 6% of the segment revenues over FY2007–09, Voltas is a leading provider of textile machinery, particularly in spinning and decentralized weaving sectors. The company has about 60% market share in the spinning sector. Voltas represents Lakshmi Machine Works (LMW) for spinning machinery and Terrot of Germany for knitting machines.

Exhibit 47: Revenue growth in engineering products and services has nosedived Sales mix of Engineering Products and Services segment of Voltas, March fiscal year-ends, 2005-09 (Rs mn)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2005 2006 2007 2008 2009

(Rs mn)

(20)

0

20

40

60

80

100

120(%)MHE (LHS) Construction & mining (LHS)

Textile machinery (LHS) Pollution control (LHS)

Others (LHS) Growth (RHS)


Long-standing relationships with principal companies

Voltas has long-standing strong relationships with its principals, in some cases going back four to five decades. In a recent press release, Voltas mentioned that Terex had awarded Voltas a certificate of achievement for 2008, with a ranking of sixth place amongst a total of 120 dealers across the world. Terex group, incorporated in 1986, is the third-largest capital equipment manufacturer in the US after Caterpillar and Komatsu. The company had FY2008 revenues of US$9.9 bn and has a market cap of about US$2 bn.

Lakshmi Machine Works (LMW) Ltd, founded in 1962, is a leading textile machinery manufacturer in India and one among the three in the world to produce an entire range of spinning machines. LMW caters to around 60% of the domestic market and has emerged as the leader in the export of textile machinery. LMW has FY2009 revenues of Rs13 bn and market cap of Rs17 bn.

Outlook: Investment cycle pick up to restore revenue growth and margins

We believe that as the investment cycle picks up engineering products segment would report strong revenue growth as well as margins. We believe in pick up of investment cycle based on (1) sequential improvement in performance of several capital goods product companies, (2) recovery in Index of Industrial Production numbers, (3) strong financial closure data for FY2009 highlighting intention to add capacity and banking system’s ability to finance it and (4) subjective commentary from several companies highlighting a recovery. Engineering products segment would additionally benefit from scale up in coal mining related to thermal power generation capacity addition.

Engineering products and services segment is expected to show signs of growth from 2HFY10. Although the segment revenues contracted about 25% in 1HFY10, we estimate that 2HFY10 would report about 6% yoy revenue growth from the smaller base of 2HFY09. EBIT margins in this segment would recover to about 18% as contribution of agency business to the segment revenues would increase in the projected period.


Voltas Industrials

Exhibit 48: Expect engineering segment to recover by FY2011E Engineering segment revenues and EBIT for Voltas, March fiscal year-ends, 2007-12E (Rs mn)

2007 2008 2009 2010E 2011E 2012ERevenueEngineering products and services 4,325 5,740 5,422 4,859 5,723 6,534

Material handling equipment 1,630 1,768 1,725 1,466 1,760 2,024Construction and Mining equipment 1,410 2,454 2,456 2,088 2,505 2,881Textile machinery 278 319 331 298 343 394Pollution control equipment 69 112 131 151 173 199Others 938 1,087 779 857 942 1,036

Revenue growth (%)Engineering products and services 71.1 32.7 (5.5) (10.4) 17.8 14.2

Material handling equipment 88.7 8.5 (2.4) (15.0) 20.0 15.0Construction and Mining equipment 84.0 74.1 0.1 (15.0) 20.0 15.0Textile machinery 17.6 14.8 3.9 (10.0) 15.0 15.0Pollution control equipment 16.1 61.9 16.5 15.0 15.0 15.0Others 55.8 15.9 (28.4) 10.0 10.0 10.0

Segment EBIT 1,005 1,136 628 729 1,030 1,176Segment EBIT margin (%) 23.2 19.8 11.6 15.0 18.0 18.0


Sequential improvement in capital goods products peers in 2QFY10

Engineering and capital goods peers’ 2QFY10 results show strong sequential improvement in engineering businesses. Thermax and L&T led the pack by registering 20%+ qoq growth in energy and electrical segment respectively. Voltas engineering segment grew marginally by 2% qoq in 2QFY10 and still has to show signs of recovery. Most peer companies still exhibited a yoy decrease in revenues in 2QFY10 in their engineering business.

Exhibit 49: Quarterly revenue numbers of engineering and capital good company show qoq sequential improvement Segmentwise 2QFY09-2QFY10 revenue numbers for various industrial companies (Rs mn)

% change (yoy) % change (qoq)

2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10

Voltas

Engineering agency & services 1,617 1,099 1,342 1,139 1,170 20.6 (31.3) (6.9) (16.5) (27.7) 18.5 (32.1) 22.2 (15.1) 2.6

Electromechanical Projects 5,874 6,258 8,701 6,272 6,807 39.6 67.5 85.8 35.4 15.9 26.8 6.5 39.0 (27.9) 8.5

Thermax

Energy 5,785 6,283 7,632 4,194 5,213 (9.1) (9.0) (22.3) (23.3) (9.9) 5.7 8.6 21.5 (45.0) 24.3

Environment 2,450 1,853 2,023 1,252 1,649 58.5 14.1 (14.6) (29.9) (32.7) 37.1 (24.4) 9.2 (38.1) 31.7

Crompton (standalone)

Power Systems 5,007 5,696 7,222 5,084 6,043 8.8 20.4 28.6 10.9 20.7 9.2 13.8 26.8 (29.6) 18.9

Industrial systems 2,788 2,727 2,698 2,539 2,926 7.9 3.5 7.6 (3.5) 5.0 5.9 (2.2) (1.0) (5.9) 15.3

L&T

Engineering and Construction 59,896 76,326 91,720 65,729 68,541 40.5 56.0 35.6 18.6 14.4 8.1 27.4 20.2 (28.3) 4.3

Electrical and Electronics 7,605 6,469 6,940 5,759 7,088 13.2 12.3 (3.3) (0.3) (6.8) 31.7 (14.9) 7.3 (17.0) 23.1

Machinery & Industrial products 6,846 5,293 6,070 4,370 5,096 15.7 (6.6) (22.2) (31.0) (25.6) 8.1 (22.7) 14.7 (28.0) 16.6

Action Construction

Revenues 1,451 766 775 809 980 60.5 (27.9) (36.6) (41.1) (32.4) 5.7 (47.2) 1.2 4.3 21.2


IIP data suggest strong recovery in industrial growth and potential capex

Growth in engineering products and services segment is closely tied to IIP growth and capital expenditure by the corporate sector. IIP growth touched double digit in August 2009 at 10.4% and came out at 9.1%in Sept-2009. IIP growth has averaged 8.9% over last four months, up from an average of 0.9% in the eight months after the collapse of Lehman. Our economic research team, led by Dr. Mridul Saggar, expects further acceleration in 3QFY10E, before IIP growth slows down again in 4QFY10E. The team expects IIP growth at 8.5% in FY2010E. This would potentially stimulate sales in engineering products and services segment for Voltas.


Industrials Voltas

Exhibit 50: Surprisingly strong recovery in IIP growth in FY2010 so far IIP growth on a monthly and 4-month moving average basis, March fiscal year-ends, 2005-10 (%)

(5)

-

5

10

15

20

25

Apr

-04

Aug

-04

Dec

-04

Apr

-05

Aug

-05

Dec

-05

Apr

-06

Aug

-06

Dec

-06

Apr

-07

Aug

-07

Dec

-07

Apr

-08

Aug

-08

Dec

-08

Apr

-09

Aug

-09

(%) IIP growth (monthly) IIP growth (4-month moving average)

Source: Central Statistical Organization, compiled by Kotak Institutional Equities

Financial closure data suggests strong impending capital expenditure activity

Financial closures achieved by the private sector grew to Rs4.2 tn in FY2009 from Rs2.4 tn in FY2008, a 73% yoy increase. We believe that financial closure activity reflects strength of the corporate capex activity in the country and is a leading indicator of likely capital expenditure activity. Financial closure data is provided by Reserve Bank of India (RBI) on an annual basis and captures private corporate sector projects achieving financial closure from banks and financial institutions. We believe that despite strong financial closure activity, actual capex may have been postponed in 2HFY09, based on economic conditions prevailing then. In our view, despite the potential postponements, strong financial closure activity and a recent revival in economic activity during FY2009 provides strong support for capital expenditure outlook for FY2010E and beyond, which should fuel growth for engineering products and segment business for Voltas.

Exhibit 51: Financial closure picks up momentum post decline in FY2008 Capital expenditure sanctioned assistance by banks/FIs, March fiscal year-ends, 1991-09

0

1,000

2,000

3,000

4,000

5,000

FY19

91

FY19

93

FY19

95

FY19

97

FY19

99

FY20

01

FY20

03

FY20

05

FY20

07

FY20

09

(Rs bn)

(100)

0

100

200

300

400

(%)Capex sanctioned in the year (LHS, Rs bn) growth (RHS, %)

Source: RBI


Voltas Industrials

COOLING PRODUCTS: RETAIN MARKET POSITION; GROWTH ON LOW PENETRATION

Voltas manufactures and sells room air conditioners, commercial refrigerators and water coolers under its unitary cooling products (UCP) segment. Voltas is considered synonymous with the air-conditioning industry in India. Voltas is one of the pioneers of cooling appliances in India and manufactured first indigenous air conditioner in 1954. Voltas has a large range of products spanning various segments of the market in terms of features and price points. Voltas’ UCP business was adjudged among the top three innovators in a survey conducted in April 2008 by BusinessWeek and BCG.

Exhibit 52: Room AC is the second-largest revenue generator for Voltas Sales mix of the Unitary Cooling Products segment of Voltas, March fiscal year-ends, 2009

Segment revenue (Rs9.1 bn)

Room AC (LHS)75%

Commercial AC 17%

Water coolers 8%


Room AC is 75% of cooling products revenues

Room AC constitutes 75% of revenues in the unitary product segment. Room air conditioning industry in India is about Rs47 bn in market size. Voltas is among the top three players in this market with a 17% market share (15% share in FY2008); the other two are LG (27% market share) and Samsung (15% market share). The company has been on the fore-front of innovation in the AC segment. It launched India’s first corner AC, ‘the Pristine’ last year. Voltas was also the first company to go main-stream with star-rated ACs, complying voluntarily with the government’s energy-efficiency labeling program. Room AC revenues have grown at 39% CAGR over FY2005-09 through innovation and extensive marketing.

Exhibit 53: Room AC revenue CAGR of 39% over FY2005-09 through innovation and marketing Sales mix of the Unitary Cooling Products segment of Voltas, March fiscal year-ends, 2005-09 (Rs mn)

0

2,000

4,000

6,000

8,000

10,000

2005 2006 2007 2008 2009

(Rs mn)

0

10

20

30

40(%)Room AC (LHS) Water coolers (LHS)

Commercial AC (LHS) Segment growth (RHS)



Industrials Voltas

UCP outlook: business to continue to grow with slight margin expansion

We estimate that UCP business will grow at about 17% CAGR over the projected period FY2010-12E fuelled by the growth in room AC market. EBIT margins will expand slightly to 8% due to (1) changing mix of the industry towards split AC, and (2) possible realizations of benefits of manufacturing at Pantnagar plant that are yet to be achieved.

Exhibit 54: Estimate 14% CAGR in UCP revenues till FY2011E and EBIT margins at 8% UCP segment revenues and EBIT for Voltas, March fiscal year-ends, 2007-12E (Rs mn)

2007 2008 2009 2010E 2011E 2012ERevenueUnitary cooling products 6,126 8,195 9,138 10,392 12,323 14,620

Room airconditioners 3,973 5,978 6,825 7,848 9,418 11,302Water coolers 556 719 739 813 915 1,029Commercial air conditioners 1,592 1,498 1,574 1,731 1,991 2,289

Revenue growth (%)Unitary cooling products 29.7 33.8 11.5 13.7 18.6 18.6

Room airconditioners 40.0 50.5 14.2 15.0 20.0 20.0Water coolers 10.6 29.3 2.9 10.0 12.5 12.5Commercial air conditioners 35.1 (5.9) 5.0 10.0 15.0 15.0

Segment EBIT 99 540 680 831 986 1,170Segment EBIT margin (%) 1.6 6.6 7.4 8.0 8.0 8.0


AC industry to grow on back of urbanization, disposable income and hot climate

Room air-conditioning industry in India grew 11% yoy in FY2009 to reach Rs47 bn market size. Voltas is among the top three players in this market with a 17% market share (15% share in FY2008); the other two are LG (27% market share) and Samsung (15% market share). The industry is gradually moving towards split AC from window AC with reduction in price differential, better aesthetics, less noise and flexibility of installation. During 2008-09 split AC segment grew about 16% in volume versus window AC segment which grew by a mere 3%. This is a welcomed transition for AC manufacturers as it translates into increased realizations.

Exhibit 55: Room AC market is gradually shifting to split AC from window AC Indian room AC market statistics, March fiscal year-ends, 2007-09

2007 2008 2009Value (Rs mn)Split AC 18,671 26,676 31,020Window AC 14,670 15,667 15,980Total 33,340 42,342 47,000Volumes ('000)Split AC 656 980 1,166Window AC 944 1,020 1,034Total 1,600 2,000 2,200Volume growth (%)Split AC 31.6 50.0 17.0Window AC 16.1 7.0 3.0Total 22.1 25.0 10.0Value growth (%)Split AC 35.6 44.0 16.0Window AC 19.6 6.0 3.0Total 28.0 27.0 11.0Volume segmental mix (%)Split AC 41.0 49.0 53.0Window AC 59.0 51.0 47.0Value segmental mix (%)Split AC 56.0 63.0 66.0Window AC 44.0 37.0 34.0

Source: CRISIL, Kotak Institutional Equities


Voltas Industrials

Air conditioners, primarily an urban household product, have the lowest penetration rate among household appliances in India. The segment is set to grow growth as (1) the power availability situation in the country improves and (2) cost of ownership and operation versus household income goes down. . CRISIL research estimates that the AC industry will grow at 4-6% in FY2010 as the economy revives and at CAGR of 14-16% over the next five years. The split AC segment is estimated to grow at CAGR of 22% over the next five years. Profitability is also expected to improve in the near term due to lower raw material costs. Voltas, with its ‘Business Superbrand’ status in cooling products, is well equipped to exploit the favorable trends in this industry. Voltas offers a very competitive product line in the room AC segment consisting of window, split, corner, cassette and slim-line ACs. Voltas has one the cheapest five-star rated AC in the fast-growing split AC segment.

Exhibit 56: Voltas offers competitive AC product line and one of the cheapest in split AC segment Specifications of AC models offered by top 3 companies

LG VoltasRoom AC industry Market Share (%) 27 17

Model LSA5NF5VFC1 Vertis Gold Price (Rs) 31,990 30,990Noise level (dB) 40 49Power consumption (W) 1,660 1,650Nominal cooling capacity (W) 5,275 5,270Star rating 5 5Model LWA5FW2DD1 Vertis PlusPrice (Rs) 17,990 18,990Noise level (dB) 55 55Power consumption (W) 1,940 2,010Nominal cooling capacity (W) 5,050 5,050Star rating 2 2

Note: Based on lowest price 1.5 ton model on company website with 5-star rating in split and 2-star rating in window

Split AC

Window AC


We believe that the industry will attract further competition from Asian players and prices will continue to see downward trend. But changing mix towards split AC will help to maintain value growth and profitability in the medium term.


Industrials Voltas

RISKS: SLOWER-THAN-EXPECTED RECOVERY IN MIDDLE EAST AND INDIA Key risks to Voltas’ performance are (1) slow revival of urban development in the Middle East and India, (2)

reliance on other main contractors and high bought-out component in EMP may lead to low barriers to entry,

and (3) longer-than-expected slowdown in industrial activity which would adversely impact engineering

products. Other risks are dependence on principals for continued business in the engineering products and

services segment, and increasing competition in the unitary cooling products segment.

Slow revival of urban development in Middle East and India

Slow revival of urban development in the Middle East and India would affect the revenue growth in electro-mechanical projects segment for the company. Lower oil prices over the last year have slowed down the pace of commercial development in the Middle East and many large projects are already on hold. Fresh fall in oil price, either due to muted demand or discovery of new oil and gas reserves, would adversely impact the Middle East economies.

Commercial development in India may remain muted for a longer-than-expected period due to (1) lower than expected economic growth, (2) volatility in property prices (rising prices reduce affordability while a drop in prices may catalyze the developers to hold back development), (3) high interest rates that reduce the affordability as lease rentals have to adjust to provide higher yields to prospective developers.

Dependence on main contractors may lead to low barriers to entry in MEP

Voltas acts as a subcontractor and depends on main contractors for getting the orders for the components of MEP work in commercial development projects. Additionally, orders include a large component of bought-out items. Voltas depends on main contractors for getting the subcontract orders for components of MEP work, thus it could not fully leverage its track record in order to command a premium over competition. We believe (1) dependence on other main contractors and (2) high bought-out component ratio (low value-add), reduces barriers to entry and may squeeze margins for Voltas. Expansion in a new geography could entail working with new contractors and thereby could take longer than anticipated to sign deals and execute projects.

Longer-than-expected slowdown in mining and construction in India

Mining and construction equipment, and material handling equipment together make up for almost 80% of the revenues in engineering products and services segment. A longer-than-expected slowdown in these sectors would discourage the players to add more capacity and would reduce sales as well as put margin pressure in this segment.

Principals may wish to build an independent presence

In the engineering products and services segment, significant proportion of the company’s business originates from few key principals such as LMW (textile machinery) and Terex (mining and construction). We estimate that LMW and Terex together contribute about 40-50% to the top-line of engineering services segment. We believe that as the Indian economy becomes sizeable and more attractive, principals may like to build an independent presence in India for themselves. We note that Voltas’ relationship with its principals has been stable over a long period going back as long as four to five decades as in the case of LMW.

Heightened competition in unitary cooling segment may put margin pressure

We believe margins in UCP are unlikely to improve as we expect that competitive pressures would remain severe with the large global players as they struggle to establish a foothold in one of the biggest consumer markets. We believe that the industry will attract further competition from Asian players and prices will continue to see downward trends. But the changing mix towards split AC may help maintain value growth and profitability in the medium term.


Voltas Industrials

FINANCIALS: STRONG EMP EXECUTION AND ENGG PRODUCTS RECOVERY DRIVE GROWTH We believe that Voltas’ consolidated revenues and earnings would grow at a CAGR of 14% and 21%

respectively over FY2009-12E. Reveue growth would be led by (1) EMP order book of Rs44 bn and

incremental inflows, (2) revival in engineering, and (3) growth in cooling products. Earnings growth exceed

revenue growth on back of (1) low margins in FY2009, and (2) margin expansion across segments over FY2009

levels. The company has robust financials with (1) cash position of Rs4.6 bn and low D/E, (2) low to negative

working capital requirement, and (3) high quality of income (cash flow generation/net income) of about 1.1X

over FY2007-09.

Recovery in engg. products and strong execution in EMP lead earnings growth

We estimate that over FY2010E-12E, Voltas consolidated revenue would grow at a CAGR of 14% while the earnings are expected to grow at a CAGR of 21%. Earnings growth exceeds revenue growth led by margin recovery in the engg. products segment on low base of FY2009. Engg. products segment had a sharp downward spike in margins to 11.5% in FY2009 from 20% in FY2008. Voltas has reported margin expansion across segment in 1HFY10. We expect that margin gains in 1HFY2010 in the cooling products and electromechanical projects segment would partially sustain in FY2011E buttressing earnings growth.

EMP growth subject to order inflow; management optimistic on opportunities

EMP segment has delivered strong performance in terms of revenue growth and margins for 1HFY10 on back of execution of specific large projects in Middle East. However, international order book has declined due to slow order inflows while domestic execution has lost pace in the commercial segment. Order book stood at Rs44 bn at end of 2QFY10, which is about 1.5 times the estimated FY2010E revenues of EMP segment and is completely executable by end-FY2011E.

Voltas’ management seems confident of 20%+ growth and 8.5-9.5% margins in the EMP segment in FY2010E and FY2011E. Management believes that slow orders inflows are also partly driven by being selective versus just external environment and remains confident oforder inflows in the future. Voltas expects to maintain 8.5-9.5% in the future years through selective bidding and process improvements, such as regional procurement and use of IT systems in project management.

We believe that growth rate in FY2011E would be affected by slow order booking in FY2010E, as even if a project is secured it would take time to ramp up in terms of revenue and margin contribution. We are building in 13% revenue growth and 8.8% margins for FY2011E versus likely 20% revenue growth in FY2010E with 9.5% segmental EBIT margins. We believe that margins in EMP segment have been boosted by execution of large proejcts such as Burj Dubai and F1 race track and that is why we expect a decline in EMP margins in FY2010E versus FY2009.

Engg. agency and mfg. business boosted by pick up in investment activity

We believe that as the investment cycle picks up engineering products segment would report strong revenue growth as well as margins. We believe in pick up of investment cycle based on (1) sequential improvement in performance of several capital goods product companies, (2) recovery in Index of Industrial Production numbers, (3) strong financial closure data for FY2009 highlighting intention to add capacity and banking system’s ability to finance it and (4) subjective commentary from several companies highlighting a recovery. Engineering products segment would additionally benefit from scale up in coal mining related to thermal power generation capacity addition.

Engineering products and services segment is expected to show signs of growth from 2HFY10. Although the segment revenues contracted about 25% in 1HFY10, we estimate that 2HFY10 would report about 6% yoy revenue growth from the smaller base of 2HFY09. EBIT margins would recover to about 18% led by (a) increase in contribution of agency business to the segment revenues, and (b) operating leverage from higher volumes.


Industrials Voltas

UCP segment would grow on low AC penetration and rising income levels

We estimate that Room AC business for the company will show strong growth, of about 17% over FY2010E-11E, on the back of (a) low penetration levels of about 2%, (b) cost of ownership and operation versus household income goes down and (c) over the medium-term with improvement in the power availability situation in the country. EBIT margins in the segment are also likely to expand to about 8% due to (1) changing mix of the industry towards split AC, and (2) incremental benefits of manufacturing at Pantnagar plant apart from what has been already achieved. We estimate that UCP business will grow at about 17% CAGR over the projected period FY2010-12E fuelled by the growth in room AC market.

Exhibit 57: Segment-wise standalone revenues and margins for Voltas, March fiscal year-ends, 2007-12E (Rs mn)

2007 2008 2009 2010E 2011E 2012ERevenueElectromechanical projects 13,708 16,529 25,464 30,700 34,789 37,928Engineering products and services 4,325 5,740 5,422 4,859 5,723 6,534Unitary cooling products 6,126 8,195 9,138 10,392 12,323 14,620Revenue growth (%)Electromechanical projects 21.4 20.6 54.1 20.6 13.3 9.0Engineering products and services 71.1 32.7 (5.5) (10.4) 17.8 14.2Unitary cooling products 29.7 33.8 11.5 13.7 18.6 18.6EBIT Margin (%)Electromechanical projects 5.2 7.4 7.6 9.5 8.8 8.8Engineering products and services 23.2 19.8 11.6 15.0 18.0 18.0Unitary cooling products 1.6 6.6 7.4 8.0 8.0 8.0Segmental EBITElectromechanical projects 710 1,218 1,934 2,916 3,044 3,319Engineering products and services 1,005 1,136 628 729 1,030 1,176Unitary cooling products 99 540 680 831 986 1,170Sum of segmentsReported revenues 24,508 30,862 40,702 46,167 53,074 59,341Reported EBIT 964 2,373 2,478 3,648 4,107 4,599EBIT margin (%) 3.9 7.7 6.1 7.9 7.7 7.8


Overall, we believe Voltas’ standalone revenues would grow at about 13% over FY2010E-12E, EBIT margins would remain stable around 8% (same level as FY2008) leading to earnings CAGR of about 20% over FY2009E-12E. Operating margins are likely to expand from 6.6% in FY2009E to 8.4% in FY2010E on back of substantial margin expansion in the EMP segment. FY2009E margins were also exceptionally low on account of sharp decline in margins of the engg. products segment.

Rohini Industrial poised for strong growth with the Voltas and Tata brands

We estimate that RIEL top line would grow at about 30% CAGR over FY2010E-12E, inline with management’s guidance. Rohini has expertise in electrical and instrumentation projects across various industry verticals and can supplement Voltas skill sets in MEP projects. As RIEL is closely integrated into project-bidding process at Voltas, RIEL can not only bid standalone but also in conjunction with Voltas and Tata Projects depending on the size and nature of the tender. Being a part of Voltas would give RIEL a huge leverage in terms of bidding for large projects and establishing better processes and systems.

On consolidated basis, we estimate the EPS to grow at 21%, in line with standalone EBIT growth. Our estimates for consolidated EPS stand at Rs9.5 and Rs10.8 for FY2010E and FY2011E respectively.

Voltas recorded strong revenue growth of 31% CAGR from FY2007-09 to reach total operating income of Rs43 bn. EBITDA margins expanded to 6.5% in FY2009 from 5.1% in FY2007, leading to 49% CAGR in EBITDA (before other income) over the same period. EPS grew to Rs6.8 in FY2009 from Rs4.0 in FY2007.


Voltas Industrials

Exhibit 58: Consolidated profit model of Voltas, March fiscal year-ends, 2007-12E (Rs mn)

2007 2008 2009 2010E 2011E 2012ETotal operating income 25,267 32,029 43,259 49,381 56,982 63,962 Raw materials consumed (18,782) (23,384) (31,685) (35,498) (41,406) (46,828) Operating and other expenses (2,610) (3,124) (4,087) (4,703) (5,418) (6,081) Employee expenses (2,596) (2,991) (4,656) (4,932) (5,340) (5,631) Total operating costs (23,988) (29,499) (40,428) (45,133) (52,164) (58,539) EBITDA 1,280 2,531 2,831 4,248 4,818 5,423 Other income 703 483 945 807 922 1,070 PBDIT 1,982 3,013 3,775 5,055 5,740 6,493 Financial charges (99) (90) (110) (82) (82) (82) Depreciation (156) (167) (210) (227) (251) (278) Pre-tax profit 1,728 2,757 3,456 4,746 5,406 6,133 Taxation (407) (997) (1,172) (1,610) (1,832) (2,077) Adjusted PAT 1,321 1,760 2,284 3,136 3,574 4,056 Minority interest & associate profits (1) 1 (31) — — —PAT for equity holders 1,319 1,761 2,253 3,136 3,574 4,056 Extraordinary items, net of tax 696 316 261 — — —Reported PAT 2,017 2,076 2,545 3,136 3,574 4,056 Growth (%)Revenue 29.3 26.8 35.1 14.2 15.4 12.2 EBITDA 14.5 97.8 11.9 50.1 13.4 12.6 Profit after tax 32.2 33.3 29.8 37.3 14.0 13.5 Reported PAT 173.7 2.9 22.6 23.2 14.0 13.5 EPS 32.1 33.5 27.9 39.2 14.0 13.5 Margins (%)Materials / sales 74.3 73.0 73.2 71.9 72.7 73.2 Operating and other expenses / sales 10.3 9.8 9.4 9.5 9.5 9.5 Employee expenses / sales 10.3 9.3 10.8 10.0 9.4 8.8 EBITDA margin 5.1 7.9 6.5 8.6 8.5 8.5 PAT margin 5.2 5.5 5.3 6.4 6.3 6.3 Effective tax rate 23.6 36.2 33.9 33.9 33.9 33.9 Dividend payout ratio 16.7 21.5 20.8 27.8 27.5 27.4 Per share ratios (Rs)Earnings per share 4.0 5.3 6.8 9.5 10.8 12.3 Dividend per share 1.0 1.4 1.6 2.6 3.0 3.4 Weighted avg. shares o/s (mn) 331 331 331 331 331 331


Strong cash position, little debt and low working capital requirement

Voltas has a strong cash position of Rs4.6 bn at end-FY2009. Gross debt stood at Rs1.8 bn, which translates into a low 0.2X D/E ratio at end-FY2009. We estimate that the cash reserves would increase further over the years as the company generates strong cash flow from operations, further reducing leverage ratio.

Extremely cautious of capital engagement; negative working capital across years

Voltas is extremely cautious of capital engagement in its businesses in the form of both fixed capital as well as working capital. Voltas has maintained negative working capital across most of the last seven-eight years apart from FY2009 when credit slowdown affected collections in the domestic market. Agency business in engineering products and services also requires low working capital. Working capital requirement as days of sales, even in the current economic downturn, was at 5 at end-FY2009, slightly higher from negative 14.3 at end-FY2008, primarily on account of increasing inventory in mining and construction business. Days receivable also went up to 79 at end-FY2009 from 64 at end-FY2008 but were more or less offset by increase in current liabilities as days of sales to 202 at end-FY2009 from 183 at end-FY2008.

Over the projected period FY2010E-12E, we estimate that the working capital of the company would be about zero days of sales. We estimate that the inventory, as days of sales, would go down to historical levels, from 94 days of sales at end-FY2009 to 76 days of sales by end-FY2011E. We also highlight that the current liabilities measure as days of sales was


Industrials Voltas

at its highest level at end-FY2009 over the last three years, and may come down to historical levels of about 185 days of sales by FY2012E.

Exhibit 59: Consolidated balance sheet of Voltas, March fiscal year-ends, 2007-12E (Rs mn)

2007 2008 2009 2010E 2011E 2012EEquity share capital 331 331 331 331 331 331Reserves & surplus 3,907 5,442 7,567 9,684 12,106 14,863Shareholders funds 4,237 5,772 7,897 10,015 12,437 15,193Minority interest 4 5 159 159 159 159Loan funds 1,116 737 1,814 814 814 814

Secured 1,113 737 1,688 688 688 688Unsecured 3 — 127 127 127 127

Total source of funds 5,358 6,515 9,871 10,988 13,410 16,167Gross block 2,851 3,163 3,986 4,426 4,916 5,456Accumulated depreciation 1,379 1,462 1,839 2,066 2,317 2,595Net block 1,473 1,701 2,148 2,361 2,599 2,861CWIP 128 197 132 132 132 132Net fixed assets 1,601 1,898 2,280 2,493 2,732 2,994Investments and goodwill 1,248 2,585 2,238 2,238 2,238 2,238Current assets 13,482 16,630 27,489 30,213 35,419 40,469

Inventories 5,123 6,398 11,194 11,497 12,549 13,286Sundry debtors 4,924 5,703 9,521 10,496 12,164 13,717Cash balances 1,677 3,002 4,571 5,781 7,906 10,339Loans and advances 1,758 1,527 2,203 2,439 2,800 3,127

Current liabilities and provisions 11,252 14,788 22,360 24,180 27,202 29,757Current liabilities 9,397 12,620 19,714 21,300 23,878 26,023Provisions 1,855 2,169 2,645 2,879 3,324 3,734

Net current assets excluding cash 553 (1,160) 558 252 311 373Total application of funds 5,358 6,515 9,871 10,988 13,410 16,167RatiosDebt-equity (X) 0.3 0.1 0.2 0.1 0.1 0.1Return on average equity (%) 38.0 35.2 33.0 35.0 31.8 29.4Return on average capital employed (%) 27.7 28.7 26.6 29.6 28.9 27.1Per share (Rs)Book value 13 17 24 30 38 46Working capital requirement (days of sales)Inventories 74 73 94 85 80 76Debtors 71 65 80 78 78 78Loans & advances 25 17 19 18 18 18Current liabilities and provisions (171) (183) (202) (196) (190) (186)Net working capital excl. cash 8 (14) 5 2 2 2


Strong cash flow from operations; even ahead of PAT

We estimate that the company will generate Rs3.5-4.5 bn cash from operations each year over FY2010E-11E. We highlight that over FY2005-09, Voltas generated cumulative profits of Rs6.85 bn and cumulative operating cash flow generation was Rs7 bn. Even during the economic downturn of FY2009, the company generated enough cash to meet its capital expenditure and interest expenditure requirement. The company has also high quality of income (cash flow from operations/net income) ratio of about 1X averaged over FY2007-09.


Voltas Industrials

Exhibit 60: Consolidated cash flow statement of Voltas, March fiscal year-ends, 2007-12E (Rs mn)

2007 2008 2009 2010E 2011E 2012ECashflow from operating activitiesNet profit before tax and extraordinary items 1,728 2,757 3,456 4,746 5,406 6,133 Add: Depreciation / amortisation / non-cash prov 156 167 210 227 251 278 Add: Financial charges 99 90 110 82 82 82 Tax paid (389) (914) (1,204) (1,610) (1,832) (2,077) Operating profit before working capital changes 1,593 2,099 2,572 3,445 3,907 4,416 Change in working capital / other adjustments (586) 1,713 (1,718) 306 (59) (62) Cashflow from operating activites 1,007 3,812 854 3,752 3,849 4,354 Cash from investing activitesFixed assets (122) (464) (591) (440) (490) (540) Investments (786) (1,337) 347 — — —Cash (used) / realised in investing activities (908) (1,802) (244) (440) (490) (540) Cashflow from financing activitiesIssue of share capital (81) (17) 353 — — —Borrowings 215 (378) 1,077 (1,000) — —Dividend paid (410) (523) (619) (1,019) (1,152) (1,299) Interest charges (99) (90) (110) (82) (82) (82) Cash (used) /realised in financing activities (375) (1,008) 700 (2,101) (1,234) (1,382) Cash generated /utilised 379 1,325 1,569 1,211 2,125 2,433 Cash at beginning of year 1,298 1,677 3,002 4,571 5,781 7,906 Cash at end of year 1,677 3,002 4,571 5,781 7,906 10,339


Key takeaways from 2QFY10 results and conference call

Moderate revenue growth; EMP and UCP up but engineering products still slow

Voltas reported 2QFY10 revenues of Rs11 bn, up 12% yoy, from Rs9.8 bn in 2QFY09. The revenue growth was driven by strong growth in the EMP and UCP segments which grew by 22% and 27% on a yoy basis, respectively. However the engineering products and services segment declined by 28% yoy.

Strong margin expansion across all segments, PAT up 58% yoy

The company reported a strong operating margin expansion of about 320 bps yoy to 11.4% in 2QFY10 from 8.3% in 2QFY09. The strong margins expansion was primarily driven by lower raw material costs as a percentage of sales which declined by 450 bps yoy to 66.2% of sales. PAT (before extraordinary items) was up 58% yoy to Rs917 mn versus Rs 580 mn in 2QFY09.

Margins for all the three segments expanded on a yoy as well as a sequential basis. Margins expanded by 650 bps yoy to 9.5% for the UCP segment, 380 bps yoy to 18.3% in engineering products and services segment, and by 240 bps yoy to 11.7% in the EMP segment. The management highlighted that margin expansion in engineering segment is on account of commissions booked from a large mining order that was executed ahead of schedule by the principal.

Order book shrunk to Rs44 bn as inflows remain sedate

Voltas reported an order backlog of Rs44 bn at the end of 2QFY10 versus Rs47 bn at the end of 1QFY10 implying that orders inflows have remained sedate. Order backlog has declined 25% on a yoy basis from Rs58.2 bn at the end of 2QFY09. The management also highlighted that Rs7 bn Yas Retail project is under suspension and likely to be revised. The company maintains positive stance on order booking from the Middle East as it expects to see activity in Qatar and Abu Dhabi. Voltas expects to end FY2010 with Rs20 bn order book, excluding Yas Retail order.


Industrials Voltas

Exhibit 61: Consolidated results for Voltas for 2QFY10 - key numbers (Rs mn)

% change2QFY10 2QFY09 1QFY10 2QFY09 1QFY10 1HFY10 1HFY09 % change

Total operating income 10,996 9,848 12,510 11.7 (12.1) 23,507 20,346 15.5Expenses (9,738) (9,033) (11,393) 7.8 (14.5) (21,131) (18,613) 13.5 Stock 78 700 (591) (514) 1,076 RM (7,324) (7,631) (7,984) (4.0) (8.3) (15,309) (15,611) (1.9) Employee (1,426) (1,219) (1,308) 17.0 9.0 (2,734) (2,126) 28.6 Other expenses (1,065) (883) (1,510) 20.6 (29.5) (2,575) (1,952) 31.9EBITDA 1,259 815 1,117 54.4 12.7 2,376 1,734 37.0Other income 145 145 119 0.3 22.4 264 264 0.0PBDIT 1,404 960 1,236 46.2 13.6 2,640 1,998 32.1Interest (16) (21) (10) (22.3) 64.0 (49) (49) 0.0Depreciation (56) (61) (49) (9.0) 13.4 (105) (110) (4.4)PBT 1,332 878 1,177 51.7 13.2 2,487 1,840 35.2Tax (415) (298) (387) 39.4 7.4 (802) (695) 15.4Net profit 917 580 790 58.0 16.0 1,685 1,145 47.1Extraordinary items (0) 31 28 28 223Minority interest (13) 0 0 (20) (20)Reported PAT 903 611 818 47.9 10.4 1,693 1,348 25.6Key ratios (%)Raw material / sales 65.9 70.4 68.5 67.3 71.4

Employee expense / sales 13.0 12.4 10.5 11.6 10.4Other expense / sales 9.7 9.0 12.1 11.0 9.6

EBITDA margin 11.4 8.3 8.9 10.1 8.5PBT margin 12.1 8.9 9.4 10.6 9.0Tax rate 31.2 33.9 32.9 32.2 37.8PAT margin 8.3 6.2 6.5 5.1 3.5Segment resultsRevenuesUnitary cooling products 1,968 1,554 4,154 26.7 (52.6) 6,122 5,567 10.0Engineering products and services 1,170 1,617 1,139 (27.7) 2.6 2,309 2,981 (22.5)Electromechanical projects 7,692 6,316 7,001 21.8 9.9 14,693 11,159 31.7Others 103 280 127 (63.4) (19.2) 230 504 (54.4)PBITUnitary cooling products 187 46 389 305.0 (51.9) 576 379 52.2Engineering products and services 215 236 157 (9.0) 36.3 372 450 (17.3)Electromechanical projects 898 588 612 52.9 46.8 1,510 992 52.2Others 14 31 14 (54.0) (0.7) 29 47 (39.4)Capital EmployedUnitary cooling products 1,029 2,711 1,222 (62.0) (15.8) 1,029 2,711 (62.0)Engineering products and services 1,259 1,122 1,302 12.2 (3.3) 1,259 1,122 12.2Electromechanical projects 384 330 1,349 16.2 (71.6) 384 330 16.2Others 6,832 3,328 4,759 105.3 43.5 6,832 3,328 105.3Total 9,504 7,490 8,633 26.9 10.1 9,504 7,490 26.9Revenue mix (%)Unitary cooling products 18.0 15.9 33.4 26.2 27.5Engineering products and services 10.7 16.6 9.2 9.9 14.7Electromechanical projects 70.4 64.7 56.4 62.9 55.2Others 0.9 2.9 1.0 1.0 2.5EBIT margin (%)Unitary cooling products 9.5 3.0 9.4 9.4 6.8Engineering products and services 18.3 14.6 13.8 16.1 15.1Electromechanical projects 11.7 9.3 8.7 10.3 8.9



Voltas Industrials

APPENDIX A: KEY TAKEAWAY FROM OUR MEETING WITH MANAGEMENT Voltas’ management is confident of 20%+ growth and 8.5-9.5% margins in the EMP segment in FY2010E and

FY2011E on the back of Rs44 bn order book and incremental order inflows. The management believes

opportuntiyt size is very big and expects government spending in Qatar, Abu Dhabi, KSA and Singapore to

fuel international order activity. Domestic execution, primarily in IT parks and malls, is slow but growth is

likely to come from airports, hospitals and metro projects and green buildings. Voltas believes Rohini

Industrial, and water and oil & gas projects would be the next growth engines, and is looking for potential

acquisitions to build a portfolio in water solutions. The company may also monetize its Hyderabad land once

the real estate market picks up.

Management guides 20%+ growth and 8.5-9.5% margins in EMP in FY2011E

The management is confident of 20%+ yoy growth in the EMP segment in FY2011E on the back of Rs44 bn order book (including Yas Retail project but excluding variation orders) to be executed by end-FY2011E. We estimate that for 20% growth over FY2010E and FY2011E, Voltas would need to execute orders worth Rs50 bn, besides those executed in 1HFY10, implying Rs14 bn of additional order inflow, assuming Yas Retail stays suspended. Voltas also expects to maintain 8.5-9.5% in the future years through selective bidding and process improvements, such as regional procurement.

Cites enough opportunities in target geographies, including domestic

The management expects to see order activity in Qatar, Abu Dhabi and KSA, which are still growing on the back of government spending. The management highlighted that about US$10 bn worth of orders have been placed in urban construction in the UAE in FY2010 so far. Execution of government backed and iconic projects, such as Burj Dubai, Yas Marina F1 track, and Changi Water Treatment Plant, has established Voltas as a key MEP player in the target geographies. Singapore government has now accredited Voltas to bid for public projects. Voltas expects to see order inflow from KSA in FY2011 if not earlier, while it explores the possibility of working with a local partner. Domestic MEP execution has been very slow primarily in commercial real estate segment dominated by IT parks and malls. Near-term growth is likely to come from airports, hospitals, metro projects and green buildings.

Focus on low capital engagement in engg. products, positive on UCP growth

Voltas’ management underscored their philosophy of low capital engagement and focusing on agency-oriented work rather than becoming an equipment manufacturer in engineering products segment. The UCP segment is expected to grow at about 15% in FY2010E. The management believes that AC market could potentially grow at more than 40% CAGR as the power supply situation gets better and the cost of electricity versus household income goes down.

Growth avenues—Rohini Industrial, water management, oil & gas, inorganic

Voltas intends to grow RIEL top line at 30-40% CAGR over the next three years by closely integrating RIEL into its project-bidding process. RIEL can not only bid standalone but also in conjunction with Voltas and Tata Projects depending on the size and nature of the tender. The company believes water management and oil & gas present big growth opportunities. Voltas is looking at potential acquisition opportunities, of the size of Rohini, in water management and oil & gas to enhance its portfolio.


Industrials Voltas

Full scale benefits of Pantnagar plant are still to come

The management explained that the main reasons for shifting manufacturing plant to Pantnagar were (1) lower wage levels, (2) lower power tariff, (3) excise exemption, and (4) income tax benefit. While lower labor costs and income tax benefits have been realized, full potential benefits of power tariff and excise exemption are still to come. State provided electricity cost lower in Uttaranchal than in Andhra Pradesh, however, limited power availability forces Voltas to use alternate source which drive up costs. Full potential costs savings should be realized once the state supply ramps up. Voltas enjoys perpetual excise exemption on Pantnagar manufacturing. However, benefits achieved have been subdued on account of lower excise tariff after government stimulus. Incorporation of GST will potentially annul the excise benefits altogether.

Hyderabad land likely to be monetized once real estate market picks up

Voltas is likely to monetize its 32 acres of land in Santnagar, five km from the old Hyderabad airport, once the real estate market turns around. Monetization may happen sooner to fund acquisition in water management business. Voltas has already leased out extra space in its corporate complex in Mumbai to Tata Teleservices and Nielson and has been receiving rental income for the same. The Ballard Estate building has been rented out to SBI.


Voltas Industrials

APPENDIX B: VOLTAS VERSUS BLUE STAR

Blue Star is ahead of Voltas on EBIT margin and RoE over a similar business mix

Voltas had a gross margin of 28% in FY2009, substantially higher than 24% for Blue Star in the same period. Voltas, however, has higher employee cost and other expenses (as percentage of sales) potentially because of substantial Middle East operation where labor and corporate costs may be higher than in India. Blue Star had a RoE of 57% in FY2009 versus 33% for Voltas in FY2009. Higher RoE for Blue Star is driven by 1) higher PAT margin of 7% vs 5% for Voltas and (2) higher asset turnover of 7X versus 5X for Voltas.

Exhibit 62: Voltas has lower profitability than Blue Star over a similar business mix Voltas versus Blue Star, Revenue mix, EBIT mix and cost structure, March fiscal year-ends, 2009

Voltas Blue Star

Revenue Rs40.7 bn Revenue Rs25.7 bn

EBIT Rs3.3 bn EBIT Rs3.2 bn

EBIT margin 8.1% EBIT margin 12.6%

Revenue

mix

EBIT

mix

Cost

structure

Others 1%

Unitary cooling products

23%

Engineering products &

services13%

Electromechanical projects

63%


24%


services7%


69%

Others 1%


59%


services19%


21%


66%


services11%


23%

Other Expense11.2%

Employee Cost9.6%

Interest0.7%

Cost of sales67.5%

Depreciation0.8%

Tax7.3%

Net Profit2.9%

Tax2%

Cost of sales76%

Interest1%

Employee Cost7%

Other Expense6%

Depreciation1%

Net Profit7%


“I, Lokesh Garg, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.”


Industrials Voltas

Kotak Institutional Equities Research coverage universeDistribution of ratings/investment banking relationships

Source: Kotak Institutional Equities As of September 30, 2009

* The above categories are defined as follows: Buy = We expect this stock to outperform the BSE Sensex by 10% over the next 12 months; Add = We expect this stock to outperform the BSE Sensex by 0-10% over the next 12 months; Reduce = We expect this stock to underperform the BSE Sensex by 0-10% over the next 12 months; Sell = We expect this stock to underperform the BSE Sensex by more then 10% over the next 12 months. These ratings are used illustratively to comply with applicable regulations. As of 30/9/2009 Kotak Institutional Equities Investment Research had investment ratings on 143 equity securities.

Percentage of companies covered by Kotak Institutional Equities, within the specified category.

Percentage of companies within each category for which Kotak Institutional Equities and or its affiliates has provided investment banking services within the previous 12 months.

10.5%

31.5%

36.4%

21.7%

2.8%

9.1%

0.0%2.1%

0%

10%

20%

30%

40%

50%

60%

70%

BUY ADD REDUCE SELL

Voltas (VOLT.BO)Kotak Institutional Equities rating and stock price target history

Source: Kotak Institutional Equities Research for ratings and price targets, Bloomberg for daily closing prices.

Rating Covered by Lokesh Garg

Price target Not covered by current analyst

X Price target removal BSE-30 Index (RHS)

The price targets shown should be considered in the context of all prior published Kotak Institutional Equities research, which may or may not have included price targets, as well as developments relating to the company, its industry and financial markets

-

50

100

150

200

250

300

Oct

-06

Nov

-06

Dec

-06

Feb-

07

Mar

-07

May

-07

Jun-

07

Aug

-07

Sep-

07

Nov

-07

Dec

-07

Jan-

08

Mar

-08

Apr

-08

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08

Jul-0

8

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08

Oct

-08

Dec

-08

Jan-

09

Mar

-09

Apr

-09

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09

Jul-0

9

Sep-

09

Oct

-09

2,000

6,000

10,000

14,000

18,000

22,000

Stoc

k Pr

ice

Inde

xPr

ice

Analyst coverage Companies that the analyst mentioned in this document follow

Covering Analyst: Lokesh Garg

Company name Ticker

ABB ABB.BO

BGR Energy Systems BGRE.BO

Bharat Electronics BAJE.BO

BHEL BHEL.BO

Concor CCRI.BO

Crompton Greaves CROM.BO

GMR Infrastructure GMRI.BO

GVK Power and Infrastructure GVKP.BO

IRB Infrastructure Developers IRBI.BO

IVRCL Infrastructures IVRC.BO

Larsen & Toubro LART.BO

Punj Lloyd PUJL.BO

Siemens SIEM.BO

Suzlon Energy SUZL.BO

Voltas VOLT.BO

Source: Kotak Institutional Equities Research


Disclosures

RATINGS AND OTHER DEFINITIONS/IDENTIFIERS

Definitions of ratings

BUY. We expect this stock to outperform the BSE Sensex by 10% over the next 12 months.

ADD. We expect this stock to outperform the BSE Sensex by 0-10% over the next 12 months.

REDUCE. We expect this stock to underperform the BSE Sensex by 0-10% over the next 12 months.

SELL. We expect this stock to underperform the BSE Sensex by more than 10% over the next 12 months.

Other definitions

Coverage view. The coverage view represents each analyst’s overall fundamental outlook on the Sector. The coverage view will consist of one of the following designations: Attractive, Neutral, Cautious.

Other ratings/identifiers

NR = Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s) and/or Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances.

CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.

NC = Not Covered. Kotak Securities does not cover this company.

RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon.

NA = Not Available or Not Applicable. The information is not available for display or is not applicable.

NM = Not Meaningful. The information is not meaningful and is therefore excluded.

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Copyright 2009 Kotak Institutional Equities (Kotak Securities Limited). All rights reserved.

Kotak Securities Limited and its affiliates are a full-service, integrated investment banking, investment management, brokerage and financing group. We along with our affiliates are leading underwriter of securities and participants in virtually all securities trading markets in India. We and our affiliates have investment banking and other business relationships with a significant percentage of the companies covered by our Investment Research Department. Our research professionals provide important input into our investment banking and other business selection processes. Investors should assume that Kotak Securities Limited and/or its affiliates are seeking or will seek investment banking or other business from the company or companies that are the subject of this material and that the research professionals who were involved in preparing this material may participate in the solicitation of such business. Our research professionals are paid in part based on the profitability of Kotak Securities Limited, which include earnings from investment banking and other business. Kotak Securities Limited generally prohibits its analysts, persons reporting to analysts, and members of their households from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. Additionally, Kotak Securities Limited generally prohibits its analysts and persons reporting to analysts from serving as an officer, director, or advisory board member of any companies that the analysts cover. Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. In reviewing these materials, you should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest. Additionally, other important information regarding our relationships with the company or companies that are the subject of this material is provided herein.

This material should not 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. We are not soliciting any action based on this material. It is for the general information of clients of Kotak Securities Limited. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any advice or recommendation in this material, clients should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the investments referred to in this material and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Kotak Securities Limited does not provide tax advise to its clients, and all investors are strongly advised to consult with their tax advisers regarding any potential investment.

Certain transactions -including those involving futures, options, and other derivatives as well as non-investment-grade securities - give rise to substantial risk and are not suitable for all investors. The material is based on information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. Opinions expressed are our current opinions as of the date appearing on this material only. We endeavor to update on a reasonable basis the information discussed in this material, but regulatory, compliance, or other reasons may prevent us from doing so. We and our affiliates, officers, directors, and employees, including persons involved in the preparation or issuance of this material, may from time to time have “long” or “short” positions in, act as principal in, and buy or sell the securities or derivatives thereof of companies mentioned herein. For the purpose of calculating whether Kotak Securities Limited and its affiliates holds beneficially owns or controls, including the right to vote for directors, 1% of more of the equity shares of the subject issuer of a research report, the holdings does not include accounts managed by Kotak Mahindra Mutual Fund.Kotak Securities Limited and its non US affiliates may, to the extent permissible under applicable laws, have acted on or used this research to the extent that it relates to non US issuers, prior to or immediately following its publication. Foreign currency denominated securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of or income derived from the investment. In addition , investors in securities such as ADRs, the value of which are influenced by foreign currencies affectively assume currency risk. In addition options involve risks and are not suitable for all investors. Please ensure that you have read and understood the current derivatives risk disclosure document before entering into any derivative transactions.

This report has not been prepared by Kotak Mahindra Inc. (KMInc). However KMInc has reviewed the report and, in so far as it includes current or historical information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed. Any reference to Kotak Securities Limited shall also be deemed to mean and include Kotak Mahindra Inc.

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