We met Voltas management and are now confident the company would be able to tide over the economic slowdown.
Given its robust order backlog (~Rs53 billion), we expect the segment to grow 30% in FY10 and 11% the year after.
We expect the UCP segment to show steady growth in FY10 (against our earlier estimate of a decline) before demand revives. We expect the EPS segment to continue to be under pressure.
The company expects to maintain overall margins, with only the EPS segment continuing to face margin pressures.
We raise FY10 and FY11 earnings estimates by 12.4% and 3.7%, respectively, to factor in steady trends in the UCP segment (we had earlier assumed a decline).
We value the stock at a 50% discount to large capital goods companies (eg, BHEL) but at a premium to other mid-caps on account of higher RoEs and zero debt. At our target price of Rs60, the stock would trade at 8x FY10e earnings.
We thus upgrade Voltas to BUY from Hold and raise our target price to Rs60 (Rs53 earlier).