We are downgrading our earnings and target price for Voltas in view of deteriorating fundamentals in its major user industries.
In the UAE region especially in Dubai, banks are facing tough times as real estate is slowing down and construction activities has been delayed. Dubai has borrowed heavily in recent years to finance the physical infrastructure needed to support and connect these new economic sectors.
Nakheel, which is one of the leading property developers in Dubai has been scaling back some of its property development plans. Large property developers like Damac, Emaar and Omniyat have announced job cuts to fight dwindling property sales.
The Abu Dhabi market is likely to remain attractive to buyers as it is a new market and is not as saturated as Dubai.
Other business segments
Voltas is the sole selling agent for Lakshmi Machine Works (LMW), which is one of the top textile machinery makers in India.
During 2007-08, hardening of rupee against the US dollar, slow down in the US economy, soaring raw material cost, power disturbance and high cost of funds, have eroded the margin and hampered further growth of the textile sector, particularly the small and medium enterprises.
This has forced the textile sector to reconsider their investment programmes and either downsize or postpone their investment plans.
The consumer durables business include water coolers window and split ACs. Due to the present economic conditions, the growth in the business has slowed down considerably. The market has stagnated in the past few months partly due to high inventory levels at dealer end.
In the short term, the margins are likely to be under pressure. However, we believe that this business has tremendous potential for the future growth.
We have reduced revenue growth from 22% to 20% in FY10. We believe margins could be under pressure as price competition may intensify in the consumer durables and engineering products business.
We have thus built in 50 bps reduction in EBITDA margin in FY10 as compared to an increase of 50 bps earlier. Earnings in FY10 have also been reduced by 18% to Rs7 from Rs8.5 per share.
In our DCF model, we built in 12% growth in FY11 followed by 4% revenue growth for perpetuity. Gradual increase in working capital coupled with a reduction in EBITDA margins.
We have arrived at a price target price of Rs70 (Rs93 earlier) and maintain
ACCUMULATE rating on the stock.