Long Term Recommendation

Voltas Ltd At an inflection point

Voltas (promoted by Tata Group) is a leading player in residential air-conditioners (RAC) in India. Utkarsh Nopany
The company enjoys a strong competitive edge in RAC due to wide distribution network (6th largest Research Analyst
and to become 3rd largest by Mar’21). Moreover, the opportune entry in the booming white goods utkarsh.nopany@edelweissfin.com
market through Arcelik JV de-risks its RAC business and strong distribution network will ensure
rapid market share gains. We believe Voltas is at an inflection point on expectation of strong
rebound in the unitary cooling product (UCP) segment’s profitability, maximum incremental
revenue gain in the entire consumer durable space over the next five years led by entry in the
white goods category and likelihood of EMPS/EPS segments springing a positive surprise on
earlier-than-expected revival in the new capex cycle (revenue grew by ~4x during FY04-09). Initiate CMP INR: 617
coverage with ‘BUY’ and TP of INR 709 (15% upside). Rating: BUY
UCP’s profitability to rebound strongly over next two years on favourable weather and weak base Target Price INR: 709
Voltas has, despite intense competition in the domestic RAC segment, outperformed peers on all Upside: 15%
parameters—market share gains while improving profitability and ROCE—overFY10-19.
Furthermore, the company has an edge over peers in all key operational parameters, which indicates
its strong competitive position in the RAC segment. We estimate the UCP segment to clock 16% sales
CAGR over FY19-21 on account of hot dry and extended summer season in 2019 over a weak base
and anticipated change in energy rating (as the current norm is valid till Dec 2019). The segment’s
margin is also projected to improve from a decade low (8.9% in FY19) to 10-year average of 11% in
FY20/FY21 on account of weak commodity prices, strong rupee and operating leverage benefits. We
envisage these to catapult Voltas to be among top 3 consumer durable player over the next 5 years.
Opportune entry in booming domestic white goods space Bloomberg: VOLT:IN
We believe Voltas’ entry in the non-RAC white goods segment (refrigerators, washing machines,
microwaves, dishwashers, etc) through a JV with Arcelik will de-risk its business model as: a) India’s 52-week
471 / 642
white goods market is set to boom over the next decade spurred by rising per capita incomes and range (INR):
electrification; b) wide distribution reach (6th largest and to become 3rd largest by Mar’21) will
Share in issue (cr): 33.1
ensure rapid market share gain in the non-RAC segment; c) access to improved technology will
enhance its value proposition to customers; and d) mitigate the risk of rising emergence of MBO, M cap (INR cr): 20,417
online retailing and increased competition for its existing UCP business.
Avg. Daily Vol.
Best EPC play of capex cycle recovery on strong B/S and healthy RoCE 82/1,429
BSE/NSE :(‘000):
Revenues of Voltas’ EMPS and EPS segments grew by ~4x during previous capex cycle (FY04-FY09).
Despite the weak capex cycle, EMPS segment’s revenue grew to a record high in FY19. We believe, Promoter
30.30
the company is now ready to participate in the new capex cycle due to: a) strong balance sheet Holding (%)
position (holding net cash & liquid investment of INR 2,182 crore as on Mar 31, 2019) and b) smooth
execution of existing orders in hand. Improved pace of order execution is reflected in book-to-bill
ratio lower than 10-yr avg in FY19 and segment adjusted ROCE improved to 8-yr high of 23% in FY19.
Outlook and valuation: At an inflection point; initiate with ‘BUY’
We initiate coverage on Voltas with ‘BUY’ recommendation and TP of INR 709 (15% upside). We
believe the company is at an inflection point on: a) expectation of strong rebound in the UCP
segment’s profitability; b) maximum incremental revenue gain in the entire consumer durable space
over the next five years led by entry in the white goods category; and c) likelihood of EMPS/EPS
segments springing a positive surprise on earlier-than-expected revival in the new capex cycle. Our
SOTP-based target price assigns 34x/8x/9x on FY21E EBITDA for UCP/EMPS/EPS segments,
respectively. The implied valuation comes at 22.0x on FY21E EBITDA, which is relatively in-line with
its 5-years’ historical average of 20.0x. Key risks include significant loss of market share in RAC,
slower-than-expected penetration in non-RAC white goods, and sharp increase in the EMPS
segment’s working capital requirement.
Year to March FY17 FY18 FY19 FY20E FY21E
Revenues (INR Cr) 6,033 6,404 7,124 7,880 8,859
Rev growth (%) 5.5 6.2 11.2 10.6 12.4
EBITDA (INR Cr) 567 663 612 747 839
PAT (INR Cr) 518 573 499 508 595
EPS (INR) 15.7 17.3 15.1 15.4 18.0
EPS Growth (%) 27.2 10.5 -12.9 1.8 17.1
P/E (x) 39.4 35.6 40.9 40.2 34.3
P/B (x) 6.2 5.2 5.0 4.6 4.2
RoACE (%) 53.7 59.0 37.2 31.7 29.1
RoAE (%) 17.0 16.0 12.8 12.0 12.9
Date: 7h June, 2019

Edelweiss Professional Investor Research

 Table of Contents

Structure ............................................................................................................................. 3

Focus Charts 1 ..................................................................................................................... 4

Focus Charts 2 ..................................................................................................................... 6

I. UCP: Long-term play in India’s white goods segment ..................................................... 7

II. Voltbek JV: Non-RAC white goods entry to de-risk RAC business .................................. 12

III. EMPS: Best EPC play on strong B/S, smooth order execution, healthy ROCE ............... 15

IV. EPS: Segment to benefit from revival in capex cycle in textile/mining ......................... 17

V. Financial Analysis ........................................................................................................... 18

Outlook and Valuations ...................................................................................................... 20

Business Overview ............................................................................................................. 22

Key Management ............................................................................................................... 23

Timeline .............................................................................................................................. 24

Financials ............................................................................................................................ 25

Edelweiss Professional Investor Research

Voltas Ltd Structure
Orient Electric Ltd Structure
Voltas is estimated to clock 17.1% EBITDA CAGR over FY19-21 driven by strong rebound in the UCP segment’s profitability
(29% CAGR) and assuming no major recovery in capex cycle for the EMPS/EPS segment. However, PAT growth is likely to
remain subdued (9.2% CAGR) on expectation of losses in the new Voltbek JV due to initial investment phase. After adjusting
for JV losses, PAT growth is expected to be 11.8% CAGR over FY19-21.

EBTDA growth will be primarily be driven Though ROCE is projected to decline over We recommend ‘BUY’ with TP of INR
by strong rebound in UCP segment’s the next two years due to high capex, but 709/share, valuing the stock on sum-
profitability over weak FY19 it will remain at healthy level of-the-parts methodology

EV/EBITDA
FY18 FY19 FY20E FY21E FY18 FY19 FY20E FY21E Segment Target
(x)
Revenue 6,404 7,124 7,880 8,859 ROE (%) 16.0 12.8 12.0 12.9 UCP 34.0 480
EBITDA margin 10.3 8.6 9.5 9.5 ROCE (%) 59.0 37.2 31.7 29.1 Voltbek JV (50%) 24.0 78
Share of JV loss 4 -52 -70 -41 EMPS 8.0 65
PAT 573 499 508 595 EPS 9.0 28
Cash - 58
Total 709

EBITDA growth of 17.1% over FY19-21E  FY20-21E ROCE of 29-32%  At 22.0x FY21E EBITDA

Upside of 15%

Edelweiss Professional Investor Research

Voltas Ltd
Focus Charts
Orient
Part I –Electric
Story in Ltd
a nutshell: Voltas to be among top Focus
3 consumer durable players over next five years
Charts
India has low penetration in all white goods India’s penetration to rise, akin to China, on rising incomes
China 2000 2005 2010 2015 2017
100%
Urban
80% Per Capita Income 756 1300 2892 4804 6066
AC penetration 31 81 112 115 129
60% WM peneration 91 96 97 92 96
Refrigerator penetration 80 91 97 94 98
40% TV penetration 117 135 137 122 124

20%
Rural
0% Per Capita Income 276 403 896 1759 1780
RAC WM Refrigerator TV AC penetration 1 6 16 39 53
WM penetration 29 40 57 79 86
India World Refrigerator penetration 12 20 45 83 92
TV penetration 49 84 112 117 120

India’s per capita income to grow to USD 3,040 by CY2023E Voltas enjoys strong competitive edge over peers in RAC

India's per capita income (in USD) 55% 10.0%

45% 9.0%
3500
3000 35% 8.0%
2500 25% 7.0%
2000
15% 6.0%
1500
5% 5.0%
1000
Voltas Daikin Blue Star Hitachi Lloyd
500
0 Operating RoCE EBITDA margin
2000 2005 2010 2015 2018 2023

UCP sales to grow at 15%+ in FY20 on two consecutive weak UCP margin to improve from 10-yr low in FY19 to normal level
summer seasons and a favourable 2019 summer season on healthy demand and softening of commodity prices
25% 30.0% 4500 14.0%
20% 20.0% 3900 13.0%
15% 10.0%
3300 12.0%
10% 0.0%
2700 11.0%
5% -10.0%
0% -20.0% 2100 10.0%
FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

2MFY20

-5% -30.0% 1500 9.0%

900 8.0%
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20E
FY21E

UCP sales growth (y-o-y)

Deviation from normal rainfall in June quarter Sales (INR cr) EBITDA margin 10-yr avg (%)

Edelweiss Professional Investor Research

Voltas Ltd
Focus Charts
Orient Electric Ltd
Focus Charts
Incremental market size of referigerators over next 5 years is Positive on refrigerators in near-term and RAC over long-
larger than current RAC market size term based on China’s penetration trend
Market Size (INR bn)
50
40
30
20
10
0
WM RAC Refrigerator

2018 2023

Voltas’ opportune entry in the white goods space will help it ..and fill the gap created by closure of Videocon
leverage large existing distribution network.. operations
40000 0.35 Videocon consumer durable revenue (INR cr)
15000
30000 0.30
12000
20000 0.25

10000 0.20 9000

0 0.15 6000
LG

Godrej

Haier
Whirlpool

Voltas

Lloyd
Samsung

3000

0
Retail network (no's) Sales per network (INR cr) FY16 FY17 FY18 FY19

Segment Financials FY17 FY18 FY19 FY20 FY21

Revenue
UCP 3,047 3,226 3,156 3,682 4,247
EMPS 2,655 2,845 3,619 3,834 4,231
EPS 332 310 312 327 344
Total 6,033 6,404 7,124 7,880 8,859
Voltbek JV* 0 0 106 465 1,016

EBITDA margin
UCP 13.5% 13.1% 8.9% 11.0% 11.0%
EMPS 2.4% 5.1% 6.3% 6.3% 6.3%
EPS 27.8% 30.4% 32.3% 30.0% 30.0%
Total 9.4% 10.3% 8.6% 9.5% 9.5%
Voltbek JV NA NA NA -35% -6%
*Voltbek revenue is not clubbed as part of the company’s total revenue due to JV nature of operations
Source: IMF; China Statistical Handbook; Various news reports; IMD; Amber DRHP Report; Edelweiss Professional Investor Research

Edelweiss Professional Investor Research

Voltas Ltd
Focus Charts
Orient Electric Ltd
Focus Charts
Part II - Story in a nutshell: Best EPC play on capex cycle recovery on strong B/S and healthy ROCE

Revenue of Voltas’ EMPS and EPS segment grew by almost EMPS segment at an inflection point as revenue touched
four-fold during previous capex cycle record high in FY19, despite weak capex cycle
3500 4000 30.0%
3000
3600 20.0%
2500
2000 3200 10.0%
1500 2800 0.0%
1000
2400 -10.0%
500
0 2000 -20.0%
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

EMPS revenue (INR cr) EPS revenue (INR cr) EMPS revenue (INR cr) Growth % (y-o-y)

EMPS order book-to bill ratio below 10-yr average indicates EMPS segment’s rising RoCE trend also indicates no
smooth execution of existing orders major working capital concerns in existing orders
5500 1.85 30%

5000 1.70 20%

4500 1.55 10%

4000 1.40 0%
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
-10%
3500 1.25
-20%
3000 1.10
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 -30%
Order Book (INR cr) Book-to-bill (x) 10-yr avg

EPS segment also at inflection point as margin at record

Voltas is best EPC play on strong B/S and healthy ROCE
high level, depsite decade low revenue in FY19
Revenue Operating Net Debt/ 600 36.0%
FY19 Credit Rating
growth (%) ROCE (%) EBITDA 550 32.0%
KEC International CRISIL AA- (Stable) 9% 26% 1.36 500 28.0%
Kalpataru Power CRISIL AA (Stable) 24% 19% 2.04 450 24.0%
Voltas ICRA AA+ (Stable) 27% 23% -ve 400 20.0%
350 16.0%
300 12.0%
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20E
FY21E

EPS Revenue (INR crore) EBITDA margin (%)

Source: Company, CRISIL; ICRA; Edelweiss Professional Investment Research

Edelweiss Professional Investor Research

Voltas Ltd
Outlook and Valuation
Orient Electric Ltd I. UCP: Long-term play in India’s white goods segment
Outlook and Valuations
Rising incomes and electrification to spur India’s white goods market over next decade
Penetration of white goods (especially RAC and refrigerators) in urban and rural areas in China’s
households jumped sharply following spurt in per capita incomes, rising urbanisation and increased
rural electrification. RAC penetration in urban areas catapulted from 31% in CY00 to 112% in CY10
primarily due to increase in per capita incomes from USD756 to USD2,892. Rural RAC penetration
too has surged over the past two decades. We expect similar trend to unfold in India over the
ensuing decade.

Penetration China India

Urban 2000 2005 2010 2015 2016 2017 FY16
Per Capita Income ($) 756 1300 2892 4804 4840 6066 3158
Urban HH% 36% 43% 50% 56% 57% 59% 32%
Color TV set 117 135 137 122 122 124 86
Refrigerator 80 91 97 94 96 98 54
AC 31 81 112 115 124 129 33
Washing Machine 91 96 97 92 94 96 29
Rural 2000 2005 2010 2015 2016 2017 FY16
Per Capita Income ($) 276 403 896 1759 1780 2239 718
Rural HH% 64% 57% 50% 44% 43% 41% 68%
Color TV set 49 84 112 117 119 120 52
Refrigerator 12 20 45 83 90 92 16
AC Penetration 1 6 16 39 48 53 10
Washing Machine 29 40 57 79 84 86 6
Source: China Statistical Handbook; National Family Health Survey; IMF; Edelweiss Professional Investment Research

Positive on refrigerators in near-term and RAC over long-term based on China’s penetration trend
Based on China’s trend, we observe that television (TV) sees first spurt in penetration level, followed
by refrigerators and others. Similar trend is unfolding in India as the refrigerator category is clocking
maximum growth in the entire white goods space (after achieving high level of TV penetration). We
are more positive on the refrigerator category than RAC in the near-term due to sharp increase in
market potential (refrigerator incremental market size over the next five years is higher than RAC’s
existing market size) and less competition (primarily dominated by MNCs).

Particulars Penetration (%) Market Size (INR crore) % share

2013 2018 2023 2013 2018 2023 2023
Per Capita Income (USD) 1,486 2,036 3,023 1,486 2,036 3,023
White Goods (ex TV)
Refrigerator 20% 30% 40% 12,560 29,550 49,210 55%
RAC 7% 11% 13% 8,920 16,460 25,050 28%
WM 11% 16% 16% 6,640 10,750 11,870 13%
Air Coolers NA NA NA 820 1,540 2,380 3%
Others - - - 1,580 2,180 1,470 1%
Total - - - 30,520 60,480 89,980
Source: Industry

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Voltas Ltd
Outlook and Valuation
Orient Electric Ltd
Outlook
RAC penetration lagged other durables, but setand
to growValuations
exponentially over long-term
Generally, RAC penetration has lagged other consumer durables (TV, refrigerators and washing
machine) due to the product’s seasonal nature and high running cost (electricity and maintenance).
However, unlike other consumer durables (where maximum penetration is 100%), RAC penetration
can rise to 300% (current RAC penetration in Japan is estimated at 280% and >130% in China). With
expected increase in income levels and rising humid temperatures, India could see a sharp increase
in RAC penetration over the ensuing decade. According to US-based IEA, India is projected to
account for almost one-fourth of the global RAC demand by CY50 (5% currently).

China’s RAC penetration grew at exponential pace on India to account for roughly one-fourth of global RAC demand
rising income by CY2050

Source: Amber DRHP Report, IEA

India has lowest RAC penetration among major consuming countries

India is the fourth largest RAC consuming country in the world, but it has the lowest RAC demand
per 1,000 persons at 4x versus 24-70x for the top-3 countries due to low per capita incomes in
relative terms. We are positive about long-term RAC demand prospects in India as: a) per capita
income has already crossed the USD2,000 mark in CY2018 (most countries have witnessed sharp
spurt in discretionary spending after crossing this level); b) experiences hotter climatic conditions
for longer duration in a year than the top 3 global RAC consuming countries; and c) projected to
become the largest populated country in the world by CY24.

RAC demand Per capita Avg Monthly No. of months

RAC demand – Population –
Particulars (per 000’s income in USD Max Temp in a above 24 degree -
2017 (in 000’s) 2017 (in mn)
person) (2018) year – 2015 2015
China 43,487 139 31 9,633 20 0
Japan 8,925 13 70 40,106 23 0
USA 7,958 33 24 62,518 20 0
India 4,890 134 4 2,016 31 6
Brazil 2,758 21 13 9,127 27 12
Indonesia 2,253 26 9 3,789 27 12
Vietnam 1,863 10 19 2,788 29 8
Thailand 1,322 7 19 7,084 30 11
Australia 982 2 40 56,698 29 6
World 96,049 753 13 17,300 - -
Source: JRAIA; IMF; World Bank

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Voltas Ltd
Outlook and Valuation
Orient Electric Ltd
Outlook
Strong execution and better competitive and
position Valuations
burnish Voltas’ long-term prospects
Voltas is a leading player in the RAC category. Despite intense competition in the RAC segment, the
company has outperformed peers on all parameters - market share gains while improving
profitability and ROCE during FY10-FY19. Furthermore, the company has an edge over peers in all
key operational parameters, indicating its strong competitive position in the RAC segment

EBITDA EBITDA margin Operating RoCE (%)^

Retail
Revenue – CAGR
Company Name Points
FY19 (FY10- FY10 FY19 FY10 FY19
(No.’s)
FY19)
Voltas – UCP division 16,000+^ 3,156 11% 9.6% 8.9% 71% 50%
Daikin (FY18)* 6,400+ 3,194 NM -ve 8.8% NM 26%
Blue Star – Unitary Products 4,500+ 2,269 10% 12.1% 7.5% 69% 26%
Johnson Control Hitachi* 8,500+ 2,241 12% 9.1% 7.3% 28% 22%
Lloyd 7,500+ 1,856 - - 5.3% - 1%
*includes commercial AC segment also; ^plans to increase to 25,000 points over next two years; ^operating RoCE is calculated as EBIT/(networth +
gross debt – CWIP – Investments – cash & bank)
Source: JRAIA; IMF; World Bank

Opening of new plant to optimize freight on proximity to port area and South/West market
Voltas currently has only one RAC manufacturing plant in Pantnagar, Uttarakhand. The company is
now setting up a second plant in South India at Tirupati, Andhra Pradesh at a cost of INR 500 crore
in two phases. Phase I is expected to be operational by Dec 2020. It will impart competitive
advantage to Voltas due to proximity to port area (which will result in optimisation of freight cost
by quickly catering to southern and western markets versus current practice of serving from its plant
located in North India) and lower reliance on imported material.

Company Existing Proposed

LG Noida, UP Pune, Maharashtra
Samsung Noida, UP Chennai, TN
Voltas Pantnagar, Uttaranchal Tirupati, AP (Dec 2020)
Daikin Neemrana, Rajasthan South India (2021)
Blue Star Kala Amb, HP Sri City, AP (2022)
Haier Ranjangaon, Pune Noida, UP (2020)
Carrier Midea Bawal, Haryana Pune, Maharashtra (2020)
Havells Ghilot, Rajasthan
Hitachi Kadi, Gujarat
Source: Various news reports

Positive near-term prospects on favourable weather condition

Voltas AC sales volume growth is highly correlated with deviation from pre-monsoon (as roughly
50-55% of annual RAC is generated during March-May). According to weather forecaster, Skymet
Weather, the pre-monsoon rainfall in the country in 2019 was the second lowest in 65 years. We
estimate the company to clock 16% sales CAGR over FY19-21 on account of hot dry and extended
summer season in 2019 over a weak base (UCP sales grew 1.3% in Q1FY18 and fell 1.7% in Q1FY19)
and anticipated change in energy rating (as the current norm is valid till Dec 31, 2019).

Edelweiss Professional Investor Research

Voltas Ltd
Outlook and Valuation
Orient Electric Ltd
Deviation from normal rainfall Voltas UCP Outlook and Valuations
Period sales growth Remarks
June quarter Annual
(%)
FY12 5.2% -6.2% -1.4% Good pre-monsoon impacted sales growth
FY13 -25.5% -9.8% 19.3%
FY14 16.6% 6.1% 11.8%
FY15 -28.0% -10.6% 22.3%
FY16 17.8% -12.9% 0.4% Good pre-monsoon impacted sales growth
FY17 -8.0% -7.8% 20.9%
FY18 3.3% -8.2% 5.9% Good pre-monsoon impacted sales growth
FY19 -1.7% -11.8% -2.2% Good pre-monsoon impacted sales growth
Likely to witness strong growth on favorable base effect and hot & dry
2MFY20 -19.6%
extended summer season
Source: IMD; Company

Increase in energy efficiency in a cost-effective manner to further boost RAC sales

India introduced energy ratings in AC for the first time in 2006 and made them mandatory w.e.f
January 2009. In the past one decade, the country’s energy efficiency norms gradually increased for
split AC from 2.3-3.1 W/W to 3.1-4.5 W/W. However, there is still a big gap between the world’s
best available technology and the current technology used in India (refer to below chart). In order
to bridge the gap, the government is planning to gradually improve the country’s average energy
norms from 3.2 W/W in 2017 to minimum 4.8 W/W in 2027. Given that RAC has now become more
of a necessity and compliance with stricter energy efficiency norms will make the product dearer,
we believe the government may incentivise the industry by reducing incremental cost burden on
consumers by bringing scale through EESL programme and rationalising GST rate in the future.

India’s RAC energy efficiency norms well below global norms Voltas’ UCP sales surged prior to change in energy norms
50%

40%

30%

20%

10%

0%
Q3FY12 Q3FY14 Q3FY16 Q3FY18

Source: IEA (2018); Company

UCP segment’s margin to improve to 11% in FY20/21E on operating leverage benefits

Voltas UCP segment’s margin contracted to a decade low of 8.9% in FY19 due to limited ability to
hike prices in a weak market to offset the impact of custom duty hike in Sep 2018 and sharp volatility
in commodity/forex fluctuation. This was particularly due to high channel inventories as a result of
erratic summer season and extended winter season. Even though the inventory situation has now
normalised post strong demand in the current summer season, management has highlighted that
the company has taken limited price hikes in selective models on account of sustained intense
competition in the industry. However, the company expects the segment’s margin to be at 10-11%
on sustainable basis, which is in-line with 10-year historical average level of 11.2%.

10

Edelweiss Professional Investor Research

Voltas Ltd
Outlook and Valuation
Orient Electric Ltd
Outlook
UCP margin contracted to 10-year low level in FY19, and
but to Valuations
revert to historical level in FY20/FY21
4500 14.0%

3900 13.0%

3300 12.0%

2700 11.0%

2100 10.0%

1500 9.0%

900 8.0%
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E

Sales (INR crore) EBITDA margin 10-yr avg EBITDA margin

Source: Company, Edelweiss Professional Investment Research

UCP segment valuation

Leading players across the consumption basket (food, staples, retail, consumer durables) are trading
at an average EV/EBITDA of 34x. Given that Voltas is the leader in the RAC segment (highly
underpenetrated product category compared to other consumption sector) and a strong ROCE
generation business (at 50% in FY19), we believe it could trade at a premium multiple enjoyed by
other leading consumption companies. However, we have valued the UCP segment at the average
multiple enjoyed by leading consumer companies (at 34x) as shown in the table below on
conservative basis.

Revenue Operating EV/EBITDA – P/E –

FY19 Sector Revenue
growth (%) RoCE (%) FY20* FY20
Asian Paints Paints 19,350 12% 43% 31.4 51.3

Britannia Food 10,973 11% 62% 33.4 50.3

Havells Durables 10,058 22% 38% 32.9 50.1

Dabur Staples 8,533 10% 64% 35.3 42.4

Marico Staples 7,334 16% 51% 31.1 42.8

Pidilite Chemicals 7,077 14% 50% 37.1 55.3

Page Industries Retail 2,852 12% 74% 33.7 51.6

Average 33.6 49.1

*Based on share price of June 7, 2019

Voltas UCP Segment Valuation FY21

Segment EBITDA 467
Target multiple 34
UCP Segment Enterprise Value 15,882

11

Edelweiss Professional Investor Research

Voltas Ltd
Outlook and Valuation
Orient Electric Ltd
Outlook and Valuations
II. Voltbek JV: Non-RAC white goods entry to de-risk RAC business
In May 2017, Voltas formed a JV with Europe’s largest white goods manufacturer, Arcelik A.S., to
venture in to the non-RAC white goods segment (refrigerators, washing machines, microwaves,
dishwashers, etc) and sell the products under the ‘Voltas Beko’ brand. The JV plans to initially source
from Arcelik’s global manufacturing facilities and later manufacture the goods on its own in India.
For this, it is planning to incur capex of INR1,000 crore over 10 years in phases. In the initial phase,
the JV plans to manufacture only refrigerators (Direct Cool and No-Frost) in Sanand, Gujarat by using
Arcelik’s technology. Operations commenced from mid-Sep 2018 and management is targeting
~10% market share in the 10th year of operations (FY29).

Non-RAC white goods segment entry to boost growth

We view Voltas’ entry in to the non-RAC white goods segment on a highly positive note as: a) India’s
white goods market is expected to boom over the next decade due to rising per capita incomes and
electrification; b) wide distribution reach will ensure rapid market share gains; c) access to improved
technology will enable it to offer value proposition to customers; and d) mitigates the risk of rising
emergence of MBO, online retailing and increased competition for its existing UCP business.

Domestic white goods market set to boom on rising incomes, electrification and urbanisation
India is likely to see sharp spurt in white goods penetration over the next decade due to rising
incomes, electrification and urbanisation. In the entire white goods category, penetration of
televisions sees first spurt, followed by refrigerators, RAC and others. After achieving high level of
penetration in the TV category, India is now witnessing a sharp spurt in penetration of refrigerators
(up from 20% in 2013 to 30% in 2018 and projected to jump to 40% in 2023). As a result, the
incremental market potential in the refrigerator category over the next five years is estimated to be
higher than the existing market size of the domestic RAC category. Furthermore, the degree of
competitive intensity in refrigerators is lower than RAC as the segment is primarily dominated by
MNCs (LG, Samsung, Whirlpool).

Market Size
Product CAGR Penetration Outlook Remarks
(INR bn)
2018 2023 CY18-CY23 CY18 CY23
14 Penetration level to remain low due to availability of cheap
WM 11 8% 13% 16% Positive
labour
25 Lowest penetration level;
Very
RAC 16 9% 11% 13% Segment witnessing a shift towards inverter ACs;
Positive
Highly competitive segment due to presence of many players
49 Very Higher utility to consumers compared to WM/RACs;
Refrigerator 30 11% 30% 40%
Positive Segment largely dominated by foreign players
73 Highest penetration level;
TV 50 8% 65% 80% Neutral Category witnessing upgradation to LCD/LED/Smart TVs;
Sharp price erosion due to entry of Chinese players
Industry 107 161 8.5%
Source: Industry

Voltas to gain sizeable market share in non-RAC underpinned by strong competitive position
Despite operating only in cooling product categories in comparison to major peers (which are
present across the white goods category with 3x market size of UCP segment), Voltas is ranked 6th
in terms of scale, 4th in profitability and 6th in distribution reach. Given strong execution track record
in the UCP segment and benefit of wide distribution reach (targets to increase from 16,000+ retail
points to 25,000+ points) over the next two years, we believe Voltas will be able to quickly gain
market share in non-RAC categories to a sizeable level over the medium-term.

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Voltas Ltd
Outlook and Valuation
Orient Electric Ltd
Outlook and Valuations Retail
Revenue – EBITDA –
Company Rank Rank Touch Rank
FY18 FY18
Points@
LG (home appliances excl TV) 10,903 1 NA 1 (Assumed) 30,000+ 1
Samsung (home appliances excl TV) 6,732 2 249 6 30,000+ 2
Godrej (includes consumer electronics) 6,339 3 433 3 22,000+ 3
Panasonic India Private Ltd (includes consumer
5,409 4 184* 8 9,000+ 8
electronics)
Whirlpool India 4,832 5 560 2 20,000+ 4
Voltas – UCP 3,226 6 424 4 16,000+ 6
Daikin Airconditioning India Pvt Ltd 3,194 7 281 5 6,400+ 11
Haier 2,350 8 165* 9 17,000+ 5
Blue Star – UCP 2,189 9 143 10 4,500+ 12
Johnson Control Hitachi 2,185 10 199 7 8,500+ 9
Lloyd 1,838 11 136 11 7,500+ 10
IFB Industries 1,808 12 86 12 12,000+ 7
Carrier Airconditioning & Refrigeration Ltd^ 1,315 13 79 13 3,200+ 13
*assumed; ^refers to FY17; sourced from various news reports

Access to improved technology enhances value proposition

Voltas had the experience of operating a refrigerator manufacturing facility earlier, but it shut down
the facility in FY06 due to reduced off-take. Despite having the requisite experience, we believe the
company re-entered the category through a JV with Arcelik to leverage the partner’s technology,
which would enable it offer a value proposition to customers. As per our limited channel checks,
the company’s recent marketing campaign of StoreFresh technology for refrigerators (which
ensures 30-day freshness of fruits & vegetables) has created good awareness among consumers in
a short period from the launch mid-Sep 2018.

Opportune entry to fill the gap left by closure of Videocon’s operations

Videocon was the third largest player in consumer appliances, with revenue of around INR 5000
crore in FY17. The company was the fourth-largest player in refrigerators and third-largest in
washing machines. After the closure of Videocon appliances’ operation in FY18, existing players in
the economy segment (Whirlpool, Haier) have significantly gained market share. However, we still
perceive a vacuum due to limited distribution reach of existing players and expectation of significant
increase in white goods market potential, which can be bridged by Voltas Beko in the near-future.

Videocon consumer electronics & home appliances revenue trend (INR crore)
14000
12000
10000
8000
6000
4000
2000
0
FY16 FY17 FY18 FY19

Source: Company, Edelweiss Professional Investment Research

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Voltas Ltd
Outlook and Valuation
Orient Electric Ltd
Mitigates risk of rising emergence ofOutlook and
MBO/online Valuations
retail
We believe entry in the white goods segment through JV will help Voltas de-risk its RAC business.
As recently seen in the smart TV category, where a new entrant (Xiaomi) has grabbed a significant
market share in a short period on account of rising emergence of multi-brand outlets (MBO) and
online retailing.

Valuation
Given that the Voltas Beko operation will be in investment phase for the next three years (till FY22)
and its operations will be ramped up in a staggered manner, we believe the valuation based on
FY21E EBITDA will not reflect the JV’s true potential. Hence, we have valued it at 24x multiple (which
is in-line with Whirlpool 1-year forward EV/EBITDA multiple) on FY25E EBITDA and then discounted
it back to FY21 at 15% rate (cost of equity).

Particulars FY20 FY21 FY22 FY23 FY24 FY25

Revenue 465 1016 1673 2424 3286 4288
EBITDA -163 -60 23 145 282 436
PAT -139 -82 -41 24 89 162
Valuation
EBITDA - FY25 436
EV/EBITDA Multiple 24
EV 10,461
Less: Net Debt 1468
Equity Value - FY25 8,993
Discount rate @ 15% 1.75
Equity Value - FY21 5,142
Voltas 50% share 2,571
No. of shares 33
Value per share 78
Source: Company, Edelweiss Professional Investment Research

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Voltas Ltd
Outlook and Valuation
Orient Electric Ltd III. EMPS: Best EPC play on strong B/S, smooth order execution, healthy ROCE
Outlook and Valuations
Capex cycle revival to spur domestic EMPS order inflow
Voltas EMPS segment’s domestic order inflow was at near record high in FY19, despite weak capex
activity in the economy and general elections impact on Q4FY19 order inflow (down 36% y-o-y).
During the previous capex cycle, the company’s domestic order inflow had more than quadrupled
from INR 355 crore in FY04 to INR 1,547 crore in FY09. In case of revival of the capex cycle over the
medium-term, we believe the company could witness a sharp spurt in order inflow from the
domestic sector in the near-future. Order inflow can come primarily from government funded
projects (REC, water management, metros, airports, hospitals) over the medium-term.

Domestic order flow to improve on expectation of revival in capex cycle

6000
5000
4000 2203
3000 1916
1505 1666
1454
2000 3170 1433 1427 1070
1083 1257 1200 1185 1246
1200 1040 2284 2740
1000 647 1547 1646 1796 1310 1370 1695 2149 1903
300 1041 1053 1044
0 355 443 459 698 566

FY20E

FY21E
FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19
Domestic order inflow (INR cr) International order inflow (INR cr)

Source: Company, Edelweiss Professional Investment Research

Equipped to participate in new capex cycle on strong B/S and smooth execution of existing orders
We believe the company is now ready to participate in the new capex cycle due to: a) strong balance
sheet position (holding net cash & liquid investment of INR 2,182 crore as on Mar 31, 2019); and b)
smooth execution of existing orders in hand. Improved pace of order execution is reflected in book-
to-bill ratio lower than 10-years’ average in FY19 (despite near record high order inflow) and
segment adjusted ROCE improved to 8-year high of 23% in FY19.

Segment book-to-bill lower than 10-yr average level Segment ROCE improved to 8-year high of 23% in FY19
5300 1.8 25%

1.7 20%
5000
15%
1.6
4700
10%
1.5
4400 5%
1.4
0%
4100 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
1.3 -5%
3800 1.2 -10%

3500 1.1 -15%

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 -20%
Order Book (INR cr) Book-to-bill (x) 10-yr avg -25%

Source: Company; Edelweiss Professional Investment Research

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Voltas Ltd
Outlook and Valuation
Orient Electric Ltd
EMPS segment valuation Outlook and Valuations
We believe EMPS segment’s valuation multiple should be primarily based on strength of balance
sheet and quality of existing orders in hand, which are pre-requisite criteria to fully participate for
any revival in the capex cycle. While the pure play comparison for Voltas’ EMPS segment is not
available, it stands out to be the best in comparison to a few pure play EPC companies (as shown in
the below table). In our view, Voltas can trade at a premium multiple compared to pure play EPC
companies on expectation that the company is fully prepared to participate in any revival in the
capex cycle as evident from smooth execution of existing orders and strong balance sheet position
(holds net cash & liquid investment of INR 2,182 crore as on Mar 31, 2019). However, we have still
valued it at par with peers on conservative basis.

Revenue Operating Net Debt/ EV/EBITDA –

FY19 Credit Rating Revenue P/E – FY20*
growth (%) RoCE (%) EBITDA FY20*
CRISIL AA-
KEC International 11,001 9% 26% 1.36 7.1 13.8
(Stable)
Kalpataru Power CRISIL AA (Stable) 10,840 24% 19% 2.04 7.6 15.2

Voltas ICRA AA+ (Stable) 3,619 27% 23% -ve 8 (assumed)

*Based on share price of June 7, 2019

Voltas EMPS Segment Valuation FY21

Segment EBITDA 269
Target multiple 8
EMPS Segment Enterprise Value 2,149

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Voltas Ltd
Outlook and Valuation
Orient Electric Ltd IV. EPS: Segment to benefit from revival in capex cycle in textile/mining
Outlook and Valuations
Voltas EPS segment revenue is at a decade low due to weak capex activity in textile & mining
sectors. However, the segment reported record high operating margin in FY19 due to increased
contribution from after sales service. In case of any revival in the capex cycle in textile, construction
or mining segments, EPS segment revenue could surge in future. Furthermore, the company has
entered into a distribution agreement with a Japanese textile machinery manufacturer, Shima Seiki,
to market its computerised flat knitting machines (which is at a nascent stage due to prevalent use
of circular knitting technology), which can act as key revenue driver in the near-term. However, we
have conservatively projected the segment’s revenue to post 5% CAGR over FY19-21.

Segment EBITDA margin at record high in FY19 Healthy RoCE on strong cash flow and limited capex outgo
600 36.0% 7 160%

6 140%
550 32.0%
120%
5
500 28.0%
100%
4
450 24.0% 80%
3
60%
400 20.0%
2
40%
350 16.0% 1 20%
300 12.0% 0 0%
FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20E

FY21E

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19
EPS Revenue (INR crore) EBITDA margin (%) Capex (INR cr) RoCE (%)

Source: Company; Edelweiss Professional Investment Research

EPS segment valuation

Leading players in the capital goods sector are trading at EV/EBITDA of 22x. However, we have
assigned 50% discount to the industry’s multiple for valuing Voltas’ EPS segment due to inferior
growth rate compared to other players operating in the capital goods sector. We will narrow down
the discount to industry multiple in case of better-than-projected segment revenue growth with
improved visibility of sustaining such growth over the medium-term.

Revenue Operating EV/EBITDA –

FY19 Revenue P/E – FY20*
growth (%) RoCE (%) FY20*
Lakshmi Machine Works 2712 3% 21% 13.8 21.1
Cummins 5697 10% 23% 21.9 26.1
Thermax 5973 33% 30% 20.4 31.0
Average multiple (a) 18.7 26.1
Discount applied (b) 50%
Voltas Multiple (a*b) 9
*Based on share price as on June 7, 2019

Voltas EPS Segment Valuation FY21

Segment EBITDA 103
Target multiple 9
EPS Segment Enterprise Value 928

17

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Voltas Ltd
Outlook and Valuation
Orient Electric Ltd V. Financial Analysis: At an inflection point
Outlook and Valuations
Revenue to post 11.5% CAGR over FY19-FY21E fuelled by robust UCP segment
Voltas’ consolidated revenue is estimated to clock 11.5% CAGR to INR 8,859 crore over FY19-21
driven by the UCP segment (16% CAGR). We expect the company’s UCP sales to surge over the next
two years on account of hot dry 2019 summer season over weak base (sales grew 1.3% in Q1FY18
and fell 1.7% in Q1FY19) and anticipated change in energy rating. Among other segments, EMPS
segment’s revenue is projected to post a modest 8% CAGR and EPS segment 5% CAGR during FY19-
21. However, these two could spring a pleasant surprise with higher growth in the future on faster-
than-expected revival in the capex cycle.

Voltas revenue to grow at double-digit rate during FY19-21E.. ..as all segments to register growth for 1st time since FY10

9000 14.0% Revenue growth (y-o-y) %

8500 12.0%
8000 10.0% 40.0%
7500 8.0% 30.0%
7000 6.0%
6500 4.0% 20.0%
6000 2.0% 10.0%
5500 0.0%
0.0%
5000 -2.0%

FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20E
FY21E
4500 -4.0% -10.0%
4000 -6.0% -20.0%
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20E
FY21E

-30.0%

Revenue (INR crore) Growth (y-o-y) % UCP EMPS EPS

Source: Edelweiss Professional Investor Research

All the segments to register positive topline growth rate for first time after a decade
Voltas’ annual revenue growth has been impacted since FY10 as one or more segments in each of
the financial years registered negative topline growth for some reason or the other. Given the
expectation of the UCP segment registering strong sales growth over the next two years (after weak
demand for two consecutive years) and EMPS & EPS segments benefiting from revival in the capex
cycle, we believe each of its segments will register positive growth over the medium-term. As a
result, the company can consistently register double-digit growth over the medium-term.

EBITDA margin to improve from 8.6% in FY19 to 9.5% in FY21E on strong rebound in UCP profit
EBITDA margin is projected to improve from 8.6% in FY19 to 9.5% in FY20/FY21 primarily on
expectation of strong rebound in the UCP segment’s margin. We estimate UCP’s adjusted EBITDA
margin to improve from a decade low of 8.9% in FY19 to 10-year’s historical average of 11% in
FY20/FY21 on expectation of strong rebound in demand. EMPS and EPS segment’s margin are
expected to remain relatively stable at the current level over the next two years.

18

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Voltas Ltd
Outlook and Valuation
Orient Electric Ltd
Voltas EBITDA margin to improve from 8.6% in FY19 to 9.5% in FY21.. Outlook
..mainly and Valuations
on expectation of strong rebound in UCP margin
900 11.0% Segment EBITDA margin (%)
15.0% 35.0%
800 10.0%
12.0% 32.0%
700 9.0% 9.0% 29.0%
600 8.0% 6.0% 26.0%
500 7.0% 3.0% 23.0%
0.0% 20.0%
400 6.0%
-3.0% 17.0%
300 5.0%
-6.0% 14.0%

FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20E
FY21E
200 4.0%
FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20E

FY21E UCP (RHS) EMPS (RHS) EPS (LHS)

EBITDA (INR crore) EBITDA margin (%)

Source: Edelweiss Professional Investor Research

Voltas consistently delivered 15%+ RoCE in past decade, despite many challenges
Voltas’ operating cycle has improved to the best level (at 68 days in FY19) in a decade
predominantly due to increase in creditor period (from 91 days in FY10 to 122 days in FY19). While
inventory period has dipped (from 107 days in FY18 to 96 days in FY19), we believe there is further
scope of reduction in the near-future on expectation of normalisation of RAC inventories. Despite
facing many challenges in the past decade (steep increase in competitive intensity in the RAC
segment, legacy order book in EMPS segment, and consistent decline in EPS revenue), the company
has consistently delivered ROCE of 15%+ in the past decade, which highlights the strength of the
company’s business model. Going ahead, the ROCE is expected to moderate from 37.2% in FY19 to
29.1% in FY21 due to high capex for Voltbek JV and second RAC plant in South India. However, the
adjusted ROCE is expected to improve to 41% in FY21 after adjustments for capex.

Voltas operating cycle improved to best level since FY10 Consistently delivered 15%+ ROCE in the past one decade
105
125 110

115 100

105 90 71

95 80 59
54
85 70 40
36 37
75 60 31 32 29
FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20E

FY21E

18 21
FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20E

FY21E

Debtor days Inventory days

Creditor days Op. Cycle

Source: Edelweiss Professional Investor Research

19

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Voltas Ltd
Outlook and Valuation
Orient Electric Ltd
Outlook
We initiate coverage on Voltas with ‘BUY’ and Valuations
recommendation and TP of INR 709, entailing 15% upside
based on current market price. Our target price is based on sum-of-the-parts methodology by
assigning 34x/8x/9x on FY21E EBITDA for UCP/EMPS/EPS segments, respectively. The implied
valuation multiple comes to 21x on FY21E EBITDA, which is relatively in-line with 5-year historical
average of 20.0x. Going ahead, the company would continue to trade above the historical average
multiple due to rising contribution of product segment revenue (which gets 3-4x higher multiple
than EMPS and EPS segments). Key risks include significant loss of market share in RAC, slower-
than-expected penetration in non-RAC white goods, and sharp increase in working capital
requirement of the EMPS segment.

EV/EBITDA multiple to trend upward in the future due to rising share of product revenue
32.0

28.0

24.0

20.0

16.0

12.0

8.0
Jul-14

Jul-15

Jul-16

Jul-17

Jul-18
Oct-14

Oct-15

Oct-16

Oct-17

Oct-18
Jan-15

Apr-15

Jan-16

Apr-16

Jan-17

Apr-17

Jan-18

Apr-18

Jan-19

Apr-19
1 year Fwd EV/EBITDA 5-yr Median Median + 1 SD
Median + 0.5 SD Median - 0.5 SD Median - 1 SD

P/E multiple to also trend upward in the future due to rising share of product revenue
45.0

40.0

35.0

30.0

25.0

20.0

15.0

10.0
Jul-14

Oct-14

Jan-15

Apr-15

Jul-15

Oct-15

Jan-16

Apr-16

Jul-16

Oct-16

Oct-18
Jan-17

Apr-17

Jul-17

Oct-17

Jan-18

Apr-18

Jul-18

Jan-19

Apr-19

1 Year Fwd P/E 5-yr Median Median + 1 SD

Median + 0.5 SD Median - 0.5 SD Median - SD

20

Edelweiss Professional Investor Research

 Voltas Ltd
Outlook and Valuation
Orient Electric Ltd
Relative Valuation Outlook and Valuations
Share Market
Name Sales CAGR EBITDA CAGR EPS CAGR
Price Cap
FY19 FY20 FY21 FY19-FY21 FY19 FY20 FY21 FY19-FY21 FY19 FY20 FY21 FY19-FY21

Havells 789 49,350 10,073 11,534 13,311 15% 1,184 1,461 1,743 21% 12.6 15.8 18.9 23%

Voltas 617 20,417 7,124 7,880 8,859 12% 612 747 839 17% 15.1 15.4 18.0 9%

Whirlpool 1,519 19,272 5,398 6,320 7,363 17% 642 758 906 19% 32.1 39.8 48.4 23%

Blue Star 808 7,782 5,235 5,941 6,736 13% 347 417 500 20% 19.8 23.1 28.3 20%

JCH 1,815 4,935 2,241 2,596 3,034 16% 164 225 282 31% 31.6 44.7 59.2 37%

Average 15% 22% 24%

Name P/E EV/EBITDA RoE

FY19 FY20 FY21 FY19 FY20 FY21 FY19 FY20 FY21

Havells 62.8 50.0 41.8 40.6 32.9 27.6 19.8 21.6 22.6

Voltas 40.9 40.2 34.3 31.8 24.8 22.0 12.8 12.0 12.9

Whirlpool 47.3 38.2 31.4 28.1 23.8 20.0 20.7 21.6 22.3

Blue Star 40.9 35.0 28.5 23.2 19.2 16.1 22.9 24.0 26.0

JCH 57.4 40.6 30.6 31.1 22.6 18.1 15.0 18.1 20.1

Average 49.9 40.8 33.3 31.0 24.7 20.8 18.2 19.5 20.8

Risk-reward Extremely Favourable

Base Case Bull Case Bear Case

FY20 FY21 FY20 FY21 FY20 FY21
Revenue Growth
UCP 17% 15% 20% 20% 10% 10%
EMPS 6% 10% 15% 15% 5% 5%
EPS 5% 5% 10% 10% 0% 0%
EBITDA margin
UCP 11.0% 11.0% 11.0% 11.0% 10.00% 10.00%
EMPS 6.3% 6.3% 7.50% 7.50% 5% 5%
EPS 30.0% 30.0% 30.0% 30.0% 30.0% 30.0%
EV/EBITDA multiple
UCP 34 37 31
EMPS 8 10 7
EPS 9 10 8
Price Target 709 838 559

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 Voltas Ltd
Business Overview
OrientDescription
Company Electric Ltd
Business Overview
Voltas, incorporated in 1954, is promoted by one of the largest business conglomerates in India, the Tata Group (holds 30.3%
stake). It operates in three segments – Unitary Cooling Products (UCP), Electro-Mechanical Project & Services (EMPS) and
Engineering Products and Services (EPS). The UCP business markets air-conditioners, air-coolers, water coolers and other
commercial refrigeration products. The company is the leading player in residential air-conditioners (RAC) in India and second-
largest in air-coolers. The EMPS business provides engineering solutions for centralised air-conditioning. The EPS business markets
mining & construction and textile machinery products. Recently, the company entered into other white goods (refrigerators,
washing machines, dishwashers, etc) through a JV (Voltbek) with Europe’s largest white goods manufacturer, Arcelik A.S.

The company currently operates one RAC plants at Pantnagar, Uttarakhand and plans to open a greenfield unit in Tirupati, Andhra
Pradesh by Dec 2020. It is also in the process of setting up a greenfield unit in Sanand, Gujarat to manufacture refrigerators by
using Arcelik technology under the Voltbek JV by Dec 2019.

Voltas is a leading player in the RAC segment in India and has recently entered in other white goods categories, which we
believe will help the company de-risk its business model and become a major player in the fast-growing white goods
Business Model
consumer durables over the medium-term. The company also provides engineering solutions for centralised air-conditioning
and markets mining & construction equipment and textile machinery products.

The company is a leading player in the RAC segment in India. While it has recently entered in to the white goods category,
Strategic Positioning we believe it will also be able to make a prominent presence in non-RAC categories over the next five years based on strength
of wide distribution network.

Voltas enjoys a strong competitive edge in RAC due to its wide distribution network (6th largest and to become 3rd largest
Competitive Edge by Mar’21) and multi-geographical plant locations (especially post hike in import duty in Sep 2018). For the white-goods
category, the company’s cost-competitive position will improve once it starts its manufacturing facility (expected to
commence by Dec 2019) in light of sharp hike in custom duty.

Financial Structure Voltas enjoys the best operating margin (10-12%) and return ratios (>50%) in the industry. It has a strong balance sheet
position, with net cash & investments of INR 2,182 crore as on Mar 31, 2019.

Key Competitors Key competitors are LG, Samsung, Whirlpool, Panasonic, Godrej, Daikin, Blue Star, Havells, Hitachi, Carrier, etc.

Rise in disposable incomes, increase in electrification & humid climate conditions, rapid urbanisation and revival in capex
Industry Revenue Drivers
cycle are key revenue drivers of this industry.

We are initiating coverage on Voltas with ‘BUY’ recommendation and TP of INR 709 per share, offering 15% upside potential
Shareholder Value to investors. Our TP is based on sum-of-the-parts methodology by assigning 34x/8x/9x for its UCP/EMPS/EPS on FY21 EBITDA
Proposition estimate. The implied valuation multiple comes at 22x on FY21 EBITDA estimates, which is relatively in-line with 5-year
historical average of 20.0x.

22

Edelweiss Professional Investor Research

Voltas Ltd Key Management
Orient Electric Ltd Key Management
Name Designation Profile

He was appointed Chairman of Voltas on Sep 1, 2017. Currently, he is the MD of Tata International
and Chairman of Trent. Having led Trent as MD for more than 11 years, he has been successful in
Mr. Noel N Tata scaling up operation across formats. He is also the Chairman of Tata Investment Corporation and Tata
Chairman
Africa Holdings. Besides this, Mr. Tata is a Director of Titan Industries and on the board of Kansai
Nerolac Paints and Smiths. He graduated from Sussex University (UK) and has completed the
International Executive Programme (IEP) from INSEAD.

He has more than three decades of experience in India’s consumer durables market. He joined Voltas
in 2001 and was appointed GM – Operations in 2006. In 2010, he took over as head of the UCP division.
Mr. Pradeep Bakshi MD & CEO
Shortly after, the Mining & Construction Equipment division was also added to his portfolio. Mr.
Bakshi has played an important role in reviving the Voltas brand.

He has a total work experience of about 35 years, bulk of which has been in large MNCs. He started
his career in audit with Union Carbide and six years later, moved to Hindustan Lever and remained
with it for over 20 years across various functions. He joined Tata Sons at its head office in 2007 and
Mr. Anil George DMD
moved to Voltas 5 years ago. Mr. George is the Deputy Managing Director of Voltas and carries
operational responsibility for the Textile Machinery Division of the company as well. He holds an
Economics degree from Madras Christian College and a Chartered Accountancy certification from ICAI.

He has more than two and half decades of work experience (mainly in marketing function). In his
previous role, with HOOQ Digital, Mr. Kapoor was the India Managing Director and responsible for
Mr. Salil Kapoor COO – UCP division
building India’s first Hollywood focused service that he built from scratch into a strong B2B entity. He
studied mechanical engineering and then obtained his MBA at FMS, Delhi University.

He has around three decades of experience in leadership positions spanning a diverse range of
functions including Business Development / Strategic Planning / Mergers & Acquisitions / Sales &
Marketing / Project Execution with India’s leading conglomerates. He has spent the initial 11 years of
VP & Chief Strategy his career in B2B Marketing, Business Development & Project Management of Engineering equipment
Mr. Dinesh Singh Officer – Corporate (light & heavy) including leading a startup. Thereafter, Mr. Singh was moved to the Strategy function
Planning at Larsen & Toubro. In his previous assignment prior to joining Voltas, he was the Global Head of
Mergers & Acquisitions at Crompton Greaves. Currently, he oversees the strategy and risk
management function at Voltas. He is an Engineer and a Management Post – Graduate (MM with
Distinction) from the Asian Institute of Management, Manila.
He has over 30 years of experience handling assignments in Business Planning, Management
Accounting, Performance Improvement, Business Strategy and Restructuring and Internal Audit. Mr.
Gajendragadkar joined Voltas from Tata Motors, where he worked for over 13 years as a Senior Vice
Mr. Abhijit Gajendragadkar Chief Financial Officer
President in Business Planning and controlling. He is an engineer from VJTI College, with an MMS from
the prestigious SP Jain Institute of Management and Research and fellow member of the Institute of
Chartered Accountants of India.

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Voltas Ltd Timeline
Orient Electric Ltd Financial Analysis
Major Milestones

Timeline Event

Year of incorporation. Jointly promoted by Switzerland-based Volkart Brothers and India’s business conglomerate Tata
1954
Group.

1954-60 Developed India’s first room AC

1961-65 Obtains licence to manufacture the complete range of Carrier air-conditioning equipment

Establishes foothold in domestic and international AC applications.

1966-70
Launched refrigerator under ‘Opal’ brand

1971-75 Ventured in to the international market for HVAC project division

1976-80 Thane plant expands to centrifugal compressors of large capacity

1981-85 Launched split AC. Started a new refrigerator factory.

1986-90 Voltas and Hitachi from Japan formed a JV to manufacture centrifugal compressor

Launched new models of window AC and ductable split AC

Launched new range of refrigeration products following technology transfer agreements with Standard Refrigeration
1991-95
(U.S.A), Hitachi (Japan) and Sigma (Australia).
Launched washing machine in collaboration with Samsung
Introduced new range of RAC under new brands – Vectra, Verdant, Veritas and Visionaire
Exited refrigerator and washing machine under own brand in 1998, but entered into contract manufacturing for
1996-2000
refrigerators in 1997
Launched ozone friendly centrifugal chillers and commercial refrigeration products
Formed JV with US-based Fedders Corporation to manufacture room-air conditioners in India
Voltas entered mass-premium RAC and launched new range of water dispensers
2001-2005
Entered into contract manufacturing agreement with Haier to make ACs and refrigerators
Plans to set up a new plant in Uttarakhand
Launched star rated RAC and new range of models to improve brand positioning
2006-2010 Changed distribution strategy from dealer model to retailer model
Voltas acquired majority stake in Fedders’
Shifted to outsourcing model
2011-2015 Became the largest player in domestic RAC market in 2012
Expansion of retail network from 4,600 points in 2010 to 10,000 points in 2016
Entered air cooler in FY16
Formed JV with Arcelik to re-enter refrigerators, washing machine and other white goods
2016-2019
Plans to set up a AC factory in Tirupati, Andhra Pradesh
Enhanced retail network to 16,000 points in 2018 and targets to increase to 25,000 points over a couple of years

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Voltas Ltd Financials
Orient Electric Ltd Financials
Income statement (INR cr)
Year to March FY17 FY18 FY19 FY20E FY21E
Income from operations 6,033 6,404 7,124 7,880 8,859
Direct costs 5,466 5,742 6,512 7,134 8,020
Employee costs 618 587 642 710 798
Other expenses 4,847 5,155 5,871 6,424 7,222
Total operating expenses 5,466 5,742 6,512 7,134 8,020
EBITDA 567 663 612 747 839
Depreciation and amortisation 24 24 24 26 28
EBIT 542 638 588 720 811
Interest expenses 16 12 33 28 28
Other income 212 174 186 142 134
Profit before tax from operations 738 801 741 834 917
Share from associates -19 4 -52 -70 -41
PBT before exceptional income and tax 719 804 689 764 876
Extraordinary items 1 1 -12 0 0
Provision for tax 200 227 164 250 275
Reported profit 520 578 514 514 601
Extraordinary items 1 0 -9 0 0
Profit after tax 521 578 505 514 601
Minority Interest -2 -6 -6 -6 -6
Adjusted net profit 518 573 499 508 595
Equity shares outstanding (mn) 33 33 33 33 33
EPS (INR) basic 15.7 17.3 15.1 15.4 18.0
Diluted shares (Cr) 33.1 33.1 33.1 33.1 33.1
EPS (INR) fully diluted 15.7 17.3 15.1 15.4 18.0
Dividend per share 1.5 4.0 4.0 3.8 4.5
Dividend payout (%) 9.6 23.1 26.5 25.0 25.0
0 0 0 0 0
Common size metrics- as % of net revenues
Year to March FY17 FY18 FY19 FY20E FY21E
Operating expenses 90.6 89.7 91.4 90.5 90.5
Depreciation 0.4 0.4 0.3 0.3 0.3
Interest expenditure 0.3 0.2 0.5 0.4 0.3
EBITDA margins 9.4 10.3 8.6 9.5 9.5
Net profit margins 8.6 8.9 7.0 6.4 6.7

Growth metrics (%)

Year to March FY17 FY18 FY19 FY20E FY21E
Revenues 5.5 6.2 11.2 10.6 12.4
EBITDA 30.9 16.9 (7.7) 22.0 12.4
PBT 40.0 8.4 (7.4) 12.6 10.0
Net profit 32.2 11.2 (11.1) 0.1 16.9
EPS 27.2 10.5 (12.9) 1.8 17.1

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Edelweiss Professional Investor Research

Voltas Ltd Financials
Orient Electric Ltd Financials
Balance sheet (INR cr)
As on 31st March FY17 FY18 FY19 FY20E FY21E
Equity share capital 33 33 33 33 33
Reserves & surplus 3,274 3,872 4,077 4,432 4,848
Shareholders funds 3,307 3,905 4,110 4,465 4,881
Minority interest 29 32 35 41 47
Borrowings 171 142 315 315 315
Non-current liabilities 0 1 1 1 1
Sources of funds 3,506 4,080 4,460 4,821 5,243
Gross block 402 408 477 507 537
Depreciation 230 237 261 287 315
Net block 173 170 216 219 222
Capital work in progress 1 4 16 300 500
Intangible Assets 81 82 81 81 81
Investment property 46 45 46 46 46
Total fixed assets 300 301 359 647 849
Investments 2,268 2,754 2,386 1,400 1,300
Other non-current assets 72 92 156 156 156
Inventories 907 813 1,091 1,206 1,356
Sundry debtors 1,454 1,570 1,833 2,028 2,279
Cash and equivalents 331 284 321 1,200 1,300
Loans and advances 21 40 86 86 86
Other current assets 1,095 1,439 1,185 1,307 1,451
Total current assets 3,808 4,145 4,516 5,826 6,472
Sundry creditors and others 2,694 2,943 2,841 3,093 3,419
Provisions 268 273 215 215 215
Total CL & provisions 2,963 3,216 3,055 3,307 3,634
Net current assets 846 929 1,460 2,519 2,838
Net Deferred tax 20 5 99 99 99
Uses of funds 3,506 4,080 4,460 4,821 5,243
Book value per share (INR) 100 118 124 135 148
0 0 0 -0 -0
Cash flow statement
Year to March FY17 FY18 FY19 FY20E FY21E
Net profit 520 578 514 514 601
Add: Depreciation 24 24 24 26 28
Add: Deferred tax 1 3 -7 0 0
Gross cash flow 543 599 525 534 623
Less: Changes in W. C. -532 425 1,394 -956 119
Operating cash flow 1,075 174 -869 1,490 503
Less: Capex 19 25 81 314 230
Free cash flow 1,056 149 -951 1,176 273

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Edelweiss Professional Investor Research

Voltas Ltd Financials
Orient Electric Ltd Financials
Ratios
Year to March FY17 FY18 FY19 FY20E FY21E
ROAE (%) 17.0 16.0 12.8 12.0 12.9
ROACE (%) 53.7 59.0 37.2 31.7 29.1
Debtors (days) 88 89 94 94 94
Current ratio 1.4 1.5 1.8 1.7 1.7
Debt/Equity 0.1 0.0 0.1 0.1 0.1
Inventory (days) 105 107 96 94 94
Payable (days) 121 124 122 122 122
Cash conversion cycle (days) 72 72 68 67 66
Debt/EBITDA 0.3 0.2 0.5 0.4 0.4
Adjusted debt/Equity (0.7) (0.6) (0.2) (0.4) (0.4)

Valuation parameters
Year to March FY17 FY18 FY19 FY20E FY21E
Diluted EPS (INR) 15.7 17.3 15.1 15.4 18.0
Y-o-Y growth (%) 27.2 10.5 (12.9) 1.8 17.1
CEPS (INR) 16.5 18.2 16.3 16.3 19.0
Diluted P/E (x) 39.4 35.6 40.9 40.2 34.3
Price/BV(x) 6.2 5.2 5.0 4.6 4.2
EV/Sales (x) 3.0 2.8 2.7 2.4 2.1
EV/EBITDA (x) 32.1 27.3 31.8 24.8 22.0
Diluted shares O/S 33.1 33.1 33.1 33.1 33.1
Dividend yield (%) 0.6 0.7 0.7 0.7 0.8

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Edelweiss Professional Investor Research

Voltas Ltd
Orient Electric Ltd
Edelweiss Broking Limited, 1st Floor, Tower 3, Wing B, Kohinoor City Mall, Kohinoor City, Kirol Road, Kurla(W)
Board: (91-22) 4272 2200

Vinay Khattar
VINAY
Digitally signed by VINAY KHATTAR
DN: c=IN, o=Personal, postalCode=400072,
st=Maharashtra,
2.5.4.20=87db74ffb17a70c89e8519a4d13e40e93c4bca
Head Research ba1a64d00f3c841d2fee3fa678,

KHATTAR
serialNumber=cd5737057831c416d2a5f7064cb693183
887e7ff342c50bd877e00c00e2e82a1, cn=VINAY

vinay.khattar@edelweissfin.com KHATTAR
Date: 2019.06.07 19:14:17 +05'30'

Rating Expected to

Buy appreciate more than 15% over a 12-month period

Hold appreciate between 5-15% over a 12-month period

Reduce Return below 5% over a 12-month period

600

500

400
(Indexed)

300

200

100

0
Jul-14

Jul-15

Jul-16

Jul-17

Jul-18
Oct-14

Oct-15

Oct-16

Oct-17

Oct-18
Jan-14
Apr-14

Jan-15
Apr-15

Jan-16
Apr-16

Jan-17
Apr-17

Jan-18
Apr-18

Jan-19
Apr-19

Voltas Sensex

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