Voltas BlueStar Initiating Coverage

RESEARCH
MEP/HVAC INDUSTRY
VOLTAS & BLUE STAR
INDUSTRY REPORT
Investment Argument
MEP/ HVAC INDUSTRY- VOLTAS LTD. & BLUE STAR LTD.
Initiating Coverage
RESEARCH Sector Engineering
INDUSTRY
MEP (Mechanical, Electrical and Plumbing), an important aspect of the construction sector, forms the
second largest component after civil works. The MEP players provide one-stop solutions for manufacturing,
contracting, commissioning and after-sales service. This includes HVAC (Heating, ventilation & air
conditioning), electrical contracting, plumbing and water management.
Economic growth of the country is dependent on its supporting infrastructure. Almost all sectors like telecom,
IT/ ITES, pharmaceuticals, education, aviation, financial services, power, hospitality and retail require a
conducive environment to perform efficiently and thus highlight the importance of an MEP player’s role.
Key domestic players in the MEP/ HVAC industry include Voltas Ltd. and Blue Star Ltd. with a combined
market share of ~60% in MEP/HVAC, packaged air conditioners (AC) and industrial air conditioning (which
includes refrigeration and cold chain equipment). These companies also have a significant presence in
home segment ACs with a combined market share of ~22%.
We initiate coverage on Voltas Ltd. with a ‘BUY’ recommendation and Blue Star Ltd. with a ‘SELL’ recommendation.
VOLTAS LTD.
! Voltas is the largest domestic player in MEP/HVAC segment and has a substantial presence abroad. It
has an order book of Rs53.3bn (3.2x FY08 segment revenue) with ~75% from the Middle Eastern market
(mostly govt/ semi-govt funded), which provides revenue visibility.
! It is well diversified in terms of business & geography which can ensure steady revenue growth in the
backdrop of the economic slowdown.
! At the CMP of Rs43, the stock trades at a P/E of 6.1x and an EV/EBIDTA of 2.8x FY10E earnings respectively.
We initiate coverage with a ‘BUY’ recommendation with a price target of Rs55 over a 12-month investment
perspective.
BLUE STAR LTD.
! Blue Star is the domestic market leader in central air conditioning and commercial refrigeration segment.
It has an order backlog for Rs16.3bn, which provides revenue visibility for <1 year.
! Its business is domestic centric and thus, the company is exposed to geographical risk in the current
slowing order-inflow scenario from the Indian market.
! At the CMP of Rs137, the stock trades at a P/E of 7.3x and an EV/EBIDTA of 4.8x FY10E earnings respectively.
In the current weak macro economic scenario, we recommend a ‘SELL’ due to lack of future revenue visibility
with a price target of Rs125.
KEY FINANCIALS (CONSOLIDATED) (Rs Mn)
Yr Ended Net YoY Gr Op Marg Net Dil.EPS ROCE P/E P/BV

Sales (%) (%) Profits (Rs.) (%) (x) (x)
2008 32,029 26.8 7.9 2,077 5.6 48.6 7.6 2.5
Voltas Ltd. 2009E 37,933 18.4 7.4 2,182 6.1 41.0 7.1 1.9
Market Cap. Rs14.2bn 2010E 45,964 21.2 7.2 2,352 7.1 38.7 6.1 1.5
2011E 55,460 20.7 7.4 2,884 8.7 39.6 4.9 1.2
2008 22,216 39.3 10.0 1,712 16.1 70.7 8.5 4.7

Blue Star Ltd. 2009E 26,044 17.2 9.5 1,560 17.3 58.2 7.9 3.5
Market Cap. Rs12.3bn 2010E 28,929 11.1 9.1 1,693 18.8 48.3 7.3 2.7
2011E 35,421 22.4 9.3 2,179 24.2 54.5 5.7 2.1
Analyst - Syed Sagheer I syeds@pinc.co.in I Tel: +91-22-6618 6390 17 February 2009 1
Analyst - Satish Mishra I satish.mishra@pinc.co.in I Tel: +91-22-6618 6488 1
Industry Analysis
MEP/ HVAC DOMESTIC MARKET

We classify the domestic market into three segments to understand their outlook in the
current economic context.
MEP/ HVAC Domestic Market

INFRASTRUCTURE ! Airport Modernisation
PROJECTS ! Metro Rail
(GOI IS INVOLVED) ! Delhi Commonwealth Games
Government’s thrust on
infrastructure projects to ! Healthcare Industry
stimulate the economy... BOOMING SECTORS ! CRO & Clinical Trials
! Refrigeration Cold Chains
! SEZ Development
REGULAR BUSINESS ! Hotels, Malls & Retail
! Office Space (Industrial & Service sector)
Source: PINC Research

The first segment is likely to continue its pace of growth, as Govt. of India (GOI) will
ensure project funding. The second segment, which is currently in it’s emerging phase
should maintain its growth rate due to inherent demand while the third segment, which
is a regular cash cow business for MEP/ HVAC players is likely to slowdown in near
future but should improve once the liquidity situation easens.
Segment 1: Infrastructure Projects (GOI is involved)
Airport Modernisation
Growing Indian economy has witnessed an impressive growth in Airline services.
Passenger traffic & air cargo has grown by 25% & 10% respectively in last three years.
Ministry of Civil Aviation, GOI has a vision to reach passenger traffic of 280mn i.e. a
CAGR of 12.7% & cargo traffic of 9mn MT i.e. a CAGR of 14% by CY20.
Currently, there are congestion problems for airways due to inadequate infrastructure
resulting in lack of runways, parking & terminal capacity which leads to delay and
consequently increases cost to consumers & the economy. At present, 70% of the total air
traffic is concentrated at five airports with Mumbai & Delhi alone handling 45% of the
entire domestic air traffic.
To meet ‘Vision-2020’, GOI is taking a mixed route of government funding and PPP. The
main priority for Airport Authority of India (AAI) is the expansion and modernisation of
Investment of ~Rs410bn its existing airports. The whole activity has been divided into four parts,
in airport infrastructure to
! Modernisation of Metro Airports
achieve a CAGR of ~13%
in passenger & cargo traffic... ! Greenfield Airports through PPP
! Modernisation of 35 Non-Metro airports by AAI
! Up-gradation of CNS & ATC services
The total planned investment for airport infrastructure in next 4-5 years is ~Rs410bn.
Timeline for airport developments are as follows:
Timeline for Airport Development

Plans Status
Delhi & Mumbai Airport Modernisation Phase-I to be completed by 2010
Hyderabad & Bangalore Airport Commissioning in 2008
Kolkata & Chennai Modernisation To be completed by 2010
Modernisation of 24 Non-Metro Airports To be completed by 2009
Modernisation of 11 Non-Metro Airports To be completed by 2010
Navi Mumbai Airport In-principle approval granted
Source: Ministry of Civil Aviation, Govt. of India
2
Industry Analysis
AAI has also identified 24 airports for city side development. This includes operation &
maintenance of terminal buildings and commercial spaces. Five airports selected in
Blue Star & Voltas to benefit phase-one are Ahmedabad, Lucknow, Bhubneshwar, Jaipur and Indore.
from airport development...
In an in-built construction, MEP work contributes to 35% of total cost. Hence, all works
towards airport infrastructure will translate to substantial business for MEP/ HVAC
players. Blue Star and Voltas being the major players in India should benefit from these
developments.
Metro Rail
Indian economy has grown at a robust pace of 8-9% in the recent past. Advantage of
huge consumption & working population base is attracting lots of investments into
India. With more than 1bn population and 30% of that residing in urban areas is posing
a tremendous challenge for day-to-day commutation. Road networks alone cannot handle
the pressure of metro cities. Increasing number of private vehicles, along with rising
fuel prices & environmental issues has emphasised the importance of development of
an efficient mode of public transport, which has given rise to the Metro Rail system in
India. Currently, metro rail projects are under implementation in six cities.
Status of Metro Rail in India

Metro Schedule Details
Completion Length (km) Value (Rs bn)
Delhi Metro 407 -
Phase-I Completed 65 105
Metro Rail projects in six cities Phase-II 2010 121 -
to generate business for MEP/
Phase-III 2015 112 -
HVAC players...
Phase-IV 2020 109 -
Mumbai Metro 146 195
Phase-I 2011 63 -
Phase-II 2016 20 -
Phase-III 2021 63 -
Chennai Metro 45 111
Corridor-I 2015 23 -
Corridor-II 2015 22 -
Hyderabad Metro
Phase-I 2012 71 121
Ahmedabad Metro
Phase-I 2010 42 -
Bangalore Metro
Phase-I 2013 33 64
Source: Metro Rail websites, PINC Research
Growth in metro rail infrastructure will provide opportunity for central air-conditioning
(CAC) players like Blue star & Voltas, which are expected to bag orders for installation
and maintenance of CAC system in trains and at railway stations.
Delhi Commonwealth Games-2010
In 2003, India (Delhi) won the hosting rights for next Commonwealth Games to be held
in Oct’10. Accordingly, Delhi city is going for a complete renovation & modernisation
phase. This pertains improving basic infrastructure, roads, public transportation and
power management. Total estimated investment will be ~USD17.5bn.
The Delhi Development Authority (DDA) with a focus on maximising athlete comfort is
building a new state-of-the-art Games Village along the east bank of the River Yamuna.
The village will be spread over an area of 63.5 hectare and total expected development
cost including residential space will be ~USD230mn.
Large MEP & HVAC players like Blue Star & Voltas are eyeing for a big chunk of business
from Commonwealth Games to be executed before Oct’10.
3
Industry Analysis
Segment 2: Booming Sectors

Health care industry
Indian healthcare industry has seen a paradigm shift from an unorganised to an organised
structure in the last few years. Many private players have entered into the lucrative
healthcare sector. Govt. of India is trying to boost the sector with incentives like,
permission of 100% FDI for all health-related services under the automatic route,
infrastructure status accorded to hospitals, lower tariffs & higher depreciation on medical
equipments and income tax exemption for 5 years to hospitals in rural areas, Tier II &
Tier III cities.
Projected Growth in Healthcare Industry in India (USD bn)

300
CAGR-12%
225
Healthcare industry to grow at
CAGR-15%
~15% CAGR for the next 6-8
years... 150
CAGR-15%
75
0
2006 2012 2016 2022
Source: Investment Commission of India, PINC Research
Favorable factors like, low cost of medical treatment, experienced and talented pool of
Medical Professionals, strong private Hospital Infrastructure, English as a widely spoken
language and Govt. support are helping India, emerge as a next destination for Medical
tourism. Medical tourists have increased almost 20-fold from 10k in ‘00 to about
0.18-0.2mn in ‘06. Medical tourism in India is projected to grow to be a USD2.2bn industry
in 2012 (Source: Investment Commission of India).
Indian private players like, Apollo, Wockhardt, Fortis, Max Healthcare, Manipal Health
systems and Care Hospitals are well known brands across the globe and are expanding
their infrastructure to reap the benefit of growing market.
Other players like, Narayana Hrudayalaya, Columbia Asia, Global Hospitals, Artemis
Health Institute, Naresh Trehan’s MediCity, Aditya Birla Memorial Hospital and Reliance
ADAG Healthcare have also started setting up chains of Hospitals in India.
Meanwhile, foreign players too are not far behind in the race. Harvard Medical
International and Cleveland Clinic have entered the country through JV, Pacific
Healthcare Holding has opened their first hospital in Hyderabad. Parkway Group from
Singapore, Emaar from the Middle East and Prexeus Health Partners from the US have
announced their plans.
As per investment commission of India, there is an opportunity of over USD25bn
investment by ‘10 in the Indian healthcare industry.
Indian MEP/ HVAC players will benefit from the healthcare boom as infrastructure will
be of high standards and hence will generate substantial business for established players
like Blue Star & Voltas.
Contract Research & Clinical trials
Medical services outsourcing from the US has seen a CAGR of 150% in the last two
years. Works related to Medical Coding, Medical Billing, and Claims Processing are
likely to be outsourced by big pharma companies across the globe. India with its large
pool of skilled IT work force and robust IT infrastructure will provide opportunity for
outsourcing of IT-enabled healthcare services. Indian Healthcare BPO Services are likely
to have a robust growth in future. (Source: India Brand Equity Foundation-IBEF)
4
Industry Analysis
India is becoming a desired destination for Clinical trials for the domestic & foreign
companies owing to low cost advantage and easy availability of volunteers for trials.
Indian clinical trials market of USD140mn in 2006 has grown by CAGR of 40 % for the
last 3 years. (Source: IBEF)
As per Crisil Report published in Sept’07,
! Contract research market in India will register strong growth of 25-30%
! Generic research outsourcing projected to grow moderately by 18-21%
Clinical Research to grow at a
! Clinical research outsourcing to witness robust growth of 30-35%
robust pace of ~30% in India
for next few years... ! Clinical trials, bio-statistics and data management to act as growth drivers
! Phase I trials and central labs testing to gain momentum; Phase II and III trials to
dominate overall demand
Companies working as Contract research organisation (CRO) and conducting Clinical
trials in India have to follow the guidelines regarding the infrastructure support. Growth
in this sector will provide huge market for MEP/ HVAC players, like Blue Star and Voltas
in India.
Refrigeration cold chains
India is a leading producer of fruits in the world with 8% share of total global production.
India is only behind China in vegetable production contributing 15% of total world’s
production. The magnitude of post harvest losses in fresh fruits and vegetables is
estimated at 5-25% in developed countries, whereas for India, losses are close to 40%.
India’s wastages are huge enough to feed countries like Brazil and Vietnam. (Source:
National Horticulture Board (NHB)-Govt. of India)
The reason for this colossal wastage is the wide gap in the cold chain infrastructure.
Cold storage facilities for fruits & vegetables are insufficient/ nonexistent. There are no
cold storages in close proximity to farms, transportation is inefficient and temperature-
controlled transportation rarely exists. (Source: NHB-GOI)
Currently, National Horticulture Board-NHB provides ~70% of cold storage facilities
available in India. As per NHB, there is a requirement to triple the cold storage facilities
by ‘11.
Sensing the huge opportunity, many national & international players are investing in
developing cold chain infrastructure. Govt. of India is also giving benefits in developing
the infrastructure & has allowed 100% FDI investment. Future logistics has plans to
Huge investments being invest Rs4bn by ‘10. Other domestic players like Concor, Adani Agrifresh, Gateway
initiated by public & private Distriparks (Snowman Frozen Foods), R.K. Foodland, Refcon Carriers, Indraprastha Cold
players for improving cold Chain, Bulaki Deep Freeze and Glacio Cold Chain are also betting on robust growth of
chain infrastructure... the sector. Multinational giants like, Spire Group, Canada’s third largest player in cold
storage business is forming a JV with Apollo Group to invest USD250mn in India.
Malaysia’s Haisen is planning a JV with Beta Empire Group & Pace CFS to enter into the
Indian market.
The billion-dollar investments announced by big players like, Reliance, Bharti, ITC,
Godrej, Tata, Aditya Birla Group and Future Group for retail expansion offer a ready
market for third-party cold chain logistics players.
Indian players like Blue Star & Voltas in the MEP/ HVAC segment will benefit from this
trend in cold chain infrastructure.
5
Industry Analysis
Segment 3: Regular Business

Special Economic Zone (SEZ)
Export processing zones were in existence in India for more than 40 years, however, only
after the approval of “Special Economic Zones Act, 2005” things have started
materialising. Seeing the benefits from SEZ, Govt. of India is trying to ease the hassles
involved in SEZ approvals.
Formal Approval In-principle Approvals
IT/ITES Bio-Tech Pharma Tex tile Multiproduct Others
9%
21% 2%
SEZ for IT/ITES, Bio-Tech and 10%
Pharma will generate 41%
business for MEP players... 4%
4%
4% 62%
5%
38%
Source: Ministry of Commerce & Industry
As of 18 Nov 2008, 531 SEZs in India have received formal approvals, out of which in-
principle approvals has been given to 143 SEZs and 270 are notified SEZs. Total investment
as on 30 Sept 2008 stood at Rs935bn.
All the spaces build for IT/ITES, Biotech, Pharma & other offices will provide business for
MEP & HVAC players. Blue Star and Voltas being the major players in India will benefit
from these developments.
Retail expansion
India has witnessed an unprecedented growth in retail sector in the recent past. An
economic growth of ~8% coupled with favorable demography has led to a consumption
boom in the country. It has grown by 20-25% CAGR in the last 5 years. Govt. has permitted
FDI to the extent of 100% in cash for wholesale format & 51% for trade of single brand
products. The Indian retail industry is currently estimated to be USD350bn and organised
Retail penetration to increase retailing forms only 5%, which is projected to increase to 14-18% by 2015 (Source:
from ~5% to ~15% by 2015... McKinsey Report).
Expansion Plans in Pipeline

Companies Expansion Plans
Big Bazaar 240 new Hypermarkets by 2011
Arvind Mills 200 new Megamart by 2012 with investment of Rs4bn
Reliance Retail 5,000 stores by 2010
Lifestyle Investment of Rs4bn in next 4-5 years
Raheja Group Plans to have 55 "Hypercity" hypermarket by 2015
RPG 450+ Music world & 50+ Spencer's Hyper by 2010
Piramyd retail 150 stores in next 5 years
Source: Ministry of External Affairs, Govt. of India, PINC Research
The current economic turmoil and credit crunch in market have slowed down the
expansion in retail sector. However, large players like Big Bazaar, Arvind Mills have
stuck to their expansion plans. Few other players are waiting on the sidelines to benefit
from softening real estate & commodity prices.
The retail sector is likely to witness an upturn following favorable economic conditions.
Indian MEP/ HVAC players like Blue Star and Voltas will benefit as MEP constitutes 35%
costs of an in-built environment.
6
Industry Analysis
Hotels
The global financial meltdown is likely to decelerate the expansion in Hotel industry.
Tourist inflow to India has also decreased post ‘26/11’ Mumbai incident.
We believe the fallen uncertainty in the global economy will generate several challenges
for the hospitality sector in terms of revenues and profitability of operations. Hotels
planning for expansion could be impacted as they find it increasingly difficult to leverage
their balance sheets/ projects to develop new hotel properties.
List of Hotel Projects in Pipeline

Uppal Group 7 luxury Hotels by 2010 (1.4k rooms)
Marriott 24 luxury hotels by 2011 (7k rooms)
Panoramic Universal Hotels at Thane, Hyderabad, Durgapur and
Impressive pipeline of hotels, Pune by 2009
however, completion is Hotels in Hyderabad The Park, Hilton, Hyatt, Accorr and Trident to
questionable in the current build 10 hotels by 2010
scenario... Marriott & Unitech 3 new hotels each at Kolkata, Noida and
Gurgaon, was expected by 2008
Accorr Group 200 hotels by 2010
Appu Hotels 10 new hotels across Tamil Nadu in next 3-4
years
Kempinski and Leela Palaces & Resorts 5 hotels in next 4 years
Mahima Real EstatePvt Ltd Hotel cum Mall project in Jaipur
Hyatt 15 five star and deluxe hotels and resorts in
India over the next 3-4 years
South India Hotels & Restaurants Association 51 Hotels in South India
Hotels in Chandigarh DLF, Radisson, Oberoi and Maurya Sheraton
to make hotels in Chandigarh
ITDC Two greenfield hotels in Delhi
Hotels in Goa 12 Hotels are expected in next 3-5 years
Le Meridian Plans 10 Hotels by 2009
Best Western 100 Hotels in 7-8 years
Source: Indian Tour Operators Promotion Council (ITOPE)
Though the list looks impressive, however, in the current scenario completion of projects
are questionable. Indian hotel industry will improve once the economy stabilises and
investors regain their confidence in India’s growth story. Many national & international
companies are betting on India, as the place of next decade. In such a scenario,
requirements for high-class hotels are set to increase in India. Development of High-
Class hotels augurs well for MEP/ HVAC players like, Blue Star & Voltas.
Industrial & Service Sector
IT, ITES, Telecom, and BFSI (Banking, financial services and insurance) sector mainly
contributes to growth in demand of office space. All these sectors except Telecom are
severely impacted by current commotion in economy across the globe. Apart from
service sector, growth in Industrial and infrastructure sector also leads to increase in
office spaces.
Though the business for MEP/ HVAC players from this segment is likely to slowdown in
near future but things should change once there is an upturn in the economy.
7
Industry Analysis
MEP/ HVAC MIDDLE-EAST MARKET

Abu Dhabi
In the year ‘05-06, Abu Dhabi Govt. decided to diversify its economy away from Oil.
Contribution from Non-oil sector is targeted to increase from 38% in 2006 to 45% by
2010. An investment of ~USD168bn was planned to be spend in 5 years from 2006-11.
Around 70% of total investment was planned for the construction & tourism sector, which
constitutes a huge market for MEP/ HVAC players. Majority of the projects will be
commissioned in next 2-3 years.
Investment Distribution Contribution to GDP

Power/Water Non-Oil Oil
6%
Industrial
55%
10% 2010E
45%
Huge investments in non-oil
sectors by Mid-East countries Oil & Gas 59%
2007
13% 41%
augurs well for MEP/HVAC
players... 62%
2006
38%
Construction
Tourism 51%
20% 0% 20% 40% 60% 80%
Source: Abu Dhabi Chamber of Commerce and Industry

When other countries across the globe are facing a credit crunch, the emirate of Abu
Dhabi is confident of sustaining the real estate growth momentum, thanks to the current
account surpluses made with sky-high oil prices in recent past. Voltas, being part of
high-profile projects in Abu Dhabi, has an assured cash inflow for next 2-3 years, in the
current uncertain scenario.
Bahrain
In Bahrain, Oil & Gas sector accounted for 11% of GDP & 76% of government revenue in
2006. In an attempt to diversify its economy, Bahrain Govt. is trying to promote other
services like health, education & information technology. Development of Bahrain as a
financial hub was a major step towards diversification. Bahrain Govt. is working towards
the Economic Vision for 2030, which targets to increase Bahraini household disposable
income to atleast twofold by ‘30.
Along with the growth in other sectors, Bahrain is focusing on the tourism industry.
Bahrain, blessed with 33 islands along with its lifestyle, rich history & culture offers a
great potential both as a regional and a world tourist destination.
Many international projects are in progress in Bahrain to make it a world class tourist
destination. Some high-profile projects currently running include Dilmunia, Bahrain
Financial Harbour, Riffa Views, Durrat Al-Bahrain, Amwaj Islands, Al-Areen Development,
Bahrain Bay, Bahrain World Trade Centre, Reef Island, Abraj Al-Lulu (Pearl Towers), Tala
Island, Bahrain Investment Wharf, Mina al Salam – Bahrain and others.
Govt. of Bahrain is involved in many of these projects and hence, they are likely to finish
as per schedule even in this current economic scenario. MEP players having presence
in Bahrain should have guaranteed cash flow in the current gloomy environment.
8
Industry Analysis
Qatar
Government of the State of Qatar modified its policies in 2000 aiming at diversifying
income sources and developing the economic infrastructure to meet the National Vision
to transform Qatar into an advanced country by 2030.
According to the World Economic Forum, Qatar is now the most open Arab economy,
and the, “best regional model for its neighbors to emulate.” Qatar has the highest GDP
per capita income in the world.
As per Ministry of Economy & Commerce, State of Qatar, following investments are
planned for next 3-4 years to meet their National Vision.
! Investment of USD100bn on infrastructure projects by ‘12
! Expansion projects worth USD45bn in next few years
! A new airport, biggest in the region with expenditure of USD5bn
! 27 mega industrial projects by ‘10 with cost of USD60bn
! Introduction of USD2.5bn project “Pearl of the Gulf” man-made Island
! Eight new hotels with 2,550 rooms will be added in the next two years
These investments will generate a huge business for MEP players and Voltas with its
penetration in Qatar, should benefit the most.
9
Industry Analysis
AIR CONDITIONER MARKET

With favorable economic conditions in the recent past and increasing disposable income,
Air conditioners (ACs) have progressed from being a luxury to a necessity. The AC market
has seen a volume & value growth of 21% & 17% respectively in the last 5 years.
Volume & Value Growth in Air Conditioner Market (%)

Air Conditioners FY04 FY05 FY06 FY07 FY08 last 5yr CAGR Projected CAGR
Volume Growth 15 25 19 22 18 21 13
Split AC 14 45 47 32 50 37 20
Window AC 15 18 7 16 7 12 4
ACs volume has grown at a
Value Growth 12 (2) 12 28 36 17 17
CAGR of 21% in last 5 years...
Split AC 16 17 20 36 55 27 22
Window AC 14 (15) 4 20 12 6 6
Source: Crisil Research
According to Crisil Research, in terms of AC volumes, the compounded growth will be

only 13% p.a. for the next 4-5 years but change in product mix will lead to higher value
growth of 17% p.a.
Change in Product Mix (Volume & Value)

Window Split
Value Mix Volume Mix
2012-13E 21% 79% 30% 70%

2012-13E
Product mix to shift towards
Split ACs; registering higher 2007-08 36% 64% 51% 49%
2007-08
value growth in ACs over
volume growth...
2002-03 59% 41% 73% 27%
2002-03
0% 20% 40% 60% 80% 100% 0% 20% 40% 60% 80% 100%
Source: CRISIL Research
Decreasing price differential between split and window AC is shifting the product mix
towards split-AC. Most of the Industrial segment is opting split over window. In home
segment also, split is preferred by first-time users.
The current economic slowdown and floating negative sentiments should dampen the
growth prospects of the consumer goods market. However, the fiscal and monetary
stimulus package amended by the Govt and RBI is likely to revive the economic growth
and boost the aggregate demand. We believe that the AC market should show a value
de-growth of ~5% in H2FY09 & 8-10% growth in FY10.
10
Investment Argument
VOLTAS LTD.
Initiating Coverage BUY
RESEARCH Sector Engineering I CMP Rs 43 I Target Rs 55
Voltas Ltd. (Voltas), a TATA group company, is India’s premier air

STOCK DATA conditioning and engineering service provider. It offers solutions for a
wide spectrum of industries in areas such as heating, ventilation & air
Market Capitalisation Rs14.2bn
Book Value per share Rs17.4
conditioning, refrigeration, electro-mechanical projects, water handling,
Eq Shares O/S (F.V. Rs.1) 330.7mn textile machinery, machine tools, mining & construction equipments
Median Vol. 1,429,869 (BSE+NSE) and materials handling.
52 Week High / Low Rs216/38 Besides being the largest player in domestic HVAC/ MEP segment, Voltas
BSE Scrip Code 500575
has a significant presence in MEP in Middle East and South East Asia.
NSE Scrip Code VOLTAS
Bloomberg Code VOLT@IN
Envisaging the construction boom in Middle Eastern market, Voltas made
Reuters Code VOLT.BO its penetration in these markets at an early stage. It is the second largest
player in domestic home AC segment.
Operating profit/ unit will
Currently, it is part of many high profile projects like Burj Tower, Ferrari
increase with change
SHAREHOLDING in (%)
PATTERN
Theme park etc. Further, it received two prestigious awards for ‘MEP
product mix and technology...
Qtr. Ended Jun-08 Sep-08 Dec-08 Project Manager of the Year’ and ‘Health & Safety’ at the Middle East Awards
Promoters 27.6 27.6 27.6 2008, which speaks volumes about the company’s status in these market.
MFs/ FIs 24.0 24.7 26.5 It has also secured new projects in Singapore and Mauritius. Its notable
FIIs/ NRIs/ OCBs 21.2 19.1 16.4
accomplishment in the domestic MEP business has been the completion
PCBs 5.9 7.3 8.0
of the new Rajiv Gandhi International Airport in Hyderabad.
Indian Public 21.3 21.3 21.5
At the CMP of Rs43, the stock trades at a P/E of 6.1x and an EV/EBIDTA of
2.8x FY10E earnings respectively. Robust order book for MEP/HVAC segment
STOCK PERFORMANCE (%) with significant presence in Middle East market coupled with diversified
business model, Voltas has the potential to post revenues at a CAGR of
1M 3M 12M
Absolute (6.2) (36.9) (74.5)
~21% for the next two years. Hence, we recommend a ‘BUY’ with a price
Relative (10.1) (36.4) (55.3) target of Rs55 on a 12- month investment perspective.
INVESTMENT RATIONALE
STOCK PRICE PERFORMANCE ! Robust order book of Rs53.3bn with ~75% from the Middle Eastern
market gives revenue visibility for MEP segment for the next 2 years.
Voltas BSE (Rebased)
300 Most of the international projects concentrated in Qatar & Abu Dhabi
are Govt/ Semi-Govt funded and hence likely to be insulated from the
225 current economic scenario.
150 ! Voltas with its business and geographical diversification has the
potential to ensure revenue growth despite slowdown in few sectors.
Operating leverage will provide
75 Further, the company’s resilient business model also keeps its margins
an edge over emerging
stable to a large extent.
players...
0
Feb-08 May -08 Aug-08 Nov -08 Feb-09
! Strong financials with cash reserves and low leverage should help
Voltas tide the current tight liquidity scenario.
KEY FINANCIALS (CONSOLIDATED) (Rs Mn) KEY RATIOS
Yr Ended Net YoY Gr Op Op Marg Net Eq Yr Ended EPS* ROCE RONW* P/E* EV/Sales EV/EBDIT
(Mar) Sales (%) Profits (%) Profits Capital (Mar) (Rs.) (%) (%) (x) (x) (x)
2007 25,267 29.3 1,282 5.1 2,016 331 2007 4.3 40.0 41.3 9.9 0.5 7.2
2008 32,029 26.8 2,530 7.9 2,077 331 2008 5.6 48.6 37.2 7.6 0.4 4.0
2009E 37,933 18.4 2,788 7.4 2,182 331 2009E 6.1 41.0 30.3 7.1 0.3 3.8
2010E 45,964 21.2 3,319 7.2 2,352 331 2010E 7.1 38.7 28.2 6.1 0.2 2.8
2011E 55,460 20.7 4,104 7.4 2,884 331 2011E 8.7 39.6 27.8 4.9 0.1 1.4
* Excluding E/O items 11
Voltas Ltd.
Background
Voltas Ltd was promoted as a JV between Tata Sons Pvt Ltd and Volkart Brothers in 1954 to
take over the Engineering & Import Division of M/s. Volkart Brothers. The company went
public in ’56 and the Volkart Brothers sold their stake in the company. In the beginning,
it was only marketing imported products and was acting as an indenting agent.
Gradually it established its first factory in ‘63 to manufacture AC and refrigeration
equipments at Chinchpokli, Mumbai and one year later a new plant was setup in Thane,
Maharashtra to manufacture air conditioning equipments like, compressor, condenser,
chiller and ancillaries. With time, the product range widened to include other
engineering equipments.
The company graduated from being a HVAC player to a full scale MEP (Mechanical,
Electrical and Public Health) player. A wholly owned subsidiary, Voltas International
Limited (VIL) was set up in ’78 to handle international MEP projects. Later in ’01, it was
merged with Voltas. Acquisition of 51% stake in Mumbai-based turnkey electrical and
instrumentation project contractor Rohini Industrial Electricals, in Aug’08 should
supplement the company’s portfolio as an MEP player in the domestic market & also
benefit through cross selling. Voltas is the largest player in HVAC/MEP segment and is
the second largest player in air-conditioners with a market share of 18%.
It offers complete solutions from the concept to the commissioning and maintenance
for material handling, construction, mining and textile business. Voltas is one of the
largest manufacturers of forklifts trucks in India with a market share of 36%. With a 60%
market share it is the market leader in spinning machinery & accessories.
Currently, the company has three manufacturing units situated at Thane (AC systems,
forklift trucks, cranes, warehousing & construction equipment), Dadra (AC Systems,
Room AC) and Pantnagar (Commercial refrigeration, water cooler, AC systems,
Room AC).
Revenue Contb (%) Business Profile

Business Segment Activities
Others - 1
! Services related Mechanical, Electrical and Public Health (MEP)
Unitary Cooling Products - 25
! Design, manufacturing, installation, commissioning and
Engineering Prod & Serv - 18 maintenance of central air-conditioning plant’s duct systems,
Electro - mechanical
Projects and Services
industrial refrigeration equipments as well as customised cold
Electro-Mech Project - 56 storages and bulk cold storage equipments
! Electrical and instrumentation-contracting services
FY08 ! After sales service
! Mining Equipment: Hydraulic Excavators, Dump Trucks, Loaders

Engineering Products ! Construction Equipment: Crushers, Screening Plants Excavators
and Services
PBIT Contb (%) ! Materials Handling: Forklift Trucks, Cranes, Container Handling
Equipment, Storage Retrieval system for Cargo Complexes
Others - 1 ! Textile Machinery & Accessories: Spinning, Knitting Weaving

Unitary Cooling Products - 20
! Air-conditioners: Window & Split AC
Unitary Cooling
Engineering Prod & Serv - 42 Products ! Commercial Ref. product & Cold Chain equipments: Water
coolers, bottled water dispensers, deep freezers, milk coolers,
bottle coolers and supermarket refrigeration equipment.
Electro-Mech Project - 37
Others ! Chemical trading for the personal care, paint, construction
FY08 chemicals and plastics industries (this business has been
transferred to DKSH India Private Limited in FY09)
Source: Company & PINC Research
12
Investment Rationale
Robust Order Book

The total order backlog of Voltas as on Q3FY09 stood at Rs53.3bn (3.2x FY08 segment
revenue) executable over 24-30 months.
MEP/ HVAC Order Book (Rs bn)

Domestic-OB (Rs bn) International-OB (Rs bn) Order Inflow (Rs bn)
60
45
46 45 43
Robust order book of Rs53bn 30
38
provides revenue visibility for 27
20
next 2 years... 15 14
11 11
6 7 8 8 10
-
Q1FY08 Q2FY08 Q3FY08 Q4FY08 Q1FY09 Q2FY09 Q3FY09
Domestic orders of ~Rs11bn (1.2x FY08 segment revenue) have a timeline of 9-12 months.
International order book of ~Rs43bn (5.5x FY08 segment revenue) with timeline of 24-30
months provides good revenue visibility, as most of the projects like, Burj Tower (Dubai),
Ferrari Theme Park (Abu Dhabi), Barwa City (Qatar), Apollo Bramwell Hospital (Qatar)
are high profile projects and are government or semi-government funded. It has also
secured new projects in Singapore and Mauritius. The Changi Water Reclamation Plant
project in Singapore was commissioned by the company in FY08.
Though domestic order execution is likely to slow down in the current economic scenario,
international projects with completion timeline of 24-30 months should help Voltas in
sailing through this tough period. By the end of H1FY09, only 65-70% of current
international order book has reached the revenue-booking threshold. Revenue booking
from international segment is expected to peak in FY10 with H2FY09 performing better
than H1FY09.
Diversification advantages
Voltas has diversified itself in terms of both Businesses and Geographies.
Business Diversification
Business and geographical
Voltas has four lines of businesses with the biggest segment, Electro Mech projects &
diversification should
services contributing 54% of the revenues in FY08. Individual segments are also
aid future growth...
diversified in different ways.
Revenue Contribution from Different Segments (%)

Segment FY08 FY09 (9months)
Electro Mech. Projects & Services 54 60
Engineering Prod & Services 18 15
Unitary Cooling Products 27 24
Others 01 01
‘Electro-mechanical projects & services’ segment serve both domestic and international
clients. International projects contributed ~45% of the segment revenue in FY08 and
~55% in FY09 (9 months). Company has now integrated vertically from HVAC to MEP in
the domestic market.
‘Engineering products & services’ segment offers wide range of equipments for
industries, like Mining, Construction, Materials Handling and Textile.
‘Unitary cooling product’ segment have Air-Conditioners, Commercial Ref. product &
Cold Chain equipments under its portfolio.
13
Market Diversification
‘Electro-mechanical projects & services’ segment contributing more than 50% of revenue
is further diversified in terms of geographies.
Geographical Division of MEP/ HVAC Order Book

Country Orders (Rs bn)
India 11
Abu Dhabi 19
Qatar 19
Dubai & Singapore 04
Foreseeing the slowdown in demand in Dubai market, the company is diversified well
across other Middle East countries, where projects are more of necessity rather than
luxury. Most of the projects in Abu Dhabi and Qatar are Govt / Semi-Govt funded and are
likely to be executed on time.
Positioning Advantage
Civil & MEP work constitutes the major cost of an in-built environment, with share of
Positioned as a full fledged ~60% & ~35% respectively of the total construction cost. Voltas has been able to position
MEP player in the Middle itself as an MEP contractor internationally, which takes care of HVAC, electrical, water
Eastern market... management & plumbing related jobs. With its positioning and executed project records,
Voltas command a favorable position in the domestic & international market.
Cost propn ~60% Cost propn ~35%
Feasibility Design and Civil Test &

Earthwork MEP work
Study Drawing Construction Hand over
Sub /Nominated Contractor

Mechanical, Electrical, Public Health (MEP)
! Plan, take statutory approvals, procure, construct, test
and commission.
! Extent of design depends on type of contract
! Design and build contract: Design right from conceptual
stage.
! Construction Contract: Develop detailed drawings
! Installation Contract: Install equipment provided by
clients
Acquisition of Rohini Electricals

Voltas acquired 51% stake in Rohini Industrial Electricals, a Mumbai-based turnkey
electrical and instrumentation projects contractor, in Aug’08. Rohini has completed
over 500 projects over the past two decades across India. It reported a turnover of ~
Rs1.2bn in FY08 and has margins similar to MEP projects. This will help Voltas strengthen
its position in the value chain from being a HVAC player to full scale MEP player, as well
as expand its market coverage to include the industrial sectors in the domestic market.
Company will also benefit from the cross selling Rohini’s product to its existing customers.
Resilient Business Model
Raw Material protection: Voltas has a policy of fixing contracts with all subcontractors
and product suppliers for Electro-Mechanical Project segment between technical and
financial bidding stage. This helps protect margins barring an extreme fluctuation in
raw material prices. It is also trying to garner newer projects which are cost plus in
14
nature. Segment 2 & 3 i.e. Engineering Products & Systems and Cooling Products are
exposed to raw material price fluctuation but to the extent of commodity-product
relationship.
Foreign currency fluctuation: Company has a natural hedge to a large extent for forex
fluctuation on a consolidated basis. Impact of forex movement on international Electro-
Mech segment is opposite to that of Engg product & Cooling product segment. For
On a consolidated level it example, depreciating rupee has a positive impact on profits from international MEP
has a natural hedge for projects and negative impact on the other two segments due to increase in imported
forex fluctuation... cost of components and products.
Robust Financials
Comfortable Cash position
Voltas Ltd has a high cash generating business model. Cash from operation has been
positive in the last three years. Cash & Bank balances and current investments were
Rs3bn & Rs2.3bn respectively at the end of FY08. Voltas remained low leveraged with
debt of Rs0.7bn and D/E of 0.13 at the end of FY08.
Debt/Equity Ratio Cash Position (Rs mn)
0.40 Cash & Bank Balances Cash from Operation
Current Inv estment
Voltas remains low leveraged 12,000
0.30
and cash rich, with cash
generating business model... 9,000
0.20
6,000
0.10 3,000
- -
06 07 08 09E 10E 11E 06 07 08 09E 10E 11E
This will aid Voltas in the current backdrop of the tight liquidity scenario and with lower
debt, it is less prone to the highly volatile interest rate regime.
Improved Margins
Company has consistently maintained high returns on capital employed and equity in
the last 3 years in excess of 35%. Also, there has been a significant improvement in
operating margins from 5.1% to 7.9% in FY08.
Margins
ROCE (%) ROE (%) OPM (%)
60 10.0
45 7.5
30 5.0
15 2.5
- -
06 07 08 09E 10E 11E
Even in the current macro economic scenario, we expect ROCE & ROE to be ~40% &
~30% for the next two years. Moving towards the ‘10/10’ vision, the company has target
to achieve PBIT margin of 10% by FY11 from the current level of 8.6% in FY08. We expect
that the company will be able to maintain its operating margin above 7% even in tough
times due to its positioning and diversified model.
15
Valuations and Recommendation
VALUATIONS & RECOMMENDATION

Outlook for Engineering Products & Services and Unitary Cooling Products segment is
negative in the coming quarters but MEP orders from the Middle East countries in the
current order book will ensure continuous cash flow for the company. Infrastructure
projects coming in India will also create new business for Voltas. With its positioning in
the value chain as an MEP player, Voltas should be able to maintain its margins.
Situation in other segments i.e. Engineering Products & Systems and Cooling Products
should improve in H2FY10 with a likely economic upturn following the government’s
fiscal & monetary initiatives.
Growth & Margins for different segments

Revenue Growth (%) PBIT Margins (%)
SEGMENT
H1FY09 H2FY09E FY10E FY11E H1FY09 H2FY09E FY10E FY11E
Electro - mechanical
Projects & Services 32.2 35.0 33.0 25.0 9.1 6.8 7.8 7.8
Engineering Products
& Services 21.5 (30.0) 6.0 12.0 15.1 10.0 11.0 11.5
Unitary Cooling
Products 16.2 (10.0) 6.0 12.0 7.8 1.0 4.5 5.0
At the CMP of Rs43, the stock trades at a P/E of 7.1x & 6.1x and an EV/EBIDTA of 3.8x & 2.8x
We initiate coverage with a FY09E and FY10E earnings respectively. Considering the robust order book for MEP/HVAC
‘BUY’ recommendation with a segment coupled with diversified business model and management reputation, Voltas has
price target of Rs55... the potential to grow at a CAGR of ~21% in revenues for the next two years. Hence, we
recommend a ‘BUY’ with a price target of Rs55 on a 12 months investment perspective.
CONCERNS
! Economic Scenario: Credit crunch and negative sentiments will force companies
to go slow on new investments. MEP/HVAC players’ role in a project start with a lag
of 9-12 months from the inception of the same. In a scenario where companies are
facing liquidity issues and going slow on capex, there can be a dip in order inflow
for HVAC/ MEP players in H1FY10.
! Softening of raw material prices vs. Client demand: Most of the orders were booked
in FY08 & H1FY09 when raw material prices were at their peak and moving further
northward. Sharp decline in commodity prices can lead to bargain for decreasing
the order price, which can ultimately shrink the order book size for the company,
consequently reducing earnings for the company.
! Competition from Chinese players: Engineering product segment faces direct
competition from Chinese producers. Slowdown in the US & European market can
lead to lower export from China to these countries and can result in flooding of their
products in other markets like India.
! Declining Commission Business: Commission part of Engineering Products and
Services segment depends on textile sector. Continuing slow down in textile sector
can lead to increasing proportion of non-commission business, which has lesser
margins of 10-12% as against 30-35% from commission business. This will exert
pressure on the revenue and margin for Engineering product & Services segment.
! Deferring consumption: Gloomy macro economic scenario has led to a slowdown
in retail consumption and spending resulting in lower demand for consumer goods.
Despite softening raw material prices and lower excise duty, which should reduce
prices, the business is not expected to recover until the sentiment improves.
! Working Capital Management: High inventory level due to lower sales of cooling
products and credit problem in the market will lead to increase in working capital
cycle impacting earnings.
16
Prestigious Projects of Voltas Ltd.
Ruler’s Palace, Muscat Emirates Palace Hotel, Abu Dhabi Cruise Liner: Queen Mary II
Etihad Towers, Abu Dhabi Commercial Complex, Sharjah New International Airport, Hong Kong
Ferrari Theme Park, Abu Dhabi Fortis Hospital, New Delhi Galleria Mall, Vashi
Burj Tower, Dubai City Centre, Bahrain Formula 1 Race Track, Abu Dhabi
17
Financial results for the quarter & nine months ended 31 December 2008 (Standalone)
Quarter Ended Nine Months Ended Year Ended
Particulars (Rs Mn)
31/12/08 31/12/07 Gr % 31/12/08 31/12/07 Gr % 31/03/08
Net Sales 8,625 6,648 29.8 27,873 22,024 26.6 30,445

Other Operating Income 35 14 235 65 -
Total Income from Operation 8,660 6,661 30.0 28,108 22,089 27.2 30,445
Total Expenditure 8,165 6,095 34.0 25,933 20,103 29.0 27,937
(Increase)/decrease in stock 18 221 (755) 350 (771)

Raw material 4,886 3,554 37.5 13,366 11,025 21.2 14,247
Purchase of traded goods 1,277 1,006 27.0 7,534 4,805 56.8 8,875
Employees cost 1,157 743 55.7 3,137 2,012 55.9 2,769

Other Expenditure 826 571 44.7 2,651 1,911 38.7 2,817
Operating Profit 495 566 (12.5) 2,175 1,986 9.5 2,509
Other Income 102 86 18.1 400 221 81.3 430

EBDIT 597 652 (8.5) 2,575 2,207 16.7 2,939
Depreciation 44 32 35.0 134 95 40.4 136
Interest (46) 4 (1,217.1) (73) 21 (446.4) 27

PBT & extraordinary items 599 616 (2.7) 2,515 2,090 20.3 2,777
Exceptional Income / (Expenses) (2) 73 (102.7) 261 189 38.4 299
Tax Expenses 173 217 (20.0) 878 749 17.2 992

Net Profit 424 472 (10.2) 1,897 1,530 24.0 2,084
Share Equity Capital (FV Rs1) 331 331 331 331 331
Reserves (excl rev res) - - - - 5,053
EPS for the Period (Rs) 1.28 1.43 5.74 4.63 6.30
Book Value (Rs) - - - - 32.6
Gross Margin (%) 15.3 17.1 17.2 17.6 17.5
OPM (%) 5.7 8.5 7.7 9.0 8.2
NPM (%) 4.9 7.1 6.8 6.9 6.8
Expenditure As % of Net Sales

Raw Material 56.6 56.7 44.9 51.5 44.3
Trading expenditure 14.7 15.1 26.8 21.8 29.2

Employee Cost 13.4 11.2 11.2 9.1 9.1
Operating/ Other expenditure 9.5 8.6 9.4 8.6 9.3
Median PE v/s Daily PE PE Band

Daily PE Median PE 300
60
225 34x
45
30x
26x
150 22x
30
18x
15 75
0 0
Nov -04 Dec-05 Dec-06 Jan-08 Feb-09 Nov -04 Dec-05 Dec-06 Jan-08 Feb-09
18
Segmentwise results for the quarter & nine months ended 31 December 2008
Particulars (Rs Mn)
31/12/08 31/12/07 Gr % 31/12/08 31/12/07 Gr % 31/03/08
Segment Revenues
Electro - mechanical Proj. & Services 6,258 3,737 67.5 16,764 11,680 43.5 16,411
Engineering Products and Services 1,099 1,600 (31.3) 4,080 4,053 0.7 5,535
Unitary Cooling Products 1,177 1,238 (5.0) 6,792 6,069 11.9 8,210
Others 108 96 12.5 315 294 6.8 398
Less: inter segment revenue 16 23 (30) 76 72 5.8 108
Net Sales 8,625 6,648 29.8 27,873 22,024 26.6 30,445
Segment Result (PBIT)

Electro - mechanical Proj. & Services 429 277 54.6 1,383 943 46.7 1,218
Engineering Products and Services 107 283 (62.1) 557 824 (32.4) 1,136
Unitary Cooling Products 8 64 (88.0) 444 395 12.2 540
Others 8 10 (24.8) 30 36 (17.8) 41
Total 551 634 (13.1) 2,413 2,198 9.8 2,935
Less : (i) Interest (46) 4 (1,217.1) (73) 21 (446.4) 27
(ii) Net Other unallocable expenditure (2) 30 (108.1) (28) 102 (127.7) 132
PBT & Exceptional Inc. /(Expenses) 599 600 (0.2) 2,515 2,075 21.2 2,777
Exceptional Income / (Expenses) - Net (2) 89 (102.3) 261 204 27.7 299
Total PBT 597 689 (13.3) 2,775 2,279 21.8 3,075
Capital Employed
Electro - mechanical Proj.& Services 3,539 1,815 95.0 3,539 1,815 95.0 1,681
Engineering Products and Services 1,344 1,002 34.1 1,344 1,002 34.1 788
Unitary Cooling Products 1,778 950 87.2 1,778 950 87.2 823
Others 115 87 32.3 115 87 32.3 54
Unallocated 1,549 1,970 (21.4) 1,549 1,970 (21.4) 2,311
Total 8,325 5,824 42.9 8,325 5,824 42.9 5,656
PBIT Margin (%)

Electro - mechanical Proj. & Services 6.8 7.4 8.2 8.1 7.4
Engineering Products and Services 9.8 17.7 13.7 20.3 20.5
Unitary Cooling Products 0.7 5.2 6.5 6.5 6.6
Others 7.1 10.5 9.4 12.2 10.2
ROCE (%)
Electro - mechanical Proj. & Services 48.4 61.1 52.1 69.2 72.5
Engineering Products and Services 31.9 112.8 55.3 109.6 144.2
Unitary Cooling Products 1.7 27.1 33.3 55.5 65.7
Others 26.4 46.5 34.3 55.2 75.0
Net Sales Mix (%)

Electro - mechanical Proj. & Services 72.6 56.2 60.1 53.0 54
Engineering Products and Services 12.7 24.1 14.6 18.4 18
Unitary Cooling Products 13.6 18.6 24.4 27.6 27
Others 1.2 1.4 1.1 1.3 1
PBIT Mix (%)

Electro - mechanical Proj.& Services 77.8 43.7 57.3 42.9 41
Engineering Products and Services 19.5 44.6 23.1 37.5 39
Unitary Cooling Products 1.4 10.2 18.4 18.0 18
Others 1.4 1.6 1.2 1.6 1
19
Year Ended March (Figures in Rs mn)
Income Statement 2006 2007 2008 2009E 2010E 2011E
Revenues 19,544 25,267 32,029 37,933 45,964 55,460
Growth (%) 32.3 29.3 26.8 18.4 21.2 20.7
Total Expenditure 18,427 23,985 29,499 35,145 42,646 51,356
Operating Profit 1,118 1,282 2,530 2,788 3,319 4,104
Growth (%) 110.2 14.7 97.4 10.2 19.0 23.7
Other income 281 619 443 430 411 418
EBIDT 1,399 1,901 2,973 3,218 3,730 4,522
(-) Net Interest 36 18 50 40 21 8
(-) Depreciation 141 156 167 206 223 240
PBT & E/O items 1,222 1,728 2,757 2,971 3,485 4,274
(-) Tax provision 224 407 997 1,051 1,133 1,389
(-) E/o loss/ (Income) 262 (696) (316) (263) - -
Net Profits 736 2,016 2,077 2,182 2,352 2,884
Growth (%) 41.0 173.8 2.9 5.2 7.8 22.6
Fully diluted Eq. sh. O/s (mn no) 330.6 330.7 330.7 330.7 330.7 330.7
Book Value (Rs) 8.2 12.8 17.4 22.5 28.0 34.7
Diluted EPS (Rs) 2.2 6.1 6.3 6.6 7.1 8.7
Diluted EPS* (Rs) 2.8 4.3 5.6 6.1 7.1 8.7
* Excluding E/O items
Balance Sheet 2006 2007 2008 2009E 2010E 2011E
Equity Share Capital 331 331 331 331 331 331
Reserves & Surplus 2,383 3,907 5,442 7,110 8,930 11,148
Net worth 2,714 4,237 5,772 7,441 9,260 11,478
Minority Interest 3 4 5 6 7 8
Total Debt 901 1,116 737 917 497 377
Capital Employed 3,617 5,358 6,515 8,365 9,765 11,864
Fixed Assets 1,635 1,601 1,898 1,992 2,070 2,130
Net current assets 1,264 2,230 1,842 3,398 4,621 6,560
Investments 461 1,248 2,585 2,785 2,885 2,985
Net Deferred Tax Asset 256 279 189 189 189 189
Total Assets 3,617 5,358 6,515 8,365 9,765 11,864
20
Cash Flow Statement 2006 2007 2008 2009E 2010E 2011E
Profit before tax 960 2,424 3,073 3,234 3,485 4,274

Depreciation 141 156 167 206 223 240
Investment inc. (29) (108) (111) (180) (186) (193)
Interest paid [Net] 36 18 50 40 21 8
Tax paid (64) (322) (597) (1,051) (1,133) (1,389)
(Inc)/Dec in working capital 62 (1,187) 1,279 (1,737) 384 2,121
Others (489) (916) (293) (250) (225) (225)
Cash from operations 618 65 3,567 263 2,570 4,836
Net capital expenditure (349) 14 (287) (300) (300) (300)
Net investments (154) 247 (1,335) (200) (100) (100)
Interest & Div recd 32 187 140 220 226 232
Others 121 10 97 250 225 225
Cash from investing activities (350) 457 (1,385) (30) 51 57
Issue of eq. shares 0 0 0 - - -
Change in debt (364) 215 (378) 180 (420) (120)
Dividend paid (187) (243) (388) (513) (532) (666)
Interest paid (39) (112) (90) (80) (61) (48)
Others 2 (4) (1) - - -
Cash from financing activities (588) (143) (857) (414) (1,014) (834)
Inc/Dec. in cash (321) 379 1,325 (181) 1,607 4,060
Key Ratios 2006 2007 2008 2009E 2010E 2011E
OPM (%) 5.7 5.1 7.9 7.4 7.2 7.4
ROACE (%) 36.5 40.0 48.6 41.0 38.7 39.6
ROANW* (%) 38.2 41.3 37.2 30.3 28.2 27.8
Sales/Total Assets (x) 5.4 4.7 4.9 4.5 4.7 4.7
Debt:Equity (x) 0.3 0.3 0.1 0.1 0.1 0.0
Current Ratio (x) 1.1 1.2 1.1 1.2 1.2 1.2
Debtors (days) 82.7 70.2 65.0 90.0 85.0 80.0
Inventory (days) 59.2 74.0 72.9 85.0 80.0 75.0
Net working capital (days) 27.1 39.5 41.2 84.3 77.0 64.3
EV/Sales (x) 0.7 0.5 0.4 0.3 0.2 0.1
EV/EBIDT (x) 9.9 7.2 4.0 3.8 2.8 1.4
P/E* (x) 15.2 9.9 7.6 7.1 6.1 4.9
P/BV (x) 5.2 3.4 2.5 1.9 1.5 1.2
* Excluding E/O items

21
Investment Argument
BLUE STAR LTD.
Initiating Coverage SELL
RESEARCH Sector Engineering I CMP Rs 137 I Target Rs 125
Blue Star Ltd. (BSL) is India’s largest central air conditioning and
STOCK DATA commercial refrigeration company. BSL has been able to position itself
Market Capitalisation Rs12.3bn
as a one-stop solution for HVAC system and has upgraded itself from a
Book Value per share Rs29.3 HVAC player to a full fledged MEP player with the acquisition of Naseer
Eq Shares O/S (F.V. Rs.2) 89.9mn Electricals.
Median Vol. 19,548 (BSE+NSE)
52 Week High / Low Rs493/122 BSL enjoys a preferred status in domestic HVAC/ MEP market with plenty
BSE Scrip Code 500067 of prestigious projects under its kitty. In ‘08, it received projects for
NSE Scrip Code BLUESTARCO upgradation of 11 airports in India and has thus far bagged all the
Bloomberg Code BLSTR@IN
Reuters Code BLUS.BO
projects from Delhi Metro. Going forward, the govt.’s emphasis on
infrastructure development in the country should generate fair amount
Operating profit/ unit will of business for the company.
increase with change
SHAREHOLDING in (%)
PATTERN
product mix and technology... With current order book and the prevailing macro environment, future
Qtr. Ended Jun-08 Sep-08 Dec-08
prospects for the company look uncertain. At the CMP of Rs137, the stock
Promoters 40.2 40.1 40.1
MFs/ FIs 9.2 8.1 8.1 trades at a P/E of 7.9x & 7.3x and an EV/EBIDTA of 5.5x & 4.8x FY09E and
FIIs/ NRIs/ OCBs 8.2 7.8 7.8 FY10E earnings respectively. We recommend ‘SELL’ on the stock, with a
PCBs 7.6 9.2 9.3 price target of Rs125, in light of slowing order inflows from the domestic
Indian Public 34.9 34.9 34.7 market and rich valuations, which give lesser margin of safety.
INVESTMENT RATIONALE
STOCK PERFORMANCE (%)
! Current order backlog is Rs16.3bn, of which Rs14.9bn accrues to the
1M 3M 12M
MEP/ HVAC segment to be executed in 9-12 months. Order inflows have
Absolute (15.3) (31.2) (68.8)
Relative (18.8) (30.7) (45.3) decreased significantly (~17% QoQ) in first three quarters of FY09.
! It’s business is concentrated mostly in India and so company is
STOCK PRICE PERFORMANCE exposed to geographical risk in the current slowing order-inflow scenario
from the Indian market.
Bluestar BSE (Rebased)
600 ! BSL’s Cooling Product segment focuses more on the high-margins,
low-competitive institutional segments. This strategy should help in
450
maintaining the margins but revenue growth should be subdued in the
300 current weak macro scenario.
Operating leverage will provide
150 ! It has strong financials with positive cash from operations in the last
an edge over emerging
players... 3 years. BSL has always put a priority on cash generation and margins
0
over revenue growth and hence, it is very selective in order picking &
Feb-08 May -08 Aug-08 Nov -08 Feb-09
strictly follows the criteria of minimum advances.
KEY FINANCIALS (CONSOLIDATED) (Rs Mn) KEY RATIOS
Yr Ended Net YoY Gr Op Op Marg Net Eq Yr Ended EPS* ROCE RONW* P/E* EV/Sales EV/EBDIT
(Mar) Sales (%) Profits (%) Profits Capital (Mar) (Rs.) (%) (%) (x) (x) (x)
2007 15,946 36.2 1102 6.9 712 180 2007 7.6 35.8 35.6 17.9 0.8 11.9
2008 22,216 39.3 2230 10.0 1,741 180 2008 16.1 70.7 60.8 8.5 0.6 5.7
2009E 26,044 17.2 2468 9.5 1,560 180 2009E 17.3 58.2 50.3 7.9 0.5 5.5
2010E 28,929 11.1 2633 9.1 1,693 180 2010E 18.8 48.3 41.6 7.3 0.4 4.8
2011E 35,421 22.4 3312 9.3 2,179 180 2011E 24.2 54.5 41.7 5.7 0.3 3.5
* Excluding E/O items 22
Blue Star Ltd.
Background
Blue Star Limited (BSL) was promoted in 1943 by Mohan T. Advani as a private limited
company named Blue Star Engineering (Bombay) Pvt Ltd. It came out with an IPO in ’69
and went public with the present name of Blue Star Ltd.
BSL is India’s leading central air-conditioning and commercial refrigeration company
associated with a large number of prestigious projects and organisations in the country.
The company with its business model of providing end-to-end solutions as a
manufacturer, contractor and after-sales service provider coupled with differentiated
products and customised solutions enjoys a preferred partner status in most of the high
growth segments.
Acquisition of Bangalore based electrical contracting firm Naseer Electricals Pvt Ltd, in
Jan’08 will help BSL in positioning itself across the value chain from being a mere
HVAC player to full scale MEP player and it will also benefit from cross selling Naseer’s
product to its existing customers.
The company manufactures and markets a wide range of air-conditioning and
refrigeration systems and products. These include large central air-conditioning plants,
packaged air-conditioning systems, split & window air-conditioners, commercial
refrigeration & cold chain equipments. Blue Star is the market leader in central air
conditioning and commercial refrigeration with a share of ~30% in both.
A significant area of business for BSL is distribution and maintenance of imported
professional electronics and industrial systems. It has business alliances with world
renowned technology leaders such as Rheem Mfg Co (USA), Hitachi (Japan), Eaton -
Williams (UK), Thales e-Security Ltd. (UK), Jeol (Japan), ISA (Italy) and many others, to
offer superior products and solutions to customers.
It has five manufacturing facilities at Thane (Maharashtra), Wada (Maharashtra), Dadra
(D&NH), Bharuch (Gujarat) and Sirmour (Himachal Pradesh).
Revenue Contb (%) Business Profile

Business Segment Activities
Professional Elect & Ind.-6
Cooling Products-24 ! Design, manufacturing, installation, commissioning and
maintenance of central air-conditioning plants and ducted
Electro Mechanical
systems
Projects and Packaged
Electro-Mech Project - 70
Air-conditioning ! After sales service
Systems
! Electrical Contracting (Vertical integration from HVAC to MEP)
FY08
! Air-conditioners: Window & Split AC

! Commercial Ref. product & Cold Chain equipments: Water
Cooling Products coolers, bottled water dispensers, deep freezers, milk coolers,
bottle coolers, ice cube machines, customized cold storages,
PBIT Contb (%) bulk cold storages and supermarket refrigeration equipment.
Professional Elect & Ind.-10

Cooling Products-21 ! Exclusive distributor of internationally renowned manufacturer
of hi-tech professional electronic equipment and services,
industrial products and systems
Electro-Mech Project - 69 Professional Electronics
& Industrial Systems ! Products: Analytical instrument, Medical electronics, Data
communication product, Material testing instrument, Measuring
FY08 instrument
23
Current Order Book

Blue Star’s total order book stood at Rs16.3bn as of Q3FY09, consisting of Electro-
Mechanical Projects & Services orders worth Rs14.9bn (1x FY08 segment revenue). 99% of
orders are from domestic clients with an average completion timeline of 9-12months.
Order Book (Rs bn) Order Book Segmentation

Order Book (Rs bn) Order Inflow (Rs bn) Sector Share (%)
20.0
IT & ITES 20-25
Current order book of 15.0
Infrastructure 20-25
Rs16.3bn provides revenue 11.4
14.0
visibility for <1 year... 10.0 15.6 Retail 15
9.8 10.3 16.3
10.7
5.0 Offices 15
Hospitals 8-10
-
Q1FY08 Q2FY08 Q3FY08 Q4FY08 Q1FY09 Q2FY09 Q3FY09 Others 15
BSL is facing the pinch of current gloomy macro environment with order inflows
decreasing ~17% in 9MFY09. There is a continuous increase in proportion of orders
from Infrastructure and healthcare sectors in the company’s portfolio. Infrastructure
projects have slightly longer gestation period but they provide a stable cash flows as
they are government funded. Repeat orders of Rs1bn from Delhi Metro Rail Corporation
Limited (DMRC) in Q2FY09 speaks about the credibility and preferred status of Blue
Star in the domestic infrastructure sphere. There should be an investment worth
~Rs240bn and ~Rs660bn for developing Airport and Metro Rail infrastructure
Infrastructure, healthcare & respectively in India in the next 4-5 years generating business worth Rs50bn for MEP/
education sectors to bring HVAC players (Source: Company). BSL is expecting a fair chunk of orders from
new orders for BSL... Commonwealth games to be held in Delhi. Government’s backing to stimulate the
economy through infrastructure spending in the current turbulent economic scenario
will ensure business for BSL.
Emerging as full scale MEP player with acquisition of Naseer Electricals
Blue Star acquired Bangalore based electrical contracting firm Naseer Electricals Pvt
Ltd in Jan’08. Naseer had top-line of ~Rs1bn in FY08 with similar margins as BSL’s
project business.
Constituent of an In-built Environment (%) Part of MEP (%)

Civil Work 60 HVAC 50
MEP work 35 Electrical Contracting 35-40
Miscellaneous 5 Plumbing 10-15
MEP works amount to ~35% of the total cost in construction of an in-built environment.
HVAC jobs have a share of 50% under MEP and rests are electrical and plumbing jobs.
BSL has been able to position itself as a one-stop solution from design, manufacturing,
installation, commissioning and maintenance of HVAC system. Acquisition of Naseer
Graduating from a mere
will help Blue Star in enhancing its capabilities in the MEP space by entering into
HVAC player to MEP player
electrical contracting which constitute 35-40% of MEP jobs. Apart from vertical
in the domestic market...
integration, BSL will also benefit from cross selling of electrical products to the existing
customers.
24
Business Diversification
BSL has three lines of business with Electro-Mechanical Projects & Packaged
Air-conditioning Systems contributing ~70% in earnings in FY08.
Segmental Contributions (FY08)

Segment Revenue Contb (%) PBIT Contb (%)
Electro-Mechanical Projects &
Packaged Air-conditioning Systems 70 69
Cooling Products 24 21
Professional Electronics & Industrial Systems 6 10
Blue Star is the domestic market leader in the central air conditioning segment. It
provides one stop solution in HVAC space. Due to its credibility, it gets ~40% of its
orders from repeat business. Acquisition of Naseer Electrical will help BSL in moving up
in value chain towards MEP space and will benefit from cross selling. The company
launched an eco-friendly range of variable refrigerant flow (VRF) systems that is getting
positive response from premium residencies, offices, hotels, and hospitals. BSL is India’s
first and only manufacturer of VRF systems and has significant advantages over its
foreign counterparts. In a short time span, it has captured a market share of ~20% in its
segment.
In cooling products segment, BSL has focused more on high-margin institutional
segments like commercial refrigeration and cold storage equipment and has kept its
presence minimal in the low margin, highly competitive consumer durable segment of
the room air-conditioner market. This model has helped Blue Star to maintain a high
PBIT margin of ~10% for the segment.
Under ‘Professional Electronics & Industrial Systems‘ segment, the company has
upgraded itself in value chain over time from a mere distributor for many internationally
renowned manufacturers of hi-tech professional electronic equipment, industrial
product and services to that of a value added reseller. BSL maintains PBIT margin of
~20% from this segment due to its innovative business model.
BSL strives to maintain its leadership status in the domestic market with a share of 30%
or more in the entire institutional segment like, central air conditioning, Packaged AC,
cold chain equipments, commercial refrigeration and telecom shelter.
Margin Accretive Business Model
In Electro-Mechanical segment, company gives sub-contracts back to back after getting
Margins and cash generation new orders and this way protect its margins against fluctuations in raw material prices
gain priority over revenue unless there is an extreme volatility. The company is also trying to get new projects of
booking... cost plus nature in future. For segment 2 i.e. Cooling Products, Blue Star focuses more
on institutional clients and has a very limited presence in home segment and hence
gets better margins.
Margins and cash generation have always been on priority for the company over revenue
booking. In the current macro scenario, company is very selective in order picking and
strictly follows the criteria of minimum advance. BSL has collected average advances of
16-17% for the current orders in Electro-Mechanical segment.
25
Robust Financials
Cash Generating Model
Blue Star has cash generating business model with positive cash from operations in the
last four years. The company is low leveraged with debt of Rs0.4bn and D/E of 0.14 at the
end of FY08.
Low-Leveraged Books Cash Generating Business Model

1.00 2,400
0.75 1,800
0.50 1,200
0.25 600
- -
FY06 FY07 FY08 FY09E FY10E FY11E FY06 FY07 FY08 FY09E FY10E FY11E

This will aid BSL in the current backdrop of the tight liquidity scenario and with lower
debt, it is less prone to the highly volatile interest rate regime.
Impressive Margins
Blue Star had a significant improvement in returns in FY08. ROCE and ROE both doubled
from ~35% in FY07 to ~70% in FY08. Operating margins also improved from 7% to 10%.
Margins
ROCE (%) ROE (%) OPM (%)
80 12.0
60 9.0
Low debt & positive cash from
operations should help in 40 6.0
sustaining higher returns...
20 3.0
- -
FY06 FY07 FY08 FY09E FY10E FY11E

In the current scenario, margins can be impacted by depreciating rupee and decreasing
billing growth. However, softening raw material prices and better operating efficiency
is likely to negate the decline in returns to a large extent and Blue Star will be able to
maintain higher returns in future. Effect of higher inventory built-up for Cooling Product
segment after Q1FY09 is also muted, as raw materials procured that time were cheaper
due to stronger rupee.
We expect ROCE to be maintained in the range of 50-60% and ROE in 40-50% range for
the next two years. Blue Star should be able to maintain operating margin of ~9% with
its business model and selective order picking.
26
Valuations & Recommendation
VALUATIONS & RECOMMENDATION

Infrastructure & healthcare developments in India are expected to bring new orders for
BSL, however there should be a significant slowdown in order inflows, considering the
current macro scenario. Outlook for Cooling Products segment is negative in the coming
quarters but situation is expected to start stablising by H2FY10 with improvement in
economic condition due to government’s fiscal & monetary initiatives. Segment 3, i.e.
Professional Electronics & Industrial systems, with its business model and diversification
among large spectrum of sectors is expected to maintain its margins, though the revenue
growth for the segment may be subdued in FY10 as it is directly related to the country’s
GDP growth.
Growth & Margins for different segments

Revenue Growth (%) PBIT Margins (%)
SEGMENT
H1FY09 H2FY09E FY10E FY11E H1FY09 H2FY09E FY10E FY11E
Electro Mechanical
Projects 26.1 12.0 12.0 25.0 11.4 9.6 10.0 10.5
Cooling Products 32.0 (6.0) 8.0 15.0 12.2 10.5 10.6 11.0
Prof Electronics
and Ind. Systems 9.1 20.0 12.0 20.0 20.3 20.0 20.0 20.0
With current order book with a timeline of <1 year and the prevailing unfavourable macro
We initiate coverage with a environment, the near term prospects for the company look uncertain. At the CMP of Rs137,
‘SELL’ recommendation due the stock trades at a P/E of 7.9x & 7.3x and an EV/EBIDTA of 5.5x & 4.8x FY09E and FY10E
to lack of future revenue earnings respectively. We recommend a ‘SELL’ in light of slowing order inflows from domestic
visibility... market and rich valuations, which give lesser margin of safety.
CONCERNS
! Economic Scenario: Credit crunch and negative sentiments will force companies
to go slower on new investments. MEP/HVAC players’ role in a project start with a
lag of 9-12 months from the inception of the same. In a scenario where companies
are facing liquidity issues and going slow on capex, there can be a dip in order
inflow for HVAC/ MEP players in H1FY10.
! Geographical Risk: Blue Star is mostly concentrated in India. The company is
exposed to geographical risk due to non-diversification. Any negative development
in the Indian economy due to the bleak outlook across the globe will hit all the
segments of the company.
! Softening of raw material prices vs. Client demand: Most of the orders were booked
in FY08 & H1FY09 when raw material prices were at their peak and moving further
northward. Sharp decline in commodity prices can lead to bargain for decreasing
the order price, which can ultimately shrink the order book size for the company,
consequently reducing earnings for the company.
! Deferring consumption: Gloomy macro economic scenario has led to a slowdown
in retail consumption and spending resulting in lower demand for consumer goods.
Despite softening raw material prices and lower excise duty which should reduce
prices, the business is not expected to recover until the sentiment improves.
! Working Capital Management: High inventory level due to lower sales of cooling
products and credit problem in the market will lead to increase in working capital
cycle impacting earnings.
27
Prestigious Projects of Blue Star Ltd.
Parliament House, New Delhi Infosys, Bangalore HSBC, Hyderabad
DLF IT Park, Secunderabad OMAXE, Noida Infosys, Chennai
Franklin Templeton, Secunderabad Select Citywalk, New Delhi Weikfield, Pune
The Park Hotel, New Mumbai Gurgaon Central, Gurgaon Heritage Foods, Kuppam(AP)
28
Financial results for the quarter & nine months ended 31 December 2008 (Consolidated)
Particulars (Rs Mn)
31/12/08 31/12/07 Gr % 31/12/08 31/12/07 Gr % 31/03/08
Net Sales 5,667 5,149 10.1 18,442 15,249 20.9 22,330

Total Expenditure 5,146 4,592 12.1 16,660 13,629 22.2 19,985
(Increase)/decrease in stock 419 (37) 297 (252) (854)
Raw material 3,902 3,862 1.0 13,435 11,607 15.7 17,763
Purchase of traded goods 126 - - 477 210 127.2 -
Employees cost 441 413 6.8 1,342 1,115 20.3 1,544
Other Expenditure 258 354 (27.2) 1,109 948 17.0 1,532
Operating Profit 522 557 (6.4) 1,782 1,621 9.9 2,345
Other Income 1 1 (9.1) 29 10 191.0 370.5
EBDIT 523 558 (6.4) 1,811 1,631 11.1 2,716
Depreciation 70 55 26.4 188 158 19.2 220
Interest 53 16 234.4 116 54 115.8 76
PBT & extraordinary items 400 487 (17.9) 1,507 1,419 6.2 2,420
Tax Expenses 78 133 (41.1) 371 382 (2.8) 679
Net Profit 322 354 (9.2) 1,136 1,037 9.5 1,741
Share Equity Capital (FV Rs2) 180 180 180 180 180
Reserves (excl rev res) - - - - 2,456
EPS for the Period (Rs) 3.58 3.94 12.62 11.53 19.36
Book Value (Rs) - - - - 29.3
Gross Margin (%) 13.8 17.7 15.7 16.8 17.4
OPM (%) 9.2 10.8 9.7 10.6 10.5
NPM (%) 5.7 6.9 6.2 6.8 7.8
Expenditure As % of Net Sales
Raw Material 76.2 74.3 74.5 74.5 75.7
Trading expenditure 2.2 - 2.6 1.4 -
Employee Cost 7.8 8.0 7.3 7.3 6.9
Operating/ Other expenditure 4.5 6.9 6.0 6.2 6.9
Median PE v/s Daily PE PE Band

Daily PE Median PE
550
40
440 26x
24x
30 22x
330 20x
18x
20
220
10 110
0 0
Dec-05 Sep-06 Jul-07 Apr-08 Feb-09 Dec-05 Sep-06 Jul-07 Apr-08 Feb-09
29
Segmentwise results for the quarter & nine months ended 31 December 2008
Particulars (Rs Mn)
31/12/08 31/12/07 Gr % 31/12/08 31/12/07 Gr % 31/03/08
Segment Revenues
Electro Mech Projects 4,223 3,768 12.1 12,777 10,549 21.1 15,563
Cooling Products 949 1,003 (5.4) 4,405 3,621 21.7 5,324
Professional Electronics and Ind Sys. 495 377 31.1 1,260 1,079 16.8 1,443
Total 5,667 5,149 10.1 18,442 15,249 20.9 22,330
Segment Result (PBIT)

Electro Mech Projects 386 448 (13.8) 1,365 1,300 5.0 1,897
Cooling Products 99 129 (23.5) 521 401 29.7 581
Professional Electronics and Ind Sys. 103 86 19.2 258 217 19.2 289
Total PBIT 588 664 (11.4) 2,144 1,918 11.8 2,767
Less: Interest 53 16 234.4 116 54 115.8 76
Net other un-allocable Exp 135 161 (15.6) 521 445 17.1 271
Total PBT 400 487 (17.9) 1,507 1,419 6.2 2,420
Capital Employed
Electro Mech Projects 2,785 2,152 29.4 2,785 2,152 29.4 2,031
Cooling Products 1,242 1,129 10.1 1,242 1,129 10.1 1,472
Professional Electronics and Ind Sys. 445 295 50.8 445 295 50.8 324
Add: Un-allocable Capital Employed 62 421 (85.3) 62 421 (85.3) (791)
Total 4,534 3,997 13.4 4,534 3,997 13.4 3,037
PBIT Margin (%)

Electro Mech Projects 9.1 11.9 10.7 12.3 12.2
Cooling Products 10.4 12.9 11.8 11.1 10.9
Professional Electronics and Ind Sys. 20.8 22.9 20.5 20.1 20.0
Total 10.4 12.9 11.6 12.6 12.4
ROCE (%)
Total 51.9 66.4 63.1 64.0 91.1
Net Sales Mix (%)

Total 100.0 100.0 100.0 100.0 100.0
PBIT Mix (%)

Total 100.0 100.0 100.0 100.0 100.0
30
Income Statement 2006 2007 2008 2009E 2010E 2011E
Revenues 11,707 15,946 22,216 26,044 28,929 35,421
Growth (%) 27.7 36.2 39.3 17.2 11.1 22.4
Total Expenditure 10,879 14,844 19,985 23,577 26,297 32,109
Operating Profit 828 1,102 2,230 2,468 2,633 3,312
Growth (%) 53.6 33.1 102.4 10.6 6.7 25.8
Other income 71 96 80 33 42 55
EBIDT 899 1,198 2,310 2,501 2,674 3,367
(-) Interest 57 95 76 160 35 30
(-) Depreciation 159 209 220 261 321 353
PBT & E/O items 682 893 2,015 2,079 2,319 2,984
(-) E/o loss/ (Income) (9) (33) (405) - - -
(-) Tax provision 202 214 679 520 626 806
Net Profits 489 712 1,741 1,560 1,693 2,179
Growth (%) 28.3 38.2 149.4 (8.9) 8.5 28.7
Fully diluted Eq. sh. O/s (mn no) 89.9 89.9 89.9 89.9 89.9 89.9
Book Value (Rs) 19.2 23.7 29.3 39.7 50.9 65.4
Diluted EPS (Rs) 5.4 7.9 19.4 17.3 18.8 24.2
Diluted EPS* (Rs) 5.4 7.6 16.1 17.3 18.8 24.2
* Excl E/o Income
Balance Sheet 2006 2007 2008 2009E 2010E 2011E
Equity Share Capital 180 180 180 180 180 180
Reserves & Surplus 1,547 1,950 2,456 3,387 4,399 5,701
Net worth 1,727 2,130 2,635 3,567 4,579 5,880
Total Debt 759 890 365 1,230 290 250
Net Deferred Tax liability 91 65 36 36 36 36
Capital Employed 2,576 3,085 3,037 4,833 4,905 6,166
Fixed Assets 1,079 1,165 1,558 2,197 2,276 2,324
Net current assets 1,413 1,845 1,419 2,591 2,582 3,797
Investments 52 53 46 46 46 46
Misc Exp 33 22 14 - - -
Total Assets 2,576 3,085 3,037 4,833 4,905 6,166
31
Cash Flow Statement 2006 2007 2008 2009E 2010E 2011E
Profit before tax 691 926 2,420 2,079 2,319 2,984
Depreciation 159 209 220 261 321 353
Interest & dividend inc. (40) (41) (17) (8) (17) (20)
Interest paid 57 95 76 160 35 30
Tax paid (119) (86) (519) (520) (626) (806)
Other Items 39 42 (303) 14 - -
(Inc)/Dec in working capital (548) (449) (464) (1,165) 31 (438)
Cash from operations 240 696 1,413 822 2,062 2,103
Net capital expenditure (403) (279) (1,125) (900) (400) (400)
Net investments - (1) 357 - - -
Interest & Div recd 36 43 16 8 17 20
Cash from investing activities (366) (237) (752) (892) (383) (380)
Change in debt 386 132 (525) 865 (940) (40)
Dividend paid (204) (473) (80) (628) (681) (877)
Interest paid (57) (95) (76) (160) (35) (30)
Cash from financing activities 124 (437) (681) 77 (1,656) (947)
Inc/Dec. in cash (1) 22 (20) 7 23 777
Key Ratios 2006 2007 2008 2009E 2010E 2011E
OPM (%) 7.1 6.9 10.0 9.5 9.1 9.3
ROACE (%) 34.1 35.8 70.7 58.2 48.3 54.5
ROANW* (%) 30.1 35.6 60.8 50.3 41.6 41.7
Sales/Total Assets (x) 4.5 5.2 7.3 5.4 5.9 5.7
Debt:Equity (x) 0.4 0.4 0.1 0.3 0.1 0.0
Current Ratio (x) 1.4 1.3 1.2 1.3 1.2 1.3
Debtors (days) 74.5 80.3 79.5 85.0 82.0 82.0
Inventory (days) 46.7 43.1 44.9 50.0 48.0 45.0
Net working capital (days) 45.9 46.6 43.1 56.4 53.2 50.8
EV/Sales (x) 1.1 0.8 0.6 0.5 0.4 0.3
EV/EBIDT (x) 15.8 11.9 5.7 5.5 4.8 3.5
P/E* (x) 25.5 17.9 8.5 7.9 7.3 5.7
P/BV (x) 7.1 5.8 4.7 3.5 2.7 2.1
* Excl E/o Income

32
T E A M
EQUITY DESK
Gealgeo V. Alankara Head - Institutional Sales alankara@pinc.co.in 91-22-6618 6466
Sailav Kaji Head Derivatives & Strategist sailavk@pinc.co.in 91-22-6618 6344
SALES
Anil Chaurasia anil.chaurasia@pinc.co.in 91-22-6618 6483
Alok Doshi adoshi@pinc.co.in 91-22-6618 6484
Sundeep Bhat sundeepb@pinc.co.in 91-22-6618 6486
Gagan Borana gagan.borana@pinc.co.in 91-22-6618 6485
DEALING
Ashok Savla ashok.savla@pinc.co.in 91-22-6618 6400
Raju Bhavsar rajub@pinc.co.in 91-22-6618 6301
Manoj Parmar manojp@pinc.co.in 91-22-6618 6326
Hasmukh D. Prajapati hasmukhp@pinc.co.in 91-22-6618 6325
Pratiksha Shah pratikshas@pinc.co.in 91-22-6618 6329
DIRECTORS
Gaurang Gandhi gaurangg@pinc.co.in 91-22-6618 6400
Hemang Gandhi hemangg@pinc.co.in 91-22-6618 6400
Ketan Gandhi ketang@pinc.co.in 91-22-6618 6400
COMPLIANCE
Rakesh Bhatia Head Compliance rakeshb@pinc.co.in 91-22-6618 6400
33
Infinity.com
Financial Securities Ltd
bright thinking SMALL WORLD, INFINITE OPPORTUNITIES
Member : Bombay Stock Exchange & National Stock Exchange of India Ltd. : Sebi Reg No: INB 010989331. Clearing No : 211
1216, Maker Chambers V, Nariman Point, Mumbai - 400 021; Tel.: 91-22-66186633/6400 Fax : 91-22-22049195
Disclaimer: This document has been prepared by the Research Desk of M/s Infinity.com Financial Securities Ltd. (PINC) and is meant for use of the recipient
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34

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RESEARCH Sector Engineering

KEY FINANCIALS (CONSOLIDATED) (Rs Mn)

Yr Ended Net YoY Gr Op Marg Net Dil.EPS ROCE P/E P/BV

2008 22,216 39.3 10.0 1,712 16.1 70.7 8.5 4.7

MEP/ HVAC DOMESTIC MARKET

MEP/ HVAC Domestic Market

Source: PINC Research

Timeline for Airport Development

Source: Ministry of Civil Aviation, Govt. of India

Status of Metro Rail in India

Segment 2: Booming Sectors

Projected Growth in Healthcare Industry in India (USD bn)

Segment 3: Regular Business

Source: Ministry of Commerce & Industry

Expansion Plans in Pipeline

Source: Ministry of External Affairs, Govt. of India, PINC Research

List of Hotel Projects in Pipeline

Source: Indian Tour Operators Promotion Council (ITOPE)

MEP/ HVAC MIDDLE-EAST MARKET

Investment Distribution Contribution to GDP

Source: Abu Dhabi Chamber of Commerce and Industry

AIR CONDITIONER MARKET

Volume & Value Growth in Air Conditioner Market (%)

According to Crisil Research, in terms of AC volumes, the compounded growth will be

Change in Product Mix (Volume & Value)

2012-13E 21% 79% 30% 70%

RESEARCH Sector Engineering I CMP Rs 43 I Target Rs 55

Voltas Ltd. (Voltas), a TATA group company, is India’s premier air

KEY FINANCIALS (CONSOLIDATED) (Rs Mn) KEY RATIOS

Revenue Contb (%) Business Profile

FY08 ! After sales service

! Mining Equipment: Hydraulic Excavators, Dump Trucks, Loaders

Others - 1 ! Textile Machinery & Accessories: Spinning, Knitting Weaving

Source: Company & PINC Research

Robust Order Book

MEP/ HVAC Order Book (Rs bn)

Revenue Contribution from Different Segments (%)

Geographical Division of MEP/ HVAC Order Book

Cost propn ~60% Cost propn ~35%

Feasibility Design and Civil Test &

Sub /Nominated Contractor

Source: Company & PINC Research

Acquisition of Rohini Electricals

VALUATIONS & RECOMMENDATION

Growth & Margins for different segments

Net Sales 8,625 6,648 29.8 27,873 22,024 26.6 30,445

(Increase)/decrease in stock 18 221 (755) 350 (771)

Employees cost 1,157 743 55.7 3,137 2,012 55.9 2,769

Other Income 102 86 18.1 400 221 81.3 430

Interest (46) 4 (1,217.1) (73) 21 (446.4) 27

Tax Expenses 173 217 (20.0) 878 749 17.2 992

OPM (%) 5.7 8.5 7.7 9.0 8.2

NPM (%) 4.9 7.1 6.8 6.9 6.8

Expenditure As % of Net Sales

Trading expenditure 14.7 15.1 26.8 21.8 29.2

Median PE v/s Daily PE PE Band

Segment Result (PBIT)

PBIT Margin (%)

Net Sales Mix (%)

PBIT Mix (%)

Income Statement 2006 2007 2008 2009E 2010E 2011E

Revenues 19,544 25,267 32,029 37,933 45,964 55,460