Result Update. Diversified Voltas Ltd BUY. Target Price Rs 197. Key Data. Key Highlights. One Year Price / Volume Chart

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1 Result Update 29 th January 2010 Diversified BUY CMP Rs 159 Target Price Rs 197 Key Data Face Value (Rs) 1 Market Cap (Rs Crs) Total O/s Shares (Crs) 33.0 Free Float (%) week H/L (Rs) 190/31 Avg Monthly Volume (BSE) Avg Monthly Volume (NSE) BSE Code NSE Code VOLTAS Bloomberg code VOLT IN Beta 1.27 Date of Incorporation Sept 1954 Last Dividend Declared (FY09) 160% Six month returns 11.65% Indices BSE 200 FCCB's Outstanding NA Warrants outstanding NA One Year Price / Volume Chart Jan-09 M ar-09 M ay-09 Jun-09 Jul-09 Sep-09 Oct-09 Dec-09 Jan-10 Closing Price Volume Source: Capitaline Share Holding Pattern (as on 31 st Dec 09) FIIs 11% FI's/MFs/ Banks/Ins 31% Non Promoter Corporate Holding 8% Q3FY10 Net sales have reported a of 3.8% at Rs 990 crs on y-o-y basis where as EBITDA has grown by 67% during the same period at Rs crs. EBITDA margins too have improved by 342 bps at 9.05 % on account of aggressive cost cutting and increase in the commission business. PAT has improved by 87% on y o y basis at Rs 76 crs. This includes profit on account of sale of property amounting to Rs 9 crs. PAT margins improved to 7.6% by 340 bps. Key Highlights Electro Mechanical, which is the core business of the company contributed 72% to the total turnover for Q3FY10 on consolidated basis. The revenues from the segment have grown by 3% for Q3FY10 on y o y basis. EBIT for the segment too have improved by 36% for the current quarter with improvement of 220 bps in the segmental margins on y o y basis. The order inflow in the domestic market was at Rs 2,000 crs during 9MFY10.Domestic order book for the Electro Mechanical Projects and services segment stands at Rs 1,220 crs as on Q3FY10 implying a 12% on y o y basis. The international order book for the segment during the same period stood at Rs 2,450 crs as on Q3FY10. Current order book is likely to get executed during FY Order book of Rohini have grown by 50% and currently stands at Rs 200 crs. Engineering products and services division have grown by 7% on y o y basis during the quarter with EBIT growing by impressive 49.3% at Rs crs. EBIT margins for the segment has improved significantly by 380 bps on account of increased commission income and stringent cost cutting measures. The textile business has remained the biggest contributor to the margins. Financial Snapshot FY07 FY08 FY09 FY10E FY11E Net Sales 2, , , , ,286.1 Promoters 28% Public & Others 22% Source: Company, KJMC Research EBITDA EBITDA % 5.1% 7.9% 6.5% 8.9% 9.3% PAT EPS P/E(x) Shefali Doshi Research Analyst Phone Ext shefali.doshi@kjmc.com 1

2 Unitary cooling products have recorded a strong 26.9% at Rs 154 crs for Q3FY10 on y o y basis with substantial improvement in EBIT margins. The company s market share in the room air conditioners have remained at 16 17%.The EBIT margins remained strong at 12.3% on account of higher value addition through increased manufacturing activity. Voltas is eyeing good opportunities in Abu Dhabi, Singapore and Qatar. The company is also looking at an opportunity of around Rs crs in the water business during next 2 3 yrs. It will be targeting projects in the areas of water purification, industrial afflument, water desanitation. Currently the company is facing concerns on the slower order inflows in the international markets and the resultant slow down in the order backlog. In the domestic market there are concerns on the slower execution of the projects. Though the company is witnessing a revival in the textile machinery business and increased inquiries in the mining and construction business, the slow down in the execution witnessed in the Electro Mechanical division continues to hang on the of the company in future. Segment Revenue Particulars Q3 FY10 Q3 FY09 9M FY10 9M FY09 FY 09 Segment Revenue use % % % % % % 922 Others % % 104 Less : inter segment revenue Net Sales / Income from Operations EBIT use ) % % % % % % % % (3.87) % Others % % 9.02 Total % % Capital Employed use ) % % % % % % Unallocated % % Total % %

3 Q3FY10 Result Update Particulars Q3FY10 Q3FY09 9MFY10 9MFY09 Net Sales / Income from Operations % % Other Operating Income % % Total Income % % Total Expenditure % % EBITDA % % EBITDA margins% 9.05% 5.63% 342 bps 9.75% 7.59% 216 bps Depreciation % % EBIT Interest % % Other Income % % PBT % % Exceptional Items - Net (Note 3) % % Profit from Ordinary Activities before Tax (7 + 8) % % Tax expenses % % Net Profit from Ordinary Activities after Tax (9-10) % % Minority Interest in Profit % % Share of Profit of Associate % PAT after minority interest % % PAT margins% 7.62% 4.23% 340 bps 7.33% 6.18% 110 bps Equity % EPS % % However considering the 9MFY10 performance of the company we revise our projections for FY10E & FY11E as below: FY10E FY11E New Old % change New Old % change Net sales 4, % % EBITDA % % EBITDA % 8.9% 8.9% 9.3% 9.3% PAT % % EPS % % Valuation At the CMP of Rs 159 the stock is trading at 17.7x and 15.5x its FY10E and FY11E earnings respectively. At current levels the stock has factored in the concerns on account of weak order book and slower execution and hence the downside is capped. Hence we maintain our buy recommendation and the target price of Rs 197. The target price offers a potential return of 24% on the CMP of Rs

4 Financial Summary - Introduction of FY11E projections Profit & Loss Statement Profit & Loss Statement FY07 FY08 FY09 FY10E FY11E Net Revenue 2, , , , ,286.1 Growth % 29% 27% 35% 12.1% 9.0% Raw material cost 1, , , , ,726.7 Employee Cost Manufacturing expenses Other expenses Total Expenditures 2, , , , ,794.5 EBITDA EBITDA Margin(%) 5.1% 7.9% 6.5% 8.9% 9.3% Other income EBITDA including OI EBITDA Margin(%) 7.5% 9.4% 8.7% 9.9% 10.2% Dep.& Amortiz EBIT EBIT Margin 6.9% 8.9% 8.2% 9.5% 9.8% Exceptional Items Interest Expenses Tax PAT Exceptional Items & Minority Int Adjusted PAT Cash Flows Cash Flows FY07 FY08 FY09 FY10E FY11E NET Profit before tax & exceptional items Depreciation Interest paid Changes in Working capital (176.16) Others (100.31) (26.14) (16.94) Cash generated from operations Taxes paid (32.19) (104.75) (134.83) (154.57) VRS payments (2.04) Net Cash Flow from Operating Activities Increase in Capital Dividends received 0 Interest recevied & other investment income Capex 1.37 (28.72) (36.66) (40.00) (30.00) Investments (131.10) Loans (37.85) (25.00) (50.00) Dividends paid (24.27) (38.80) (51.95) (93.72) (107.44) Interest paid & others (11.61) (9.09) (11.08) (24.29) (18.90) Net change in cash Opening cash Closing cash Balance Sheet Balance Sheet FY07 FY08 FY09 FY10E FY11E Sources of Funds Share Capital Share warrants Reserve & Surplus Minority interest Total Debt Deferred Tax Liability TOTAL Application of Funds Net Block Capital work in progress Investments Inventories Sundry Debtors Cash & cash Equivalents Loans & Advances Current Liabilities Net Current Assets Deferred Tax Assets TOTAL Key Ratios Key Ratios FY07 FY08 FY09 FY10E FY11E Profitability & Return Ratios EBITDA Margin (%) 5.1% 7.9% 6.5% 8.9% 9.3% NP Margin (%) 7.99% 6.48% 5.88% 6.19% 6.51% EPS CEPS BVPS ROE 38.0% 35.2% 33.0% 33.7% 31.0% ROACE 54.5% 53.2% 46.7% 42.6% 41.0% Operating efficiency and other ratios Debtors T/o Inventory T/o Interest Coverage (x) Asset/Turnover (x) D/E (x) Valuation Ratios P/E (x) P/CEPS (x) P/BV (x) Mcap/Sales (x) EV/Sales (x) EV/EBITDA (x)

5 Mr. Girish Jain Executive Director (B) Mr. Suresh Parmar A.V.P. Institutional Equities (D) Mr. Vipul Sharma A.V.P. Institutional Sales (D) Recommendation Parameters Expected returns in absolute terms over a one year period Buy appreciate more than 20% over a 12 month period Hold / Neutral appreciate up to 20% over a 12 month period Reduce depreciate up to 10% over a 12 month period Sell depreciate more than 10% over a 12 month period Disclaimer : This publication has been prepared from information available on public domain and doses not constitute a solicitation to any person to buy or sell a security. The information contained therein has been obtained from source believed to be reliable to the best of our knowledge. KJMC Capital Market Ltd. dose not bear any responsibility for the authentication of the information contained in the reports and consequently, is not liable for any decisions taken based on the same. Further KJMC only provides information updates and analysis. All option for buying and selling are available to investors when they are registered clients of KJMC Capital Market Ltd. As per SEBI requirements it is stated that, KJMC Capital Market Ltd., and/or individuals thereof may have positions in securities referred herein and may make purchases or sale thereof while this report is in circulation The National Stock Exchange (EQ, WDM) The National Stock Exchange (Derivatives ) The Stock Exchange, Mumbai MCX-SX Currency MCX-Commodity* Mutual Fund s AMFI No. * Under KJMC Commodities Market India Ltd Member : SEBI Regn. No. INB : SEBI Regn. No. INF : SEBI Regn. No. INB : INE : MCX/TM/CORP/1772 : ARN For further details : visit our website - KJMC Research is also available on Bloomberg (KJMC <Go>) 5