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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.
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