After a lacklustre 3Q, the focus shifts to FY12 growth, which could be at risk unless order inflows and execution pick up over the next couple of quarters. The macro environment remains challenging. The valuation of the core engineering business is still expensive; we maintain Sell. New TP Rs147.

Disappointing 3QFY11 numbers due to engineering segment underperformance
Voltas 3Q11 earnings were below our estimates. Consolidated sales for the quarter rose 5% yoy to Rs10.4bn, while 3Q11 EBITDA margins fell 144bp yoy to 7.6%. However, adjusted for one-offs, profit fell 18% yoy to Rs565m. The engineering segment disappointed again with revenue declining 3% yoy and PBIT margins falling 260bp yoy, continuing the downward trend in segment margin over the past four quarters. But, the other two segments registered a strong performance during the quarter: engineering services had sales of Rs1.4bn (up 21.7% yoy), with PBIT margin at 17.5% (up 393bp yoy); sales in cooling products grew 27.9% yoy to Rs2bn, while PBIT margin fell 265bp yoy to 9.7%.

Order inflows remain key for FY12 growth in core engineering business
The core engineering segment reported an order backlog of Rs47bn (down 6% yoy and qoq).Order inflow for the engineering segment came in at Rs5bn (up 20% yoy), declining 26% qoq. The sequential decline in the order book keeps the pressure on order inflows in a toughening macro environment. We believe strong order inflows over the next couple of quarters are important if the core engineering business is to grow in FY12. While margins in this segment will likely improve with improving project execution, we see headwinds in the form of rising commodity prices and the risk of slower project execution.

Core engineering business remains expensive; we reduce estimates, maintain Sell
Performance of the core engineering business remained lacklustre during 9M11. We lower our earnings forecasts 2-6% for FY11-13F, assuming pressure on margins going ahead. We also increase our WACC due to the higher risk-free rate. Deconstructing the company's business on FY12F earnings, we see the core engineering MEP business is trading at 19.5x PE. We believe this is expensive and maintain Sell on the stock with a reduced target price of Rs147. Voltas currently trades at 16x FY12F PE.