Margin pressures may cap upsides for Voltas; Dec quarter show mixed

After two dismal seasons, the sector is hoping for a recovery this year

The December quarter performance of air conditioning major Voltas was a mixed one. While its unitary cooling products (UCP) segment outperformed expectations, the projects division disappointed. In addition to air conditioners and air coolers for the retail segment, the UCP portfolio also includes commercial refrigeration products. It accounts for 62 per cent of the company’s revenues.

The segment reported a revenue growth of 9 per cent as compared to the lower single-digit growth the Street was working with. Growth was largely due to higher realisations and volumes which fell lower than expected in a weak season. The company’s 4 per cent volume fall for October-November was lower than the sector’s 5 per cent volume decline. The market leader in the room air conditioner market managed to maintain its year to date market share at 25.8 per cent. 

Though the revenue show beat expectations, the margins for the segment at 9.3 per cent was down 300 basis points y-o-y and weaker than expected. The company highlighted that the time lag in passing the increase in the input costs, given resistance from the trade amidst a seasonally lower offtake period and price disruptions affected the results (margins) of the segment. 

Given demand concerns, the improvement in the margin trajectory may take some time to pan out. Say Naval Seth and Saaksha Mantoo of Emkay Research, “Delayed price hikes and elevated commodity prices should continue to impact UCP’s operating performance for the near term.” After two consecutive weak summer seasons, the sector will be hoping for an improvement this year.

While the projects business revenues were much lower than expected, margins improved on project execution efficiencies and order completion. Prospects hinge on the inflow of orders on the back of higher infrastructure spends by the government. 

The Q3 performance led to a 14 per cent downward revision of earnings for FY22 by Motilal Oswal Research with further rating action dependent on improvement in demand and price hikes. At the current price, the stock, which gained 2 per cent on Tuesday, is trading at 51 times its FY23 earnings estimates.