Street looks at Voltas' margin trend; rise in share of ACs a positive

Increasing share of AC market and volume outlook are positive, but profitability pressure remains a worry

Shares of Voltas have gained over 25 per cent from the June-end lows of Rs 493.45. This trend may sustain if factors like profitability show improvement.

The earlier weak sentiment was after the company’s air conditioner (AC) sales were affected by unseasonal rains in a seasonally strong April-June quarter (Q1). However, things turned out to be better than expected. While the AC business did see an impact in Q1, reporting flattish revenues year-on-year, Voltas still improved its market share to 23.5 per cent, from 22 per cent at end of the March quarter, improving its leadership in a business that contributes more than half to overall sales. Voltas also said it has ramped up its product mix to gain market share in the inverter AC segment. 

Voltas’ projects business, contributing 40 per cent to sales, is also on a much stronger footing and has reported good growth and profitability. Even though private sector capital expenditure is yet to pick up, the government’s push for electrical distribution, water treatment, and Smart City development, etc, is increasing opportunities for companies like Voltas. The company is selectively looking at better quality orders, and effective execution only means better margin trajectory. Already, the Q1 margins at 10.2 per cent were better than the 7.6 per cent in the previous quarter and 5.3 per cent in the year-ago quarter, for the projects business.

While this is supportive, it is the unitary cooling products (includes AC) segment that has seen a dip in profitability. Segment margins came in at 12.5 per cent in Q1, compared to 14.1 per cent in the year-ago quarter, and remain a cause for worry. Though volume prospects remain good, led by strong brand positioning and increasing penetration, analysts say they will be keeping an eye out for margin improvement. The dip in margins, some analysts say, could be as the company has been targeting market share at the cost of profitability, while others feel Q1 was somewhat affected by unseasonal rains, and the margin trajectory may improve further. 

Any improvement on this front could help the stock gain further ground. Analysts at Jefferies believe the current share price levels factor in potential weak June quarter results as long as the AC segment margins do not see a sharp weakness, and the engineering segment margin recovery continues.