Voltas: Hopes of recovery dashed

Voltas is feeling the heat of economic and investment slowdown, both in the domestic and international markets

The company negatively surprised the Street by reporting a 91.4 per cent drop in consolidated net profit to Rs 8.9 crore for the quarter ending March, which was far higher than about 40 per cent profit decline expected by analysts.

Significant erosion in margins, a continuous drop in the order book and lower demand in its key business segments have led to increased concerns. Consequently, analysts now believe there is scope for downgrades of the company’s FY14 earnings estimates.

“The pressure is mounting on most fronts like lower margins, high working capital, write-off in certain projects, significantly lower demand and growing competition. We expect pressure to continue for a few more quarters,” said Daljeet S Kohli, head of research at IndiaNivesh Securities.

Post-results on Tuesday, its share price fell 3.6 per cent to Rs 89 and another six per cent the following day to close at Rs 83.70 where it is trading at 11.7 times FY2014 estimated earnings. Valuations might look reasonable, but considering the weak business outlook, the possibility of downgrades in earnings estimates and pressure on return on equity (RoE) ratio (FY13 RoE at around 13 per cent), the stock is likely to remain under pressure in the near-term.

Voltas’ two major business segments (Electro - mechanical projects and services & Engineering products and services), which cater to institutional and bulk cooling demand and provide products and services  and construction equipment and accounted for 62 per cent of revenues in the quarter, were the key reasons for the weak performance as revenues in both segments fell on a year-on-year basis due to lower demand in the user industries. The company’s order book, which pertains to the Electro mechanical segment has fallen from a high of about Rs 5,100 crore in third quarter of FY12 to Rs 3,720 crore in the fourth quarter of FY2013. The order book is about one time the segment’s revenue and indicates low growth visibility.

That apart, the segment also reported decline in margins as a result of raw material pressure along with increase in debtors and inventory. Also, due to delays at one of the company’s projects in Qatar (Onerous Contract) it has faced cost overrun, for which it provided Rs 277 crore in FY12 and Rs 96 crore in FY13. However, even if extraordinary items are excluded, the consolidated profit before tax is down 43.7 per cent year-on-year to Rs 77.7 crore in the quarter.

The bright side was the commercial and consumer cooling segment (37 per cent of revenue). Thanks to the 10.2 per cent revenue growth and significant improvement in margins on account of higher realisations, the segment saw profits rising 63 per cent to Rs 74.7 crore.

Strong promotional activities, launch of products and rising temperatures have helped the company report robust performance. Consequently, the company was able to restrict the profit fall at the consolidated level. However, in this segment as well, analysts advise to be watchful in the coming quarters, given that competition is intensifying due to entry of new players, especially foreign.