Growth, margin concerns emerge for Voltas

The 39% rise in net profit to Rs 80 cr was due to higher other income, not strong revenue growth

Voltas reported its December quarter (Q3) results after the market closed on Tuesday.  Having outperformed expectations in a decent manner, it was natural to expect the Voltas stock to trade high on Wednesday. But no. It traded flat on concerns over outlook for growth and operating profit margin.
 
To begin with, the 38.7 per cent increase in net profit at Rs 80.2 crore was helped by other income of Rs 60 crore, and not by strong revenue growth. In fact, net revenue dipped 6.7 per cent from a year ago to Rs 1,174 crore in Q3. Second, a rise in operating profit margin of 309 basis points from a year ago to 7.5 per cent was helped by a reduction in the quantity of stock held, carried out by discounted sales. Hence, the good show in Q3 doesn't look sustainable. One look at the segmental performance activates concerns.
 
Unitary cooling products (retail segment) saw 4.6 per cent decline in revenue from a year ago. This was on expected lines, given the cash crunch after note ban, but what didn't go down well with analysts is the segment's Ebit (earnings or profit before interest and tax) margin, down 116 basis points at 10.6 per cent from a year ago. Voltas continues its leadership, with 21.7 per cent market share. But analysts look wary. "The competition is heating up and raw material costs don't offer advantage anymore. Voltas needs to take a call on maintaining its market share or profitability. Either way, it could result in financials taking a knock in the near term," an analyst said.
 
Pressure on electro-mechanical projects (EMPs) and engineering projects and services (EPS) hasn't relented. Despite closure of certain projects (seen as positive), EMP revenue declined nearly three per cent in Q3 from a year ago. While the closure step helped the segment's Ebit margin turn positive to 3.9 per cent in Q3, analysts don't see that as sustainable. Prospects don't look promising for EPS either; it posted a 27.6 per cent fall in revenue in Q3 from a year ago. Given subdued demand for textile equipment and unpredictable demand for mining and construction equipment, EPS is likely to remain under pressure in the medium term.
 
With these uncertainties looming, a weak outlook for UCP (most promising segment now) could force analysts to lower their net profit expectations for the company. The stock trades at 24 times the company's FY18 expected earnings, which is not cheap.