Retail demand largely drives Voltas growth

Profit beats estimate, but stock falls on profit-booking after announcement of results

In what was a comfortable quarter for Voltas, revenues went up 18 per cent year-on-year (y-o-y) to Rs 1,845 crore, a bit lower than Bloomberg estimate of Rs 1,874 crore. Revenue was largely driven by unitary cooling products (UCP), which benefited from the extended summer. The UCP business largely sells cooling products for retail customers, while the electro mechanical projects (EMP) division caters to institutional clients.

The UCP segment's revenue at Rs 1,195 crore was up 29 per cent y-o-y in the June quarter (Q1). UCP, which is relatively a high-margin business, also lifted the blended operating profit margin of Voltas to 10.8 per cent; up 240 basis points y-o-y. Earnings before interest and tax (Ebit) margin of UCP business expanded from 12.2 per cent in Q1FY16 to 14.9 per cent in Q1FY17 aided by price hikes. With the UCP segment (accounting for 65 per cent of revenues) performing good, net profit in the June quarter at Rs 158 crore surged 54 per cent y-o-y, beating Bloomberg estimate of Rs 125 crore.

Despite this, Voltas's stock fell 1.5 per cent on Tuesday after a fresh 52-week high. The fall, analysts say, is due to profit-booking given the 23 per cent rally in the past three months.

Suppressed revenue growth in the EMP and engineering products segments weighed on the stock. After showing signs of promise in Q4FY16, revenues of EMP segment grew only three per cent and its Ebit margin fell to 1.9 per cent against 3.4 per cent in Q4FY16. Although a sequential comparison might not be fair (given seasonality), margins were expected to stay firm at three per cent. While the Ebit margin of EMP was up from 1.6 per cent in the year-ago period, accelerated execution is essential for profitability to meet the expectation of three per cent for FY17. The EMP business added orders worth Rs 731 crore in Q1, which saw its order book rise five per cent y-o-y.

The performance of engineering products business was also weak in Q1 as revenues dropped one per cent, while its Ebit fell 20 per cent to Rs 19 crore. Consequently, the Ebit margin for the division declined 600 basis points y-o-y to 27.9 per cent.

With the revenue growth of EMP and engineering products verticals being muted, pressure mounts on the UCP business. For now, Voltas appears well-positioned to derive growth from this vertical. Its leadership in UCP puts it ahead of its peers. "With the UCP business remaining robust, positive management forecast can result in earnings upgrade for Voltas," says Santosh Yellapu of Angel Broking.