Voltas: Lower margins aren't cool

The Street was disappointed with Voltas’ December 2008 quarter numbers mainly because operating margins turned weak across its many divisions. Despite revenues rising by a reasonably strong 30 per cent, the operating profit margin fell 280 basis points to 5.5 per cent.

What’s more, despite a lower tax rate, the company reported a fall in the profit after tax of 10 per cent at Rs 42 crore. Also while the order inflow remains strong, industry watchers are worried they could slow down, which in turn could mean a slower pace of growth for the Rs 3045 crore engineering firm. In 2009-10, Voltas is estimated to grow net sales at 20-22 per cent compared with an increase of 25--27 per cent in the current year.

As a result, the increase in net profits next year is tipped to be around 20 per cent. The stock isn’t at all expensive since, at the current price of Rs 38 it trades at just a shade below 5 times its estimated 2009-10 earnings. It’s just that investors aren’t sure about how conducive the macroeconomic environment will be over the next six to eight months.

The anxiety isn’t just limited to the home market. Voltas executes projects in the Middle East and although the management has clarified that the projects that it is working on are supported or funded by the government because of which the chances of cancellations are low, the Street is nevetheless cautious.

Orders from this region amount to Rs 4,200 crore, which accounts for the bulk of the total orders of around Rs 5,300 crore. The key electro mechanical division, thus, runs the risk of execution being delayed. Should the top line lose some momentum, it could offset any gains that the company might make from falling raw material costs as also lower expenses on employees. As such, it could be a while before operating margins expand meaningfully.