Voltas profitability set to expand

With global business 48% of order book, firm expected to gain from events like FIFA World Cup

Even as broader indices have been flat in the past three months, Voltas has posted 16 per cent returns. With 29 per cent year-to-date gains, it is among the better-performing ones in the capital goods pack.

The outperformance would have been greater had Voltas kept pace with analyst estimates for the second quarter of financial year 2016 (FY16), especially in its mainstay Unitary Cooling Products (UCP).

UCP revenues declined by six per cent year-on-year in the first half of FY16 (H1FY16) due to the prolonged winter in north India, which accounts for 50 per cent of UCP volumes. But, with earnings before interest and taxes margins remaining intact at 11.6 per cent, analysts continue to remain bullish.  

Analysts at Prabudas Lilladher say, “While attractive promotional offers were being provided by most players as part of festive promotion programme, Voltas is not seeing any significant price action after price cut in H1FY16.” Despite this, Voltas has held on to its volume share. The launch of air coolers in Q3FY16 should only help the company grab a bigger piece of the segment.

The topline pressure seen in the UCP business in H1FY16 was partly offset by good growth in the EMP (electromechanical projects) segment. EMP provides solutions for cooling and heating, fire protection, cold chains and water and sewage. With an order book of Rs 3,600 crore, translating to 1.6 times book-to-bill ratio, international events such as FIFA World Cup 2020 and Dubai Expo 2020 hold potential for this segment.

With projects worth $32 billion to be tendered in Qatar, Yellapu Santosh of Angel Broking expects an uptick in order awarding from West Asia in FY17. Voltas is estimated to report 27 per cent year-on-year increase in FY18 international order inflows (estimates at Rs 3,500 crore). International business accounts for 48 per cent of the order book. The strategy to bid for projects with ticket size of Rs 300-400 crore with completion span of 15 months should help mitigate the margin pressures in the EMP segment.

Also, with its legacy orders set to be completed by FY16, analysts are hopeful of four to five per cent Ebitda margins from FY17 in the EMP business. Voltas has sustained consolidated Ebitda margins at nine to 10 per cent since FY15, up from six per cent in FY13.