Cool times still away for Voltas and Blue Star

The challenges for their core business are expected to remain for some more time, given the muted demand from industry and consumers. Reasonable valuation is the only silver lining

The country’s prominent listed companies in the electro-mechanical projects (EMP) and unitary cooling products (UCP) segments, namely Voltas and Blue Star have reported divergent performance for the December 2012 quarter. EMP, which involves setting up central and packaged air-conditioning, electrical, plumbing and fire fighting projects for customers across industries, forms a large part of revenues (65-70%) for both companies.

While Voltas’ EMP revenues and overall profits were down, Blue Star did well and reported a turnaround at the net level, its third consecutive quarter of profits after it saw a loss in 2011-12. On the other hand, Voltas did well in UCP, while Blue Star’s lagged.

Going ahead, in the near-term challenges remain on account of weak demand. However, most analysts believe the economic growth and investment cycle will revive in FY14. And, given the reasonable valuations which reflect most of the negatives, investors could look at gradually accumulating the two stocks on declines.

Q3: Divergent trends
Between the two, Blue Star reported better performance than Voltas in the December 2012 quarter. With the EMP business reporting a nine-quarter high growth of 7.6%, Blue Star’s revenues grew, albeit marginally, by 2.6% year-on-year in the quarter. In contrast, Voltas’ EMP revenue declined 3.2% leading to flattish overall revenues.

 

 

In UCP, the trend was the reverse. Blue Star’s unitary cooling products business witnessed a decline of 5.1% while Voltas’ reported a growth of 2.1%, which partly offset/compensated for the performance of EMP. The on-going ‘all-season’ aggressive media campaign along with discount offers in the festive season has helped Voltas grow revenues as well as maintain its number one position in the domestic residential air-conditioners market.

 

On the profit front, while Blue Star reported operating as well as net profit (adjusted) in the quarter compared to a loss (Rs 9 crore, Rs 33 crore, respectively) in the year ago period, Voltas reported a significant decline of 70% and 88%, respectively. Like topline growth, Blue Star’s EMP business reported profit of Rs 23 crore compared to a loss of Rs 15 crore, which though was partly offset by decline in profit of other divisions (UCP and engineering).

For Voltas, EMP segment profit plunged 90% to Rs 6 crore thanks to the latter booking revenue of Sirda Medical project (85% complete) at zero margins. Although UCP segment profits were flat and Engineering Products and Service segment saw profits jump 55%, overall profits fell as EMP accounts for two-third of profits for Voltas.

 

Outlook
Given that Blue Star’s order inflow (Rs 585 crore) in the quarter remained flat and order book (Rs 1,628 crore) declined around 25%, the prospects of EMP business aren’t exciting. Though Voltas has not announced these figures, analysts don’t expect the trend to be significantly different. They expect the challenges in EMP and UCP businesses to continue for some more time.

Says Sanjeev Zarbade, analyst, Kotak Securities in his post result note on Voltas, “Order intake scenario remains challenging and execution is sluggish as clients are facing liquidity issues.” Adds Sunil Jain of Nirmal Bang in post result note on Blue Star, “The near-term outlook continues to remain a concern on lower order inflows and higher competitive intensity.”

As regards UCP, generally, prices are revised in the March quarter just before the peak season (summer) starts. But, price hike hopes seem distant this time, as till date both companies have not announced any price hikes. Room AC industry went through one more quarter of de-growth (10%), notes Jain of Nirmal Bang. And besides sluggish demand, forex fluctuation could further impact margins.

Valuation
Nevertheless, despite the grim outlook of the companies’ businesses, analysts are turning positive as they believe the worst is behind and valuation of about 10-11 times estimated FY14 earnings are reasonable.

Says Jain, “We think FY13 will be the year of all the concerns bottoming out and the revival of economy in FY14 can help Blue Star achieve similar growth as shown in previous up cycles. The focus on profitability and not volumes will also lead to better margin performance in FY14.”

Jain feels the poor demand environment leading to a poor performance by the company and corresponding decline in share price offers an opportunity to enter the stock, albeit with the a long term perspective. Adds Zarbade, “While the outlook (for Voltas) remains subdued, valuations are reasonable.”