After a prolonged period of underperformance, the Voltas stock outperformed the BSE Sensex and BSE Capital Goods Index in three months with gains of 26.4% (weekly gain of 9%) despite a disappointing operational performance in June 2012 quarter. After touching its 52-week high of Rs 138.50 today, the stock is seeing some profit-booking.
However, this seems to have happened without the fundamentals having changed or even likely to change in the immediate future. The outlook for all of the company’s three businesses continues to be uncertain and challenging. Though the government’s initiative to push for reforms is welcome, it will take time for the activity in the infrastructure sector to pick up as inflation and interest rates are likely to remain high. There is an upward risk to food inflation due to delayed monsoon and commodity prices could trend higher on account of Quantitative Easing-3.
Subdued industrial activity does not augur well for the engineering projects and services division (7-8% of consolidated sales). Competitive intensity in both electro-mechanical projects (especially West Asia) and unitary cooling products (market leader in multi-brand retail segment of room air conditioners), which form around 90% of total revenues, also continues to be intense.
Analysts see continued risk to margins especially electro-mechanical projects segment going ahead as there are fewer orders overseas and the activity has been subdued in the domestic market. There may be further provisioning required for Sirda Medical project after the techno-commercial audit in September 2012 quarter which continues to see further upward revision in costs, changes in design and delay in completion.
Given that the business performance will continue to remain under pressure, the valuation (16.5 times FY13 estimated earnings) seems to have run ahead of fundamentals and is above the five-year average multiple of 15 times. Says Lokesh Garg, analyst, Kotak Insitutional Equities in a report dated September 26, “Valuations turn unattractive and receding earnings outlook prompts downgrade. Hence we downgrade the stock to reduce with target price of Rs 135 based on 15 times one year forward earnings.”