Profitability of Voltas and Blue Star improved significantly in September 2012 quarter (Q2) but was still below expectations. However, the segment margin of electro-mechanical projects (EMP) business, which contributes 60-65% of total revenues, is finally showing signs of stabilisation. Also, segment margins of unitary cooling products (UCP) division for Voltas have jumped and the same has shown least pressure in over five quarters for Blue Star. Thus, the worst may be over for the two companies on the profitability front.
The topline growth, however, continues to be a worry as companies do not see a major improvement in order inflow scenario for EMP division and secondly, execution is weak mainly due to delays from client’s end. In a post result conference call on Thursday, the Voltas’ management said, “In the domestic business, companies are not doing capex as money is hard to come by. In Middle East, the situation has not improved substantially. Orders are not coming in as people are very cautious in awarding projects and clients are negotiating as much as they can.”
In this backdrop, till the time the investment cycle picks up, these stocks may at best track broader markets, which comes after a long period of underperformance.
Profit showing signs of stabilisation
While Blue Star disappointed on sales growth thanks to a decline of around 2% witnessed by EMP division, Voltas significantly exceeded expectations led by both EMP and UCP. Despite weak demand and competition, the company has maintained its market leadership of 20.3% in air conditioners which is ahead of erstwhile leader by 500 basis points.
On the operational performance front, Blue Star has delivered better than expected results with an improvement in margins for a second consecutive quarter thanks to the EMP business reporting profit as compared to a loss in year ago period. Even the UCP segment margin decline of 74 basis points was lowest in last five quarters.
Voltas’ operating profit margin at 3.7% was below analysts’ expectations of 5.5% as EMP profitability improved only marginally thanks to slow moving international projects.
On net profit front, even as year-on-year growth looks impressive both companies disappointed due to lower than expected operational performance (for Voltas) and significant decline in other income (both).
Muted revenue outlook
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Order book for both companies declined in Q2-- more for domestic bound Blue Star (down 22.3% year-on-year) than diversified Voltas (down 7.2%). Companies continue to witness muted order inflow for EMP business despite government’s efforts to kick-start the economy. The scenario is even worse internationally.
Says Shareen Batatawala, analyst, Angel Broking, in post-result note on Blue Star, “Slowdown in investment cycle and consumer segments like IT/ITES, healthcare, hospitality and infrastructure remain key concerns though macroeconomic sentiment has improved in the recent past.” Agrees Amish Pansuria, analyst, Nirmal Bang, “The external environment continues to remain a concern leading to low order inflows.”
In the UCP business, competitive intensity is only going to increase for the two companies. Additionally, forex fluctuation may impact margins.
However, the pain on profitability may reduce in the coming quarters. Says Batatawala for Blue Star, “Post FY13, Blue Star should see a gradual improvement in operating margin. In addition, declining debt level would lower interest cost resulting in higher net profits.” The company is focused on profitability and ready to compromise on volumes.
Voltas though is unlikely to see a significant recovery in margin relative to Blue Star as the outlook on profitability of Sidra project (85% complete) and Rohini Electricals (subsidiary) is still uncertain. In UCP, the management said that it will fiercely ensure that they keep up their market position that they have won after years of struggle, which may result in higher advertising and promotion spends.