 "Voltas: Near-term challenges increase")
The Voltas stock has shed year-to-date gains as the company's September 2016 quarter (Q2) results fell short of Street estimates and the government's move to ban old 500- and 1,000-rupee notes from circulation took a toll on sales. In fact, the latter has emerged as an overhang on Voltas' earnings prospects, particularly on its unitary cooling products (UCP) business which has been offsetting the weak show of the company's non-retail businesses.
In Q2, even as UCP segment's revenue grew by 13.5 per cent to Rs 354 crore, consolidated revenues fell by seven per cent to Rs 981.5 crore. Electro-mechanical projects (EMP) and Engineering products and services (EPS) divisions witnessed 14.5 per cent and 22 per cent year-on-year (Y-o-Y) decline in revenues. This is why, despite keeping a check on operating costs (down eight per cent year-on-year), poor show by EMP and EPS segments arrested the operating profit growth to just 6.4 per cent (Rs 69 crore). One positive though was the 90 per cent surge in order inflow of EMP business to Rs 380 crore, which pushed up order book to Rs 4,300 crore. Net profit, however, with the help of mark-to-market gains grew by seven per cent year-on-year to Rs 72 crore.
Therefore the question which analysts have is how long the UCP business can compensate for the shortfall from other businesses. The UCP business itself is reeling under significant competitive pressure which was reflected in its Ebit (earnings before interest and tax) margins of 11.5 per cent in Q2. After a strong Q1 for UCP business where Ebit margin expanded to nearly 15 per cent, analysts were having similar expectations in Q2 as well.
In addition to these competitive pressures, there could be more headwinds for Voltas from the ongoing demonetisation scheme. December quarter, which is seasonally weak for most air-conditioner manufactures including Voltas, could experience further dent in sales as nearly 40 per cent of secondary sales to the end-customers happen on cash basis for Voltas, estimate analysts. Some spill-off effect is expected in March 2017 quarter as well. In fact, analysts at JM Financial believe that even the first quarter of FY18 may witness a dip in summer season (March-May 2017) sales due to carry forward inventory of December 2016 quarter inventory and high growth base of 2016 summer season.
All these factors put together have compelled most brokerages to trim their earnings expectation for FY17 and FY18. Religare Institutional Research has reduced its earnings per share target by seven per cent and 10 per cent for FY17 and FY18 respectively for Voltas. Likewise, Kotak Institutional Equities too has sharply reduced its earnings target for FY17- 19 by 11-16 per cent.
However, conviction on Voltas' stock remains unchanged, given Voltas' long-term growth prospects. "Structural story remains unaffected by near-term disruption, which is mostly discounted as seen in recent correction", analysts at Edelweiss affirm in their report. Patient investors thus could use corrections to accumulate it.
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