Voltas: Projects business back on track

Overall revenues up 26% in quarter, electro-mechanical projects revenue rises 36%

In what came as a positive surprise, Voltas's electro-mechanical projects or EMP division, which was under stress for many quarters, showed signs of a turnaround in the March quarter (Q4). The division's revenue grew 36 per cent year-on-year in Q4, and the Voltas stock gained three per cent on Tuesday. Consolidated revenue at Rs 1,875 crore was well ahead of Bloomberg consensus estimate of Rs 1,640 crore. Given the intense competition in its core consumer-oriented unitary cooling products or UCP business, which accounts for 48 per cent of total revenues, analysts were bracing up for moderation in operating margins.

But, with operating margins coming at 9.88 per cent (9.64 per cent in the March 2015 quarter and Bloomberg consensus estimate of 8.7 per cent), Voltas exceeded expectations. Adjusted for one-offs, net profit came higher than the estimate of Rs 116 crore. Reported net profit at Rs 176 crore received a leg-up from profit on sale of properties of Rs 28 crore in March 2016.

While Q4 appears positive, the management commentary is awaited, particularly for the UCP business, where revenue growth at 10 per cent lags behind the Street expectation of 15 per cent. Ebit margin (earnings before interest and tax) for the UCP segment has slipped from 17.8 per cent a year ago, to 16.2 per cent in Q4. While this indicates a price war in the retail cooling products business, the Ebit margin decline may also be attributed to a rebound in commodity prices from recent lows. With the operating margin in the UCP business likely to remain under pressure, sharper growth in volumes would be critical for Voltas.

Performance of the engineering products segment (five per cent of total revenues) was in line with estimates. The segment's revenue at Rs 92.7 crore grew 14 per cent year-on-year, though its Ebit margin declined 280 basis points year-on-year to 32.6 per cent in Q4.

The star performer was EMP (46 per cent of total revenues). After many quarters of muted performance, not only did it post strong revenue growth but its Ebit also increased from Rs 4.3 crore in last year's quarter to Rs 27.8 crore in Q4. Among the three segments, only EMP posted growth in Ebit margin, 3.4 per cent in Q4 versus 0.7 per cent in the year-ago period. While higher revenues point to progress in execution, EMP division's order book fell 11 per cent to Rs 3,514 crore as on March 31, 2016.

Misal Singh of Religare Capital Markets does not expect any major earnings upgrade despite Q4 results being better. "Most of the upside for Voltas is also capped in its current pricing," he says.