Margin improvement ahead for Voltas

Order inflows were up 155% to Rs 870 cr and order book grew 2% to Rs 4,210 cr in Q3FY13

Voltas’ stock has been an underperformer for some time now, thanks to a slump in its core business (electro-mechanical projects or EMP), on account of subdued order flow following the economic slowdown and competition in the unitary cooling products (UCP) division. While these concerns have still not gone away entirely, analysts believe the worst is behind for the company.

In EMP, Voltas reported sequential improvement in order inflows (up 155 per cent to Rs 870 crore) and order book (up two per cent to Rs 4,210 crore) in the December 2012 quarter (Q3), though significantly down on a year-on-year basis. While the management has been playing it safe by indicating weak outlook for order inflows, going ahead, due to muted demand and intense competition, it has witnessed improved order inflows in industrial and IT/ITeS sectors in the domestic market (54 per cent of total order book) in Q3. Further international orders are expected to pick up in the second half of this calendar year.

  Says Kunal Sheth, analyst, Prabhudas Lilladher, “The Saudi Arabian market is expected to continue to remain robust driven by its large demography and infrastructure needs. In the Qatar market, tendering for FIFA-related projects has already started and awarding activities are likely to pick up by mid-2013. The Kuwait market, despite political uncertainties, is likely to come up with new tenders. Dubai has started to significantly show an increase in tourist traffic and there has been an increase in real estate prices over the last 12-18 months. The Dubai government has started talking in terms of big investment plans, which could throw up opportunities in the next 12-18 months.”  

The management is not aggressively bidding for orders and is focusing only on orders, which offer decent margins and help improve cash flows.

This, along with no more provisioning for cost overruns in Sidra project (90 per cent complete), indicates imminent bottoming out of margins. In the UCP division, the company has maintained its leadership position in FY13 till date (nine months ended December 2012) despite tough competition thanks to the success of ‘All Weather ACs’.

Thus, sales growth has remained robust at 24 per cent in the same period as Voltas has been able to report growth in room ACs despite de-growth reported by the industry. This trend is expected to continue, according to analysts, thanks to an expected new product range and customer-centric marketing focus. Analysts expect better times for the industry in FY14.

Says Sanjeev Zarbade, analyst, Kotak Securities, in a March 11 report, “For FY14, the industry expects a growth of around 15 per cent coming on the back of a likely de-growth in FY13. The AC market was flat in FY12 .”

Voltas has hiked prices by about 10 per cent before the peak summer season (35-40 per cent of annual AC sales) starts. This, along with stable raw material prices will help improve margins. However, rupee depreciation and cost of developing energy-efficient products (norms to be further tightened in January 2014) may push up costs and pose risks.