Profitability of Voltas and Blue Star improved significantly in the September 2012 quarter (Q2) but was still below expectations. However, the segment margin of electro-mechanical projects (EMP) business, which contributes 60-65 per cent of total revenues, is finally showing signs of stabilisation. Also, segment margins of the 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 top line growth, however, continues to be a worry as companies do not see a major improvement in order inflow for the EMP division and secondly, execution is weak mainly due to delays from clients’ 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 stabilising
While Blue Star disappointed on sales growth thanks to a decline of around two per cent in the 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 per cent in air conditioners which is ahead of the 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 the year-ago period. Even the UCP segment margin decline of 74 basis points was the lowest in the last five quarters.
| NOT SO COOL | ||||
| In Rs crore | Voltas* | Blue Star | ||
| FY12 | Q2’FY13 | FY12 | Q2’FY13 | |
| Sales | 5,186.0 | 1,164.0 | 2,700.0 | 578.6 |
| % change y-o-y | -0.1 | 5.3 | -5.6 | -3.4 |
| Operating profit | 337.0 | 43.6 | -11.4 | 20.1 |
| % change y-o-y | -27.0 | 390.0 | PTL | 151.3 |
| Adjusted net profit | 313.0 | 28.4 | -89.2 | 7.3 |
| % change y-o-y | -1.3 | 67.8 | PTL | LTP |
| Note: * Consolidated PTL is profit to loss; LTP is loss to profit Source: Companies | ||||
Voltas’ operating profit margin at 3.7 per cent was below analysts’ expectations of 5.5 per cent as EMP profitability improved only marginally thanks to slow moving international projects. On the net profit front, even as year-on-year growth looks impressive, Voltas disappointed on lower-than-expected operational performance, while both saw significant decline in other income.
Muted revenue outlook
Order book for both companies fell in Q2 — more for domestic bound Blue Star (down 22.3 per cent year-on-year) than diversified Voltas (down 7.2 per cent). 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 a 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 the 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 the Sidra project (85 per cent complete) and Rohini Electricals (subsidiary) is still uncertain. In UCP, the management said it will fiercely safeguard its market position won after years of struggle, which may result in higher advertising and promotion spends.
