Though stocks of Voltas and Blue Star went up as foreign money poured into Indian equity markets in 2012, the outlook continues to be cautious due to subdued economic activity in international markets and a slump in the domestic commercial real estate sector.
Says Deepal Delivala, analyst, Citigroup Global Markets, in her report, “We expect limited upside given the challenging macro environment in India and subdued order inflow activity in the Middle East.” Sharan Lillaney, analyst, Angel Broking, adds, “There are still no signs of pick-up in demand from commercial real estate.”
With valuation at about 14 times one-year forward earnings and no improvement in fundamentals, both stocks look fairly priced at current levels, believe analysts. In the December 2011 quarter, while Blue Star disappointed the Street, Voltas’ performance was better than expected.
| GRIM OUTLOOK | ||
| in Rs crore | Voltas* | Blue Star |
| Net sales | 1,165 | 590 |
| % chg | 12 | -4 |
| Op profit | 87.4 | -3 |
| % chg | 10.1 | PTL |
| Adj net profit | 61 | -33 |
| % chg | 2 | PTL |
| Order inflows | 960 | 590 |
| % chg | 92 | -13.5 |
| Order book | 5,100 | 2,160 |
| % chg | 8.6 | 4.2 |
| * Consolidated; PTL is Profit to loss; % chg is Y-O-Y; December 2011 quarter Source: Companies, BSE | ||
Q3: Continued pain
Voltas’ revenues grew at a three-quarter high of 12 per cent year-on-year thanks to the pick-up in the electro-mechanical projects (EMP) division (18 per cent) and strong volume growth in the cooling products division (19 per cent). Operating profit grew 10 per cent after declining year-on-year in the past five consecutive quarters due to higher profitability in electro-mechanical and engineering divisions, which compensated for a 350 basis points margin drop in cooling products.
After adjusting one-off items, such as cost escalations in a Qatar project and a property sale, net profit was up a marginal two per cent. Its order book grew almost nine per cent despite a higher base (18.5 per cent) in the same quarter last year as order inflows almost doubled.
In case of Blue Star, sales declined four per cent. The fall, however, was lower than the 13 per cent decline reported in the previous quarter, led by a 15 per cent fall in the EMP division during Q3 (which forms more than 60 per cent of total revenues). On the positive side, strong growth in the cooling products and industrial systems segment supported overall revenues. Blue Star also reported losses at the operating and net levels for the first time, on higher input costs witnessed by all business segments (EMP contracts are fixed prices), stiff competition and jump in interest charges partly led by the rupee depreciation. The EMP division posted a loss before interest and taxes of Rs 15 crore due to cost overruns and execution delays; while margins in the other two segments tanked by more than 350 basis points. Further, order inflows declined by over 13 per cent and hence, order book growth was a mere 4.2 per cent, its lowest ever.
FY13: Ray of hope
Blue Star’s management expects FY13 to be better as new orders in EMP division are being bagged at higher margins of 10-11 per cent and current loss-making projects are expected to get executed by first half of FY13.
Even Voltas’ management is hopeful of booking adequate orders in FY13 with the two new joint ventures in Middle East and East Asia, but reiterated that incremental orders in EMP-international (which contributes 70-75 per cent of segment revenues) are coming in at lower margins of three to four per cent, compared to the current seven per cent. However, the Qatar project, which is 53 per cent complete, and low-margin legacy orders of loss-making subsidiary, Rohini Electricals, are expected to be completed by 2012-end. Sequentially margins should improve.
Valuations ahead of fundamentals
Analysts feel valuations have run ahead of fundamentals. Voltas trades at 12.5 times FY13 estimated earnings, close to historical average one-year forward price to earnings (P/E) multiple of 15 times. Similarly, Blue Star trades at 15.5 times FY13 estimated earnings, which is close to its historical multiple of 18-19 times.
The outlook, namely on order inflows and profitability, still continues to be cautious though the extent has softened. Says Lillaney, “Blue Star continues to witness a challenging environment.” Adds Rahul Gajare, analyst, Edelweiss Securities, “The business environment remains challenging for Voltas across the three segments. EMP margin is likely to be under pressure owing to lack of sufficient new orders given the slowdown and high competitive intensity.”
