The stocks of Voltas and Blue Star, two leading names in the air-conditioning and refrigeration business, are down by around 20 per cent since their September quarter results and touched 52-week low levels of Rs 81.50 and Rs 168, respectively, on Tuesday. The two posted disappointing results for the quarter and their order inflows also continued to decline.
More important, the managements of both expect more pain in the coming quarters. Also, expectations of improvement in international markets’ ordering activity and peaking of the interest rate cycle in the domestic market, which analysts estimated would benefit the companies, have come down.
“We aim to achieve a high single-digit margin only in FY14 (2013-14), as the benefits of higher margins (10-11 per cent) on new orders will be reflected post the first quarter of FY13 (June 2012),” said Vir Advani, executive director, Blue Star, in the company’s conference call. As the worst is not over, analysts have downgraded their valuation multiple and target prices for the two stocks. On a relative basis, though, they believe Voltas is better off at 10 times compared to Blue Star, which is trading at 12 times, based on their 2012-13 earnings’ estimates.
| MARGIN, ORDER INFLOWS DOWN | ||
| in Rs crore | Voltas* | Blue Star |
| Operating income | 1,122.0 | 605.0 |
| % chg | 5.3 | -13.0 |
| Operating profit | 28 | 14 |
| % chg | -74.0 | -79.0 |
| Reported net profit | 42 | -21 |
| % chg | -55.0 |
NA |
% change is year-on-year; all figures are for the quarter ended September 2011
Source: Companies
PAIN CONTINUES
Top line performance was disappointing, with Blue Star reporting a 13 per cent decline in sales (first time since the September 2009 quarter) and Voltas a modest growth of 5.3 per cent despite a lower base (decline of 3.2 per cent in the corresponding quarter last year), due to weak demand and execution issues.
Both companies reported a 750-basis points (bps) drop in operating profit margin at about 2.5 per cent on account of higher raw material and employee expenses, cost overruns in certain projects, continued pain in electromechanical projects (EMP) and cooling products. The poor operational performance affected bottom line. While Voltas reported net profit dropped 55 per cent, the plunge is deeper; after adjusting for a one-time profit on sale of properties/surrender of tenancy rights, the figure is down 77 per cent.
Blue Star incurred a net loss (reported) of Rs 20.8 crore, mainly due to a nine-fold jump in interest cost, which includes a mark-to-market loss (marking down assets to reflect current values) of Rs 20 crore on account of the rupee’s deprecation against the dollar.
OUTLOOK
Analysts have downgraded the stocks to ‘reduce’ or ‘sell’, as they do not see any improvement for the companies’ businesses in the near future. Says Kunal Sheth, analyst, Prabhudas Lilladher, in his results’ analysis report on Voltas, “The company will continue to face headwinds in the EMP and cooling products segments, both on volume and margins. This will continue to put pressure on working capital and balance sheet, restricting valuation.” For Voltas, both segments form a total of 89 per cent of overall revenue; it is 77 per cent in the case of Blue Star.
Order inflows in the EMP business will continue to remain subdued, on account of slow decision-making on awarding contracts, leading to delays in project approvals. Margins are expected to remain under pressure. Voltas’ management highlighted in the conference call that lack of orders in the international market had led to severe competitive intensity, forcing the company to lower its bidding margin to five per cent (from eight per cent) to improve its chances of winning orders. International markets form 59 per cent of Voltas’ total order book. On the other hand, Advani of Blue Star, said, “Margins are expected to contract by three to five per cent year-on-year until the first quarter of 2012-13.”
In cooling products, volumes have come down due to a slowdown in the economy on account of rate increases and a less severe summer. Additionally, rising competition from Japanese players have also led to an increase in inventory levels and consequently pricing pressure. Says Ankit Babel, analyst, PINC Research, in his results’ analysis on Blue Star, “Overall slowdown in the economy and weak consumer sentiments might continue to impact performance of the cooling products division.”
