Voltas: Chilling out

Outstanding orders of Rs 1,900 crore will power Voltas growth

Voltas' results in the September 2006 quarter results were affected owing to longer-than-anticipated time related to planning and getting the necessary resources in place for two large projects in its electro-mechanical projects division that the company bagged late FY06 in the Middle East.

Senior company officials pointed out that revenues inflows from these two international projects in the last quarter was minimal.

As a result, the company has seen its overall operating profit decline by 24.7 per cent y-o-y to Rs 20.1 crore in the September 2006 quarter compared with 13.3 per cent growth in net sales to Rs 529.88 crore.

Operating profit margin also fell by 190 basis points y-o-y to 3.8 per cent in the last quarter. Higher staff costs, coupled with an increase in other expenditure, were also responsible for the pressure on margins in the September 2006 quarter.

Voltas' senior officials pointed out that a surge in demand from BPOs and shopping malls for cooling solutions helped in partly offsetting the sluggish performance from overseas markets in the electro-mechanical division.

Nevertheless, segment profit of the division fell 60.8 per cent y-o-y to Rs 7.9 crore in the last quarter. The company expects revenues from these two large projects in the Middle East to start flowing in the December 2006 quarter, and should help improve its operating margins.

This has helped keep investor sentiment strong for the Voltas stock, which has appreciated 25 per cent over the past three months compared with 16.8 per cent gain in the Sensex.

Meanwhile, in its engineering products and services division, strong demand for fork lifts and construction machinery helped segment profit grow 63.3 per cent y-o-y to Rs 26.3 crore in the last quarter.

Going forward, Voltas' growth is expected to be powered from its outstanding order book of Rs 1900 crore in the electro-mechanical division at the end of Q2 FY07, which is up 46 per cent y-o-y. But with the stock trading at 34 times estimated FY07 earnings, it is expensive.

Dabur India: Rich diet

Driven by the foods and home care segments, Dabur India turned in fairly good numbers for the September quarter with top line growth of 20.7 per cent at Rs 560 crore.

Despite higher expenses on raw materials, the company managed to improve the operating profit margin by 30 basis points to 17.3 per cent y-o-y thanks to lower spends on advertising down from 11.5 per cent of sales in Q2 FY06 to 9.3 per cent in Q2 FY07. At Rs 78.6 crore, the net profit grew a strong 25 per cent.

The foods segment continues to do well having grown by a strong 30 per cent y-o-y in the first half of this financial year, with the international business chipping in (31 per cent growth).

The oral care and home care portfolios too are showing momentum despite keen competition. While nurturing its brands, Dabur is also scouting around for brands and businesses to buy and is in the process of accumulating a sum of around Rs 800-900 crore for the purpose.

While Dabur has successfully built up brands in the personal care segment, and has established itself as a niche player, it will need to have a presence in the bigger segments such as personal wash so as to be able to scale up the business. Even if it buys brands, they will not come cheap.

Moreover, competition, is keen across all spaces and with the emergence of modern trade, margins are bound to be under pressure. Besides, spends on marketing and promotions too are unlikely to come down given the plethora of brands on shop shelves. Thus, while top line momentum may continue, costs will eat into margins.

At the current price of Rs 148, the stock trades at 31 times estimated FY07 estimated earnings and 25 times estimated FY08 earnings. However, the valuation captures the upsides from near term growth as also the best possible utilisation of the cash.

With contribution from Amriteshwar Mathur and Shobhana Subramanian