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A cool summer for Voltas

LiveMint logoLiveMint 25-05-2017 R. Sree Ram

The Voltas Ltd stock surged 9% on Wednesday after the company surprised the Street with stronger-than-expected performance for the March quarter. Overall revenue grew 9%, driven by the cooling products division.

Early onset of the summer season in several parts of the country and recovery of the cooling products business from the difficulties of demonetisation pushed up the division’s revenues by about 27% in the last quarter, the best growth in at least five years.

The growth is not only better than the 10% expansion in the room air conditioners market last quarter but also exceeded the 20% growth reported by its listed peer Blue Star Ltd. According to John Perinchery, an analyst at Emkay Global Financial Services Ltd, large market share and brand dominance may have aided Voltas’s performance.

What came as a bigger surprise though is profitability. Ebitda margin expanded by one percentage point from a year ago, thanks to the improvement in profitability at the electromechanical projects division. Ebitda is earnings before interest, tax, depreciation and amortization. It measures operating performance.

Importantly, profitability at the cooling products division remained intact. In view of the entry of new competitors into the room air conditioning market, aggressive pricing by LG for its variable speed (inverter) air conditioners and the rise in input costs, analysts expected the cooling products business to see pressure on profitability.

The management indicated as much in an interview to CNBC- TV18 in March. But as it turns out, things were not as bad as feared in the last quarter. Ebitda and net profit grew in the range of 19-22%. A significant part of the profit is driven by improvement in profitability at the electromechanical projects division.

With Wednesday’s gain, the Voltas stock is up 36% so far this fiscal year. While one-year forward valuations at around 26 times are not cheap, sustainability of the profitability and recovery in the electromechanical projects division will be key for continuation of the outperformance in the stock.

More clarity on this will emerge in the conference call scheduled to be held on Thursday. Sanjeev Zarbade, an analyst at Kotak Securities Ltd’s private client research, says investors will want to know if profitability will be sustained in the cooling products division. Also, they will be eager to check if the reported numbers are boosted by any one-offs or non-repeatable events and if the worst is over in the electromechanical projects division, adds Zarbade.

The fiscal first quarter (April-June) is also a seasonally strong one for cooling products. Perinchery of Emkay says commentary on the current sales trends and possible impact of the goods and the services tax on the industry will be important. With air conditioners going for (efficiency) ratings revision, any slowdown in demand can pile up the inventories, impacting future performance. Also, it will be important to know if the electromechanical division is on a turnaround path so that improvement in profitability will be sustained. If so, then it can open a rerating opportunity for the Voltas stock.

While this makes Thursday’s conference call a crucial event for the stock, much depends on the near-term outlook for the cooling products division. Thankfully, initial indications are that demand conditions remain healthy. Industry interactions by Jefferies India Pvt. Ltd show continuation of strong demand conditions in the current quarter also.

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