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Voltas: Upside from urban domestic market revival

LiveMint logoLiveMint 08-06-2014 Vatsala Kamat

A 22% jump in Voltas Ltd’s stock price after the quarterly results last week reflects investor conviction about the company’s growth prospects. Importantly, margin pressure due to legacy projects is expected to ease in the next couple of quarters.

The boost in profitability in the quarter came from the unitary cooling products (UCP) division, which is in the business of large air-conditioning products. On the back of a 12% rise in revenue from a year ago, operating margin jumped by 410 basis points. One basis point is a one-hundredth of a percentage point.

Better product mix and the rupee’s appreciation, which helped save costs on imported components, lifted profitability. A report by Barclays Research, which significantly revised the earnings estimates for the next two years, says urbanization and Voltas’ efforts to penetrate into smaller cities should see the expansion of its market share in room air-conditioners, too.

Yet, the quarter’s net revenue was down 8% year-on-year as two other segments—electro-mechanical and engineering—did not fare too well. These two segments cater to large engineering projects, where execution delays in the domestic and international markets pulled down sales billing and profit margins. The electro-mechanical division reported a loss during the quarter.

In spite of the drop in revenue, Voltas’ operating margin rose by 26% because of lower costs on all fronts—raw material, employee and other marketing expenses. The company also generated free cash despite legacy orders with execution delays and weak profitability.

Order inflows during the quarter were not encouraging because they were down 18% from a year ago. Analysts are not unduly worried though. Voltas’ focus on selectively bidding for mid-sized orders with higher profit margins is a positive. Although the company has a stronghold in some overseas markets for large engineering and cooling products, a revival in the domestic investment cycle should bring in orders from buildings and water projects, too.

Voltas’ stock price upside will, therefore, come from a revival in the urban domestic market and an upward revision in profit growth over the next two to three years.

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