Voltas’ revenues for the quarter ended June 2017 (Q1) were broadly in line with the Street’s expectations despite the goods and services tax (GST)-led reduction in inventory by trade partners.
The company’s profitability was better than expectations, surprising investors. Given the return to normalcy in the air-conditioning segment, improvement in orders in projects and expansion in margins, analysts believe the company will perform well, leading to its stock price rising.
Unitary cooling products, which is primarily the air-conditioner
(A/C) segment and contributes two-thirds of the company’s revenues, grew by a little over 1 per cent on a year-on-year basis despite the destocking of inventory due to the goods and services tax (GST).
The company also highlighted that Q1 growth was restricted owing to unseasonal rain in southern India, apart from uncertainties surrounding the GST. What’s more, Voltas has further strengthened its market leadership in the room air-conditioner market (at multi-brand outlets) with an increased share of 22.2 per cent as at the end of June 2017 compared to 21.4 per cent at the end of March 2017.
The Electro-Mechanical Projects
(MEP) and Services i.e. the engineering segment, which gives almost a third of its revenues, growing 14 per cent year-on-year, did compensate for the slower growth in the cooling products segment. More importantly, it impressed on the profitability front with sharp improvements in earnings before interest and tax (EBIT) margins at 5.3 per cent compared to 1.9 per cent year-on-year.
The management said it had been focusing on profitability in this segment. Among key orders booked in Q1 include Rs 490 crore for electrical projects in India, Rs 359 crore MEP work for a commercial building in the United Arab Emirates, and Rs 137 crore MEP work for a museum in Oman. The overall order book of the segment thus was up 11 per cent year-on-year at Rs 4,906 crore as of June 30, 2017. Analysts say that given the lumpy nature of this business and as low margin
legacy orders have been gradually executed, the next 12-18 months will see the improving profitability trend continue. With this, Voltas’ revenues at Rs 1,962 crore grew 6.35 per cent year-on-year, and were largely in line with the Bloomberg consensus estimate of Rs 1,983 crore. Net profit
at Rs 188 crore, however, beat the consensus estimates of Rs 167 crore. Earnings before interest, tax, depreciation and amortisation (Ebitda) at Rs 210 crore also came higher than the Rs 206 crore indicated by consensus estimates. Analysts at Motilal Oswal Securities said that the Ebitda margin
of 10.9 per cent was slightly higher than their estimate of 10.5 per cent.
hiccups may have restricted A/C segment revenues, analysts see sales normalising. Analysts at Jefferies, after their channel checks in July, said that normalcy had returned and dealer orders from companies had picked up for new stocks while price change is in the 0-1 per cent band to reflect the GST
impact across product ranges. Though the second quarter is the lean season for the A/C business, orders have begun with double-digit growth year-on-year, say analysts. Analysts at Antique Stock Broking had earlier said that GST
implementation will impact revenues in the near term, but should normalise on a full-year basis and they see 25 per cent compound annual growth in earnings during FY17-19. For the A/C segment, analysts expect the company to be one of the key beneficiaries of LG exiting the fixed-speed room A/C segment, and healthy demand continuing driving growth particularly from the North. Further, analysts at Edelweiss see the government’s recent directive to prioritise domestic procurement in metro projects will benefit companies such as Voltas
for system contracts.
Overall, analysts remain bullish on the stock. Those at Jefferies, after the results, remain positive on Voltas and maintain Buy with a target price of Rs 600, valuing the stock at 28x FY19 estimated earnings, a premium to 10-year valuation average of 22x. The stock currently trades at Rs 537 levels.