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Write-offs and cost pressures pull down profits at Voltas

Write-offs and cost pressures pull down profits at Voltas
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First Published: Sun, May 22 2011. 08 50 PM IST
Updated: Sun, May 22 2011. 08 50 PM IST
Voltas Ltd’s results for the March quarter disappointed the Street as profit margins were hit adversely by mounting cost pressures and continued write-off of losses incurred by its subsidiary, Rohini Industrial Electricals Ltd.
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Despite 15% higher revenue, Voltas’ operating profit fell 6% while net profit fell by a sharper 24%, when compared with the year-ago period.
The key problem was the electro-mechanical projects and services segment, which accounts for a little more than half its revenue. Weak execution, mainly on overseas orders, resulted in a mere 2% growth in revenue. Project delays escalate costs and impact profitability. Meanwhile, losses written off from Rohini (part of this segment) surged to Rs 15 crore in the March quarter, from around Rs 9 crore in the preceding quarter and a marginal profit posted a year ago. Margins from the segment, therefore, fell by around 170 basis points (bps).
One bps is one-hundredth of a percentage point.
The company’s unitary cooling business, which accounts for a third of revenue, grew 38% from a year before. The firm has a one-fifth share of the retail air-conditioner market, a part of this business. But stiff competition, higher dealer incentives and discounts along with cost pressures did not allow for growth in margins, though they were sustained at the same level as a year ago.
While the engineering products and services segment, which caters to the machinery and mining business, grew the fastest, margins were hit more severely due to rising costs, expenses on equipment, and reportedly lower commission income.
An across-the-board dip in margins, therefore, brought down the overall operating profit margin by around 195 bps, to around 8.5%. Adjusted net profit for March quarter, after accounting for tax reversals in the previous-year period, contracted by 24%. Perhaps, the sequential improvement in profitability even after higher write-offs was a blessing.
Voltas’ management is confident of ramping up revenue in the current fiscal year on the back of its Rs 4,900 crore order book, which is around one year’s revenue.
Moreover, no further shocks are expected from the subsidiary business. And that’s, perhaps, the reason why the stock recovered after results were announced.
Trading at Rs 162 apiece, it has moved in line with the capital goods index, which has slipped in the last six months, when compared with the first half of fiscal 2011.
For Voltas, challenges remain on account of a less severe summer—which could lower sales of retail air-conditioners—higher costs, and the fact that nearly a third of its order book is in international terrain, mainly West Asia.
The onus, therefore, is on timely execution and cost management that could cushion profits, at least in the longer term.
Graphic by Yogesh Kumar/Mint
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First Published: Sun, May 22 2011. 08 50 PM IST