Currency risks, weak Q2 results cloud over Voltas

Voltas was expected to report muted performance but didn’t even meet these low expectations


Graphic: Vipul Sharma/Mint
Graphic: Vipul Sharma/Mint

Voltas Ltd slumped 8% on Thursday after the company surprised the Street with weaker-than-expected performance for the September quarter (Q2). Given the challenges in the non-cooling products business, Voltas was expected to report muted performance. Revenue growth estimates of analysts varied in the low single digits.

But it turns out the company was not even able to meet these low expectations. Sales net of excise duty are down 7% from a year ago. The combined revenues of the electromechanical projects and the engineering products divisions fell 15.5% due to slow project execution and tough business conditions for capital equipment.

Revenues at the unitary cooling products division increased 13.5%. But even that trailed some analysts’ expectations. “Unitary cooling products sales growth at 13% y-y is lower than our forecast of 30% growth,” Nomura Research said in a note. The room air conditioners market is estimated to have grown 10-13% in the September quarter, according to an analyst with a domestic broking firm. Given its strong presence in the domestic market, Voltas is expected to do better.

The company claims it continues to maintain market leadership in room air conditioners in India. But the lower-than-expected growth in the segment points to competition and pricing pressures. Perhaps that partly explains the meagre 60 basis point expansion in margins. This, along with a drop in profitability at the non-cooling products business, weighed down overall earnings. Operating profit and net profit grew by a meagre 6-7%. A basis point is 0.01%.

According to another analyst who did not want to be named, there was no major negative surprise in the company’s September quarter results. Performance of the non-cooling products businesses is expected to be volatile given the challenges in capital expenditure environment. As summer season draws to an end, the air conditioner industry naturally gets into inventory re-stocking mode. So, subdued sales are not completely unexpected.

What came out of the blue is currency demonetization and the uncertainty it is creating for the business. First the measure will hit inventory stocking of air conditioners, especially in non-metros. This is already leading to cuts in sales estimates. Dolat Capital has cut Blue Star Ltd’s cooling products business growth estimates for the current fiscal year this week.

The second factor is the impact demonetization can have on air conditioner sales, especially in tier II-III towns where transactions are mostly done in cash. Analysts expect the impact to last for five-six months, which is a good part of the next summer season.

Of course the demonetization risks are playing out for several days now. But weaker results have also stoked concerns about Voltas’s market position. A better-than-market growth in the cooling products business would have avoided some of the drubbing the stock saw on Thursday, says an analyst quoted earlier.

Nevertheless, given the premium valuations—the Voltas stock trades at 25 times current fiscal year’s earnings estimates—and the business risks, the correction is not unwarranted. The company is holding a conference call with analysts on Friday, where it may provide more clarity on the business environment and the kind of impact it sees from the currency demonetization.

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