The retail air conditioner (AC) market is said be growing at 30-32% per annum in the last few years. In the last four-six quarters, Voltas Ltd has sharpened its focus on this segment. The firm has lined up energy-saving products and aggressive marketing. At present, Voltas with a 19% market share in ACs is second to the Korean brand LG by a small gap.
Voltas’ market share grew from 16.5% in April to the present 19%. Further, according to the management, its sales volumes in the segment grew by 65% between April and February of fiscal 2011, twice the industry average.
The segment, along with institutional ACs, comprises the unitary cooling products (UCP) division, which accounts for one-fifth of the total revenue. But severe competition and discounts by peers in the retail market, proliferation of new players along with cost pressures due to rising raw material costs could eat into profit margins. For example, copper prices have jumped three times from $3,000 (Rs1.36 lakh today) per tonne in the last 18 months.
In the December quarter, the UCP division’s Ebit (earnings before interest and tax) margins fell by around 250 basis points (bps) from a year ago, as higher margins were given to dealers to dispose off inventories. This improved cash flows by reducing receivables to a healthy 20 days during the quarter. The UCP segment revenue should grow faster in the summer—in December, it grew 29% year-on-year. However, higher interest rates could affect consumer demand for ACs.
Higher volumes along with the 5% price hike taken in retail ACs in January could see improved margins from the UCP division in the next two quarters. The segment accounts for about 21% of the total Ebit, while the balance comes from the engineering advisory services (EAS, 30%) and electro-mechanical projects (EMP, 50%). Voltas’ overall margin fall of 150 bps was shored up by the EAS division.
There are concerns about the core EMP business where the slow pace of execution, especially in international projects, could affect profitability. That’s perhaps why the stock, which trade at Rs151 apiece and about 12 times estimated fiscal 2012 earnings, has significantly underperformed the CNX Nifty since October.
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