The Voltas Ltd stock had rallied sharply during the run-up to the company’s March quarter results and, unsurprisingly, it’s giving up some of those gains.
Sure, the results beat Street expectations. But these were muted to begin with.
Investors anticipated subdued earnings growth, pressure on margins, further losses on the Sidra medical project in Qatar and delays in new orders from its international business.
Net sales slipped 6% to Rs1,574 crore, mainly because of a sharp 39% drop in revenue from the engineering products and services segment. That’s because Voltas sold off the material-handling division, and also because high interest rates and environmental issues affected the mining and construction businesses.
Revenue posted by the core electro-mechanical project segment and unitary cooling products (air conditioning) also dropped around 3% each.
The surprise lay in an improvement in operating margins. Profit after tax was up 3% to Rs104 crore and operating margins widened by 30 basis points (bps) from last year. One basis point is one-hundredth of a percentage point. Margins remained flat for the electro-mechanical projects?segment, and?dropped 200 bps year-on-year for the air-conditioning business due to an increase in competition from Japanese firms, a rise in the cost of imports and the delayed onset of summer. But the silver lining was that despite weak revenue growth, margins improved sharply by 230 bps for the engineering products and services division as the textiles machinery business saw healthy revenue growth, according to a note by Emkay Global Financial Services.
Also See | Quarterly performance (Graphic)
The company’s order inflows, however, plunged 61% to Rs450 crore in the March quarter from the year earlier. The overall order book slipped 12% to Rs4,290 crore. While the company has started seeing some signs of revival in the West Asia market, the overall order environment remains bleak.
Ravi Swaminathan of Spark Capital Ltd said in a recent note: “The management expects margins to remain suppressed as new order inflow secured for electro-mechanical products (which contribute to 62% of Voltas business) are at considerably lower margins (around 4-5% Ebit margin), compared with historic levels.” Ebit is earnings before interest and tax.
The stock trades at around 12 times FY13 expected earnings, but given the bleak operating environment, the most that can be said for it is that the negatives have been priced in.
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