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Voltas’ margins can come under pressure

Voltas’ margins can come under pressure
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First Published: Tue, Jun 01 2010. 10 22 PM IST

Graphic: Yogesh Kumar/Mint
Graphic: Yogesh Kumar/Mint
Updated: Tue, Jun 01 2010. 10 22 PM IST
The March quarter brought good tidings for Voltas Ltd, a Tata group company that specializes in engineering solutions. Historically, the company has reported relatively lower operating profit margins (OPM) in the fourth quarter.
This March, OPM at 10.1% of sales was higher than around 8% in the preceding quarter and around 6% in the year-ago period. Both raw material and staff costs as a percentage of sales were lower year-on-year (y-o-y), shoring up profitability.
Graphic: Yogesh Kumar/Mint
Also, the higher pace of execution in large projects led to higher billings. As a result, consolidated revenues jumped by 49% on a quarter-on-quarter (q-o-q) basis to Rs1,480 crore, although it was marginally lower y-o-y.
A key reason for this was the decline in revenue from the electro-mechanical projects (EMP)segment , which accounts for nearly 60% of the firm’s revenue. Also, sales of material handling equipment did not pick up during the quarter.
What shored up revenue and profitability was the unitary cooling products (UCP) segment, which accounts for around 30% of total revenue. It reported a 70% jump in revenue y-o-y in the March quarter. Besides pent-up demand for room air conditioners and launch of new bottled drinks, company officials cite the focus on energy-efficient products as factors that contributed to a rise in sales.
Voltas reported a 46% y-o-y and a 66% q-o-q jump in the March quarter operating profit to Rs150 crore. Order inflow is robust; the March quarter saw Rs1,150 crore worth of orders, with nearly three-fourths accruing from international markets.
The total order book on 31 March was around Rs4,720 crore. Analysts reckon that while this is just around 1.3 times its estimated fiscal 2011 revenue, the revival in Voltas’ areas of operation is a positive. For example, a recovery in textiles, sustained uptrend in infrastructure projects and mining augur well for its engineering division.
But despite the positive outlook, the management has repeatedly said that markets have become extremely competitive. One could see pricing pressures when securing large projects in future. This apart, the next two quarters could see higher raw material costs, which will naturally impact operating profits. According to a report by Kotak Institutional Equities Research: “The company could face headwinds of margin pressure in EMP and UCP segments and a slow pickup in execution of new projects.”
While analysts’ consensus advises a cautious approach to buying the stock, it is up since its results. The stock trades at Rs182.50 each, which discounts its estimated 2011 earnings about 16 times.
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First Published: Tue, Jun 01 2010. 10 22 PM IST