Voltas Ltd’s investors and management are looking with some concern at Egypt. About two-thirds of revenue from its largest segment, electro-mechanical projects and services (EMPS), comes from overseas orders—a majority of them from the Middle East.
The violence in Egypt has sparked concerns about instability spreading across the region. A number of Voltas’ important projects have been executed in the Middle East and the company’s new joint venture in Saudi Arabia will take off from April.
The management highlighted this as a key concern at a post-result conference call with phrases like “bit of conservatism in (Middle-Eastern governments) in giving new orders” and “maybe decisions (in handing out orders) may be delayed.”
Indeed, it was the EMPS segment that dragged down sales growth for the three months ended 31 December. This category, which typically accounts for one-seventh of Voltas’ revenue, saw a 3% decline from a year ago because many projects were in early stages of execution, the company said.
However, strong growth in its other two business areas—cooling products such as air conditioners and refrigerators, and engineering services—salvaged revenue numbers. Overall net sales grew 5% from a year ago. But the order backlog slipped to Rs4,700 crore compared with Rs5,000 crore at the end of the September quarter.
The company managed to handle raw material costs pretty well. As a percentage of sales, input costs were almost stable. However, an increase in employee costs and inventory stack up led to earnings before interest, taxes, depreciation and amortization falling by 11.7% from a year ago.
Operating margin fell by 150 basis points to 7.6%. One basis point is one-hundredth of a percentage point.
So what are the positives for the company? One, the profit numbers also include the Rs9 crore loss for its subsidiary Rohini Industrial Electricals Ltd. Voltas has now taken complete operational control of the unit and that could well turn it around.
Secondly, countries such as Abu Dhabi and Qatar, which is hosting the 2022 football world cup, are stepping up on building infrastructure. These governments are also flush with money from higher crude rates.
True, the company is doing reasonably in the domestic sector with more orders from the infrastructure segment and increasing air conditioner sales. However, bagging and executing new projects in the important Middle-Eastern market will be a key upside trigger for the stock that has shed nearly 20% since the start of this year.
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