A seasonally weak quarter for air conditioners (ACs) coupled with the adverse impact of the note ban on sales was expected to be a drag on Voltas Ltd’s December quarter performance. However, although sales were affected, the projects division more than made up for it, leading to higher-than-anticipated operating profit jump.
The quarter’s net revenue at Rs1,180.5 crore was 6.7% lower than the year-ago period. The unitary cooling products (UCP) division, comprising of AC sales and which accounts for a third of the total revenue, clocked a 5% drop in revenue. There was an 11% drop in the number of ACs sold as the currency crunch hit sales for most part of the quarter. Meanwhile, revenue at the electro-mechanical projects (EMP) division, too, contracted by a similar degree.
Fortunately, the EMP division’s profit margin at 3.9% was better than what the Street had pencilled in. This made up for the 110 basis point decline in the UCP division’s profitability. A basis point is 0.01%.
Besides, the operating expenditure as a percentage to sales fell from a year back as raw material cost was lower. Therefore, the operating profit at Rs89 crore zipped past the average estimate of 20 brokers by 40%. It was also around 52% higher year-on-year. Higher profit clocked in spite of lower revenue traction led to a significant 210 basis point jump in operating margin.
Further, a steep rise in other income fuelled net profit by 55% to Rs81.6 crore.
The Voltas stock, which last changed hands at around Rs350 on BSE, is on a strong wicket in spite of its relatively high price-to-earning multiple of 18 times one-year forward estimated earnings.
For one, the next two quarters are better for the UCP division given that the demonetisation effect will wear off as the peak season for AC sales picks up. Note that Voltas is the market leader with a 27% share of the AC market. Also, the order inflows for its EMP projects division are likely to gain momentum as the economies of the Middle East, where Voltas has a significant presence, are improving on the back of rising crude oil prices. Above all, legacy loss-making projects are now behind the company, paving the way for improved overall profitability.