Tata group-owned Voltas Ltd’s June quarter results beat the Street’s forecast on the strength of its retail unitary cooling products (UCP) division. Net profit, after adjusting for investment income revaluation of about 21 crore, jumped 53% from the year-ago period to 159.8 crore. It beat Bloomberg’s 20 analysts’ consensus estimate by 27%.

The company’s rising sales and share in the retail air conditioner AC market, where it is the leader, boosted the quarter’s performance. After all, the June quarter is the one with best sales in this consumer segment given the hot climatic conditions in the country. UCP segment sales, which accounts for almost two-thirds of the consolidated revenue, rose by 29% year-on-year (y-o-y).

This more than offset the flat sales growth clocked by electromechanical projects and services (EMP), and engineering products and services (EPS). These two segments still mirror the sluggishness in the global and domestic economies as revenue hinges on large project-driven orders. However, with the jump in sales and operating leverage in the UCP division, cost benefits kicked in. Cost of raw material, employees and other expenses incurred for marketing and administration as a percentage to sales fell from the year-ago levels.

Operating margin therefore surpassed the Street forecast significantly, rising by 236 basis points y-o-y to 10.8%. Again, it was the UCP division’s 270 basis points growth in profit margin (before interest and tax) that translated into a commendable traction in overall profitability for Voltas. This was in spite of the 620 basis points fall in the EPS division’s margins. A basis point is 0.01%.

Operating profit growth of 52% is no doubt very good. With news of strong AC sales hitting the market earlier, the stock had already run up, yielding double the returns than the benchmark S&P BSE Capital Goods index over the past three months.

Another reason for the optimistic outlook is that Voltas, given its brand equity even in international markets, is likely to see a rise in orders in the ensuing months from the Middle East. Analysts have pinned their hopes on the mega trade fair Dubai 2020 and the Qatar Olympics in 2022, which should see strong order inflows for the EMP and EPS divisions. This might see Voltas cruise along for the next two years by which time the low capex cycle on the home ground should turn favourable.

That’s why the stock trades at rich valuations of 24 times FY18 estimated earnings per share. Given its strength in operating parameters, new orders will determine any upgrades in earnings or valuation from current levels.