The after-effects of a dull summer season linger on for Voltas investors
Margins almost halved as input cost pressure and intense competition weighed on realizations
Voltas Ltd’s broadly in-line results brought no cheer for investors. The stock lost 1.8% Tuesday even as the company said its revenue and profit increased 37% and 12%, respectively, in the September quarter.
The disappointment emanates from the cooling products business. Margins almost halved as input cost pressure and intense competition weighed on realizations.
True, the management expects margins to revive. But with the season remaining dull, analysts have pared their earnings estimates. “We cut our FY19/20E earnings by 7%/6% to factor in weak unitary cooling products margins,” said Motilal Oswal Securities Ltd.
The cuts in earnings estimates would have been sharper, but for the fact that the electro-mechanical projects segment, the other major business division, is on the path to recovery.
Execution has picked up and healthy order intake is expected to help the division maintain revenue and earnings momentum. “We believe that domestic execution is seeing an uptick driven by clients demanding faster project execution, especially government ones in the run-up to the elections,” analysts at Jefferies India Pvt. Ltd said in a note, adding “(the) 58% domestic order book share in ₹4,900 crore order book should see the revenue and margin growth trajectory continue.”
The commentary should comfort investors. But this division alone cannot drive the stock which lost 6% over the last year compared to a 2% drop in the BSE 500 index.
The cooling products division, which generates the greater part of Voltas’ earnings, is facing rough weather.
A dull summer season this year means the industry is saddled with inventories. The industry has 2-2.5 months of inventory compared to 1-1.5 months a year ago.
With the season ending, analysts fear companies will have to step up discounting to clear inventories. “In the room air conditioner segment, the industry is still saddled with excess inventories of ~800,000 units and companies will have to offer incentives and trade discounts to liquidate it in 3QFY19,” Emkay Global Financial Services Ltd said in a recent note on Blue Star Ltd.
That said, the next season is just one quarter away. The companies begin to place products from January and February onwards. If the weather normalizes the industry should see a good recovery. “We believe margin surprise will be sharp especially in 4Q if summer temperatures are normal,” analysts at Jefferies added.
But the challenge is the intermediate period. As feared by some, if industry sales decline this year the companies will see a notable earnings impact in the December quarter. That can lead to another round of cuts in earnings estimates.
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