Shares of Voltas Ltd sizzled this past month, gaining 18% until Friday before cooling off. Better prospects in its air conditioning (unitary cooling products or UCP) division dovetailed with a strategy to penetrate other white goods sub-segments powered the shares.

Higher sales in the south in the last few weeks normalized inventory from two months until December to one month. Ahead, efforts to broaden its product range and offer greater choice to customers could lead to market share gains. As such, the firms’s share in room air conditioners (ACs) has grown about 600 basis points in the last six years to 24%.

But, that’s not enough. It remains to be seen if the demand pull can power the company’s March quarter revenue.

In the last two quarters, Voltas has been unable to raise prices due to weak demand resulting in 3% sales contraction in the nine months ended December. Little surprise, the stock has underperformed benchmark indices for a long time in calendar year 2018.

According to a JM Financial Services Ltd report, “Industry players are unable to hike prices to make up for adverse currency movements and import duties as competition remains high. Further, rising costs and sticky selling prices in the UCPs segment has already taken margins downhill. Voltas management maintained its full-year guidance for UCPs segment margins at 11% for FY19 versus 14.7% in FY18."

Further, the company’s entry into refrigerators and washing machines through a joint venture, Voltas Beko, would translate into revenue accretion only after a few quarters. Initial marketing costs may also tell on its overall near-term profitability.

As if this is not enough, new orders in its EMP (electro-mechanical projects) division are slack. Execution delays have cut into margins. Analysts say with about 18 months’ revenue visibility in its kitty, the division intends to focus on orders with better margins.

Voltas is aiming at greater localization to replace imported parts to grow its Ebitda (earnings before interest, tax, depreciation and amortization) margin, at present around 8-9%.

No doubt, the company is making the right moves to strengthen its operations in the UCP and EMP divisions. However, it may be several quarters before the favourable effect translates into earnings growth.

In fact, some sceptics forecast a contraction in earnings in FY19 before it gains traction in subsequent years. Meanwhile, the recent rally has puffed up valuations. Voltas’s current share price of 612.35 discounts FY21 earnings estimate on Bloomberg by 31 times, which may cap its potential till earnings measure up. 

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