Markets
Margin pressures cast chill over Voltas
Summary
- Against the backdrop of stiff competition and subdued demand, shares of Voltas have declined 29% so far in CY22.
Voltas Ltd’s shares fell by around 5% on Thursday on NSE. Profitability for the September quarter (Q2FY23) was far from inspiring. Many analysts have also reduced earnings estimates for this financial year and the next, factoring in lower margins for the company’s unitary cooling products’ (UCP) business. In the post earnings call, Voltas’ management told analysts that the UCP segment’s margin would be a high single-digit for the next 12-15 months.
In Q2, a generally lean quarter, the UCP business earnings before interest and tax (Ebit) margin stood at 7.3%, contracting by 281 basis points (bps) year-on-year (y-o-y) and 40 bps sequentially. One basis point is 0.01%. The headwinds of carry forward of high-cost inventory continues to weigh on the margin, Voltas said. Further, the competitive environment remains fierce.
Voltas is the market leader in the overall room air conditioner business with year-to-date August market share at 22.8%. However, this is lower than June exit market share of about 24%. The management has guided that it will have a judicious balance between its market share and margin.
UCP revenues grew by 4% y-o-y in Q2. Voltas’ electro-mechanical projects and services segment’s revenues fared better than expected, clocking 3% growth. The engineering products and services segment saw 9.5% revenue growth.
Overall, Voltas’s consolidated operating revenues rose by 4.2% y-o-y to ₹1,739 crore. However, cost pressures meant a 22% drop in earnings before interest, tax, depreciation, and amortisation (Ebitda) to ₹100.8 crore.
The outlook remains dull. “Voltas’s earnings have not grown since FY2017, amid eroding profit margins, and there is little visibility into any near-term acceleration, given subdued demand and intense competition," said a report by Kotak Institutional Equities dated 2 November. The broking firm now builds in the UCP segment’s Ebit margin of 7.8%/ 9.5%/10.7% for FY2023E/24E/25E (versus 9.0%/10.8%/11.3% previously), leading to 13%/13%/8% cuts to Kotak’s earnings per share estimates for these three years.
Against the backdrop of stiff competition and subdued demand, shares of Voltas have declined 29% so far in CY22, compared to the 4% gain of the Nifty 50 index. Voltas’ shares are now flirting with the 52-week low seen in October. One of the key factors worth watching over the next 12-24 months, according to Nuvama Research, is how the Voltas leadership strikes a balance between margins and market share gains (25% target) in the current challenging environment.
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