Home >Markets >Mark To Market >Voltas’ Q3 result is good, but its stock valuations are already rich

Voltas Ltd’s December quarter results have surprised analysts positively. Its unitary cooling products (UCP) business was the star performer last quarter, reporting a robust 40% year-on-year (y-o-y) revenue growth. That’s a striking improvement from the 9% growth seen in the September quarter. In the December quarter, pent-up demand and increased stocking by dealers helped the segment.

“UCP revenue growth (ahead of listed peers) in a seasonally lean quarter reflects channel filling ahead of price increases initiated in January 2021," said analysts from Emkay Global Financial Services Ltd in a report on 15 February. The segment’s earnings before interest and tax (Ebit) margins expanded by 235 basis points (bps) to 12.5% helped by cost-saving initiatives and better operating leverage. One basis point is one-hundredth of a percentage point.

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Revenues from Voltas’ electro-mechanical projects and services (EMPS) and the much smaller engineering products and services (EPS) businesses increased by 26% and 46%, respectively. However, Ebit margins fell in both these segments.

Robust show
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Robust show

To some extent, better unitary cooling product margins did help set off the decline in margins in EMPS and EPS businesses. Overall, Voltas’ consolidated revenues grew 34% y-o-y to 1,995 crore. This is a big improvement from the 13% revenue growth seen in the September quarter. In the December quarter, earnings before interest, taxes, depreciation and amortisation (Ebitda) margin expanded by 78 bps to 7.3%.

The December quarter has set the stage for further upside if the summer season is normal versus lower temperatures, Jefferies India Pvt. Ltd’s analysts said. “Voltas outperforming peers in its segment and gaining share should see premium valuations sustain," the analysts said in a report on 15 February.

To cope with rising input costs, Voltas has hiked prices by 5%-6% across unitary cooling products. This should offer some cushion to margins, but the scenario is not particularly rosy. “We believe the risk to margin exists in this highly competitive industry as companies revert to their advertising spends and other expenses in the key summer season," said analysts from Motilal Oswal Financial Services.

The meaningful appreciation in Voltas’ shares suggest that investors are already factoring in a good portion of the optimism. The stock has jumped about 45% since the end of October and now trades at around 46 times estimated earnings for financial year 2022, according to Bloomberg data.

“A favourable upcoming summer season, market share gains, benign base (Q1FY21) and strong execution should continue to drive Voltas ahead of industry growth," said analysts at Emkay. They, however, pointed out that “expensive valuations restrict us for rating upgrade."

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