(Satish Kumar/Mint)
(Satish Kumar/Mint)

Voltas: winning strategy in ACs offsets pain in projects business

  • Voltas’ edge has been its strong presence in room ACs and battery of new products/variants to take on competition
  • For now, all bets for the firm’s near-term prospects are on the AC business

Looks like the sizzling summer this time around helped Voltas Ltd buck the slowdown in retail consumption to report significant growth in the June quarter. Its strategy to fill product gaps and offer a wide range of air conditioners (ACs) helped beat industry growth. This also masked the pain in its projects business in domestic and overseas markets.

The company’s unitary cooling products (UCP) segment, which represents ACs, staged the best performance in nine years. Revenue growth of 47% year-on-year was way beyond analysts’ expectations of 15-20% for the quarter. What worked in its favour, like it did for other AC makers, is the heat wave and the subsequent delayed monsoon. In spite of stiff competition, Voltas’ edge has been its strong presence in room ACs and battery of new products/variants to combat competition. Room AC sales grew by 36% year-on-year, where it maintained its leadership for the eighth consecutive year.

However, one must recall that AC firms, like other retail segments, lost out early this year due to weak sales and high inventory. But, Voltas’ strong brand and range helped contain discounts. Import duty-led cost pressures were reined in, leading to a 60 basis point (bps) rise in Ebit (earnings before interest and taxes) margin.

That said, Voltas has its fair share of problems. Global and domestic macroeconomic challenges dragged revenue in both electromechanical projects and engineering products and services. With revenue contraction, Ebit margins fell by 220 bps and 230 bps, respectively.

Analysts said the drag from these segments pulled down overall profitability. Rightly so, Ebitda (Ebit plus depreciation and amortization) margin was a tad lower than the year-ago period at 11%. However, the higher revenue mix of UCP segment reduced the pain.

Meanwhile, investors have turned cautious after it formed a joint venture Voltas-Beko to foray into a new range of white goods. Edelweiss Securities Ltd said in its results review that the company does not have the full range of products even for the festive season.

This explains why Voltas’ stock has been volatile and has underperformed benchmark indices, such as the Nifty Midcap, in the recent past. Even the stellar AC sales and market share gains have pushed the stock up by barely 1-2%

For now, all bets for the firm’s near-term prospects are on the AC business. Even so, the current market price of 605.60 discounts Voltas’ estimated FY21 earnings by about 30 times, leaving little room for optimism till the other business segments pick up, too.

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