With peak summer season ahead, Voltas may see volumes and margin gains

Q3 was disappointing on account of one-offs, margins pressures

India’s largest room air-conditioner company, Voltas, saw some of the biggest downgrades among the top 200 stocks post the December quarter earnings. Brokerages cut the company’s FY23 earnings by an average of over 20 per cent due to losses in the quarter and margin contraction amid severe competitive pressures.

Praveen Sahay of Prabhudas Lilladher Research has revised its FY23 earnings downwards by as much as 27 per cent to factor in the margin contraction in unitary cooling products segment (UCP) segment. The segment saw a 90 basis point drop in margins in Q3 as compared to the year ago period.

The other reasons for the earnings revision were losses in electro-mechanical projects and services (EMPS) business of Rs 46 crore due to delay in collections and settlements and a Rs 32 crore loss in Voltas Beko.

Overall, the company reported a loss of Rs 110 crore as compared to a profit of Rs 96 crore in the year-ago quarter. Operating profit margins too slipped by 490 basis points YoY to 3.8 per cent. What led to the weak operating performance/loss was a provision of Rs 140 crore on account of the cancellation of a contract and encashment of bank guarantee in the EMPS segment.

This is the second consecutive quarter when a contract was cancelled unilaterally and bank guarantees were encashed by the main contractor, resulting in losses for the company, says Emkay Research. Voltas is seeking legal remedies in these cases, which are from the Middle Eastern market. While the order book for the EMPS segment is strong, the street will await profitable execution to revise their estimates for this segment.

In a seasonally weak quarter, the company sales in the UCP segment (over 60 per cent of consolidated sales) were broadly in line with estimates, though margins were 90 basis points lower YoY. Brokerages, however, are positive on the volume growth front given the upcoming summer season and the fact that trade inventory is at normal levels. Brokerages believe the company’s ability to hold on to its market and margins will be key going ahead. The company indicated that its year-to-date market share stands at 22.5 per cent in the room air conditioner market which is down 400 basis points from last year. Siddhartha Bera and Kapil Singh of Nomura Research expect strong demand, favourable operating leverage and price hikes to improve margins. It will be difficult for other players to continue with negative margins sustainably, they add. The stock, according to the brokerage, is currently trading at 30x its FY25 EPS, and offers a favourable risk reward.

Prabhudas Lilladher Research, too, is positive on Voltas for the long term, despite near-term challenges related to margins. This is based on its leadership position in room air conditioners, balance sheet comfort (Rs 860 crore of net cash in H1 of FY23) and better traction in order flow from domestic/international market. They expect its earnings per share to grow at 18.7 per cent annually between FY22-25. The stock is currently trading at 43 times its FY24 earnings estimates.