When most companies in the capital goods sector are battling the industrial slowdown, Voltas Ltd seems poised to take advantage of better times. It might seem optimistic, but here’s why.
The firm’s electro-mechanical projects (EMP) business, which comprises almost half the total revenue earned, deals with large air-conditioning plants. In the recent past, profit margins of this segment were hit due to some large legacy projects in overseas markets. For instance, although this division posted an 18% year-on-year (y-o-y) growth in revenue, it was on a wafer thin operating margin. More recent orders that focus on margins would ensure higher profitability.
Meanwhile, the tide has turned for Voltas on new orders. About half the EMP segment’s revenue accrue from the Middle-eastern economies that are hit by plummeting crude oil prices. That could be a worry, but analysts say two mega events—Dubai Expo 2020 and Qatar World Cup Football 2022—should lift orders for Voltas’ EMP segment. That said, capex in the domestic market is unlikely to pick up soon.
The Street has also taken note that Voltas has withstood cutthroat competition in the retail air-conditioning market. Although changing market dynamics from dealer sales to e-commerce, preference for split ACs over window ACs and the entry of new multinational firms have increased competition, Voltas’s share of the pie has inched up in the past two years. It commands one-fifth of the market, with a profit margin of 11-12%.
More importantly, the firm boasts of an order book that is a little over 1.5 times 2014-15 revenue of the EMP segment. Investors have given a thumbs-up to Voltas on revenue visibility and its strong hold in the markets that it operates in. The stock has returned 21% in one year, when both the benchmark Sensex and BSE capital goods index have contracted. At Rs.312.10, Voltas trades at a rich valuation of about 20 times 2017-18 estimated earnings per share.
The only major concern is whether competition across product segments will continue to drag down profitability. The firm has steered towards an asset-light model and outsourcing to contain costs. In the September quarter, Voltas is a net debt free company with positive operating cash flows. Only if this continues along with the expected orders will the stock remain an outperformer among peers.