Voltas’s cool Q1FY21 results may well support stock’s premium valuations

Voltas Ltd’s unitary cooling products (UCP) segment brought in the surprise factor for the June quarter, boosting the company’s overall results. The UCP segment includes air conditioners and other cooling products.

For the June quarter, UCP’s revenue fell by 60% year-on-year (y-o-y). Analysts reckon Voltas’s UCP performance is better than estimates as well as that of peers. Of course, the lockdown meant business conditions were challenging last quarter.

It is encouraging that Voltas’s UCP segment saw market share and margin gains. Earnings before interest and taxes (Ebit) margin expanded by 236 basis points y-o-y to 15.5% in Q1. The margins improved sequentially too. One basis point is one-hundredth of a percentage point.

Better sales mix and lower advertising spends helped margin performance. Nonetheless, analysts feel it may be tough to sustain the high margins in coming quarters, as some of the costs start inching up with a recovery in revenue.

Revenue from electromechanical projects and services (EMP) and engineering products and services businesses decreased by 37% and 35%, respectively, y-o-y. The EMP business posted an Ebit loss for the last quarter.

Overall, Voltas’s consolidated profit halved for the quarter from last year to 81.8 crore, but came in better than analysts’ estimates. Investors approved, taking Voltas’s shares up by about 4% since numbers were out on Friday.

To be sure, the UCP segment had done well in the March quarter as well, clocking a revenue growth of 20%. The division could continue to perform well going ahead. “We reckon the UCP segment will drive recovery and the EMP segment will remain subdued for the next two quarters,” said analysts from Kotak Institutional Equities in a report on 17 August.

Voltas’s investors have little to crib about. From its pre-covid highs in February, shares of Voltas are about 12% lower. But in comparison, shares of Blue Star Ltd, which also has a meaningful presence in cooling products, have declined 35% from their highs earlier this year. Based on Bloomberg data, the Voltas stock trades at 32 times estimated earnings for FY22.

While valuations appear to be on the higher side, many analysts have a positive view on the company’s prospects. “Voltas is outperforming its peers and the gaining of share should sustain premium valuations,” said analysts from Jefferies India Pvt. Ltd in a report on 17 August. The broking firm added, “We believe Voltas is a good recovery play on both consumption and investment themes in India, with a strong balance sheet to back it.”

Even so, the fact that Voltas’s shares have been rather resilient during this pandemic crisis would mean substantial upsides in the stock may be capped.-Live Mint

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