Voltas Sees Cooling Off In Profits For Q4FY13

Voltas announced its Q4FY13 results on May 21, 2013. The company has been severely impacted by uncertainties in its hospital project in Qatar. Moreover, there is considerable weakness in its order book, making the near-term outlook dodgy.

In Q4FY13, the revenues of Voltas touched Rs 1597.11 crore, a growth of 1.44% from that seen in Q4FY12. In terms of segments, Electro-mechanical Projects and Services (MEP) and Engineering Products and Services (EPS) saw their revenues decline by 3.97% and 2.81% respectively. Together, these segments contribute more than 60% of the company’s revenues. The overall sales figures, however, were boosted by the 10.16% YoY growth in Unitary Cooling Products for Comfort and Commercial Use (UCP).

While the overall revenue growth was just about in the positives, the profitability of Voltas took a major hit. This was mainly because of complications in the execution of its Sidra Medical Research Centre Hospital project in Qatar. Delays in design, frequent changes in architectural/interior layouts, ceiling height restrictions and abortive engineering/rework have caused prolonged delays in the completion of this project.

In the previous year, based on a techno-commercial review, the company had accounted for Rs 277 crore, taking cognizance of the cost already incurred and that to be incurred. However, considering further delays in execution and certain other developments, additional cost overruns of Rs 95.55 crore were accounted for in Q4FY13.

This led to a decline of 91.41% in the profitability of Voltas to Rs 8.92 crore in Q4FY13 from that of Rs 103.81 crore in Q4FY12. This impact was admittedly cushioned to a certain extent by a profit of Rs 44.28 crore on the sale of properties/surrender of tenancy rights.

Going ahead, the near-term outlook of Voltas doesn’t look particularly favourable. Although cost overruns have been accounted for more than once, the risk of uncertainties continues to exist. This may lead to further variations in revenues or costs till the completion of the project, which the main contractor of the project has stated can be expected by March 31, 2014.

The domestic MEP business of Voltas has taken a hit due to a subdued investment climate, but the EPS business has been buoyant. The company continues to see tremendous strength in its UCP business. The Indian air conditioning market has been facing intense competition, a large number of new entrants, unfavourable climatic conditions and subdued consumer sentiment. Even in this environment, though, it continues to enjoy a leadership position. Despite a decline in the industry volumes, Voltas has managed to pull off a growth in revenues and profitability in the UCP segment.

We had recommended this stock in Dalal Street Investment Journal, Vol. 28 Issue # 2 (dated January 13, 2013). Our call was based on factors like the order backlog in its MEP business, possible improvement in the EPS business with positive macroeconomic developments, robust performance in the UCP segment as well as the situation at that time, which had hinted an end to negative surprises on the Sidra front.

The Sidra project has indeed caused major harm to the profitability of Voltas and continues to pose a risk to the company’s performance in the near-term. However, we maintain our positive outlook on the company in the medium-long term and recommend that investors buy the stock on dips.