Stock Review: Voltas

Though the decision to go slow in West Asia augurs well for margins, it could hit order inflows in the medium term Voltas' decision to go slow on bidding for electro-mechanical projects (EMP) in West Asia augurs well for operating profit margins (OPMs), which have been stagnant for the past five quarters (at an average 8.8 per cent), thanks to competitive pressures.

However, the news did not cheer the markets, which are more worried about the slowdown in the pace of overall order inflows in the EMP business till the time share of other regions like South-East Asia or domestic market in the total order book pick up.

Investments in the West Asian region have been affected by a phenomenal drop in crude oil prices after the global economic slowdown and, later on, by the Dubai crisis. Activities have been going slow for the past two years and competitive pressures have intensified. Out of the total consolidated order book of  5,000 crore in the June quarter, overseas orders contributed about 70 per cent and West Asia (Oman, Abu Dhabi, Qatar and Dubai) forms a significant portion of the global orders.

Though the companys share of electromechanical projects business has been declining from 64 per cent of sales in 2008-09 (FY09) to 65 per cent in FY10 to 49 per cent in the first quarter of the current financial year, it is still the largest contributor to sales and has been driven more by overseas orders traditionally. Further, though the company has been diversifying its overseas order book with a focus on such new areas as Singapore and Hong Kong, the process will take some time.

The only support comes from the robust volumes witnessed by the unitary cooling products (UCP) business, which contributes 42 per cent of total revenues (June quarter) and the strong momentum in the domestic EMP and engineering products businesses on the back of the capex cycle, that is going strong in India currently.

Meanwhile, analysts are cautious about the company's growth prospects in the medium-term, though they expect things to pick up for the company from 2011-12.

Voltas ended higher by 3.4 per cent over its previous close to `226.8 on September 17. It trades at a slightly uncomfortable valuation of 16 times average estimated earnings for FY12, given the overall fairly priced broader market valuation.