Management warnings could hurt Voltas stock
Profit margin could decline further contrary to expectation. Voltas has cut margin guidance for the unitary cooling business to 7% from 8% earlier owing to rising cost and thrust on market share gain amidst subdued industry. Voltas also expects its MEP margin to be around 5% compared to earlier expectation of 6% margin. The company indicated it may achieve even lower than5% EBIT margin in FY13 owing to further delay in execution of Sidra hospital project in Qatar to Jun13 from Dec12.
Company is in consolidation mode as new initiatives failing. Voltas had forayed into industry electrification and water treatment a few years back to expand its growth prospects. Industrial electrification business has been losing money for nearly two years now. Water treatment business is now turning for the worse due to execution related issues. Hence Voltas has decided to consolidate its business even at the cost of growth.
Voltas is trading at a PE of 15.6x FY14e and PB of 2.4x FY14e, which is quite high in our view given weak earnings outlook. We forecast a modest recovery in revenue along with 6.3% EBITDA margin, which is on the higher side compared to management
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