Revenues at Voltas grew by 5%YoY, 4% below expectations. Margins declined by 152 bps to 7.3% against CIRA expectations of 10.5%. Profitability in this quarter was adversely impacted by a Rs 9 crore loss in the Rohini subsidiary. While some of this impact was set off by a reversal of Rs 6 crore of provisions, overall the underlying results were weaker than expected.
Some of the key negatives are that the key pressure point seems to be the electromechanical business where order inflows have been subdued, especially in the international markets. Losses at Rohini and higher input costs have put downward pressure on margins. Margins in the unitary products business were also impacted due to higher margins given to dealers to liquidate inventory and higher input costs.
However, on the positive side, losses at Rohini are expected to be lower going forward as lower margin orders are close to completion. Their execution in Q4FY11 is expected to pick up driven by a ramp-up in Qatar projects among other things.
Domestic business could be impacted by the challenging macro scenario at the moment. Recent political problems in the Middle East may further delay the order award activity. We have cut our revenue estimates by 12-17% over FY11E-13E, which drives our earnings cut. We now value Voltas at 15x June-12E against 18x Dec11E EPS, a 25% discount to L&T and on a par with its historical average PE. The stock is down 23% from recent highs and offers limited upside. We believe the investor focus would be on order inflows and any developments on these would drive stock performance.
