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Sowmya Sundar

Electro-mechanical products deliver cool returns.

THE highlight of Voltas's performance for the quarter ended September 2003 is the sharp improvement in operating profit, driven by a favourable product mix. Though the turnover registered a marginal growth, profit before taxes and extraordinary items rose sharply primarilydue to higher contribution from the engineering agency and services business. The sluggish topline may not be a cause for worry as Voltas' revenues are project-driven and revenues are not distributed uniformly across quarters.

Electro-mechanical division charges up

Voltas operates in four areas of business. Its electromechanical division is the highest revenue contributor and the fastest growing segment. This division undertakes turnkey electro-mechanical projects and now has a good presence in the overseas market, especially the West Asian region.

This is the most promising business, contributing about 55 per cent to sales and 44 per cent of the operating profits. The growth is primarily driven by overseas business and also from the services segment such as multiplexes, theatres and shopping malls. Having executed a number of turnkey projects for airports, hotels and palaces abroad, Voltas is now scouting for opportunities in China and also plans to get a larger share in the Indian market.

Theelectromagnetic division has steered the growth for the last few quarters and would continue to do so in future. It has projects worth Rs 500 crore under execution as on August 2003 (about 40 per cent of the March 2003 turnover). However, margins are low at about 5 per cent. This segment showed a substantial growth of 28 per cent in the first half-year ended September 2003.

Services surge

The engineering agency and services business contribution is significant to the profitability as margins are high in this business (about 30 per cent). This division procures equipment such as road construction machinery, mining machinery, textile machinery and machine tools from various overseas and Indian manufacturers and sells it in the domestic market.

The demand for the products such as `crushers' used in road building appears promising. Given the scope for road construction activity and a wider product portfolio on offer, the offtake from this division could pick up. As it is a commission-based business, even a marginal improvement in offtake could ramp up profits and operating margins significantly.

The improved operating performance for the September quarter could also be due to a substantial rise in the contribution of this segment to profitability; it contributed just 7.4 per cent to the turnover but accounted for a significant 40 per cent of the bottomline, up from 26 per cent in the corresponding previous quarter.

Market share gains

The cooling and refrigeration segment caters to the retail demand for air-conditioners and refrigerators.

Voltas has improved its market share substantially over the last two years and has introduced a number of products in various ranges. It also takes up contract manufacturing for international players such as Samsung and LG.

Tough market conditions are keeping margins under check. This segment's contribution to earnings growth would be limited unless there is a substantial ramp up in volumes.

For the company, the lower profit growth at the net level was primarily due to higher extraordinary income for the September 2002 quarter.

At Rs 105, the stock trades at 13 times its trailing 12-month per share earnings. Shareholders can hold the stock and evaluate after the next quarter performance.

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