The Voltas stock that crashed 50 per cent between September 2012 and September this year to multi-year lows of Rs 62.50 has had a spectacular rally in the last few weeks. It has risen 87 per cent to Rs 117 per share. What explains the roller-coaster ride?

Poor performance of the company’s electro mechanical projects (EMP) segment had been weighing on the stock for more than a year. Delay in project completion and cost over runs in international projects had eroded margins of this segment. In fact, in the June 13 quarter, the segment reported an operating loss. Also, the drying up of the order pipeline due to lack of orders from the MENA region and also the slump in the domestic market added to the woes of the company.

However, over the last few weeks, the stock is seeing renewed investors action, following the green shoots in the September quarter results.

One, revenue and profits of the EMP business, despite falling in the September quarter, seem set to revive with substantial orders from West Asia. The company has bagged three new orders totalling up to Rs 1,000 crore - electrical works in a sports hall and a health centre in Qatar and for a five star hotel Kempinski Wave in Muscat, Oman.

The company’s order book as at the end of September stood at Rs 4,349 crore. This is 1.36 times the EMP segment’s FY-13 revenues. With Qatar preparing to host the football world cup in 2022, more orders are expected to come. Also, Voltas has said that it has been very selective in its projects this time and has picked up only those that can give it at least 5 per cent margins.

Two, the unitary cooling segment that largely sells residential air-conditioners posted a strong 50 per cent jump in operating profits. Though sales increased by a mere three per cent, profit got a boost thanks to improved margins on favourable product mix and one time savings in cost.

The recent rally has taken the price-to-earnings multiple of the stock significantly higher. At Rs 117, the stock discounts its earnings of the last one year by 19 times- at the higher end of its PE band of the last two years (10-20 times). Though the stock continues to be a good long term bet, there may be limited upside in the short term. Only after one or two quarters more, can one know if the growth in the EMP segment is sustainable.

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