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Voltas: A look at margin stability - Views on News from Equitymaster

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Voltas: A look at margin stability
Mar 25, 2009

The environment in which a business functions is constantly changing. These changes constantly put pressure on the margins of every business. A company has to perennially guard its margins from erosive factors like burgeoning costs, a downward pressure on prices due to negotiations from customers and growing competition, need to increase sales etc. It is indeed an indication of management skill and profitability of the business if a company is able to maintain or grow its margins over a good number of years. Thus, to gauge this aspect of the business, one would have a look at the historical behavior of the company’s margins. In this article, we shall have a look at the different business segments of Voltas in terms of how its margins have stood up to the above mentioned factors over the period of FY02 to FY08. We shall consider each of its business segment’s EBIT (earnings before interest and taxes) for this purpose.

 Voltas: EMPS division margins
Source: Company

The company’s first segment, the Electro-mechanical Projects and Services (EMPS) division, contributes to 54% to the company’s revenues. It is a project based business for Voltas and has fetched an average EBIT margin of about 5.7% over the past seven years. Notwithstanding this average figure, it has historically witnessed a fair bit of volatility with over 10% margins in FY02 coming down to a mere 1.8% two years later in FY04. In the lasts nine months of FY09, it has been able to fetch a margin of 8.2%, which is above its historical average and thus is commendable due to the fact that commodities saw a volatile swing in prices during this time.

 Voltas: EPS division margins
Source: Company

The Engineering Products and Services (EPS) segement of the company, which contributed to about 17% of sales in FY08, has been the most lucrative business segment for the company. Its has enjoyed average margins of about 27% over the period under consideration. However during the latest nine months of FY09, its performance has been relatively quite bad with EBIT margins falling down to 13.7%. This fall has been largely due to the Mining and Construction Equipment Business and Textile Machinery Business, mainly on the back of fall in demand for garments in the developed markets and a sudden slowdown in the construction sector. But overall historically, the segment has shown significant strenght and stability in its margins which lends confidence in the ability of the segment to maintain profitability in the long term.

 Voltas: UCP division margins
Source: Company

The Unitary Cooling Products division (UCP) has been quite a drag for the company. Though it contributes to a big chunk of the sales (26%), it has performed extremely poorly in terms of margins during the last seven years. Between the period of FY02 to FY08, the UCP has been able to bring in an average margin of virtually 0%. Though the segment has performed relatively better in the last two years, this poor and erratic historical performance is testament to the intense competition in the retail market in which the UCP business operates, thus rendering it almost unprofitable.

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