Carrier: Tumbling margins

Carrier Aircon, the Indian subsidiary of the US air conditioner major, reported a sharp 20.6% growth in sales for the first nine months of FY01. The company is set to announce its full year results early next week. Carrier postponed its full year results from June 8, 2001 due to the recent move by its parent company to acquire a 100% stake in the Indian subsidiary.

(% growth)	1QFY01	2QFY01	3QFY01	9mFY01
Sales	20.2%	25.3%	16.7%	20.6%
OPM (%)	9.9%	4.7%	4.9%	7.0%
Net profit	26.8%	-41.2%	16.1%	-1.0%

Though the sales growth in the first nine months of the current year is above our projected growth levels, at the operating levels, Carrier has taken a big hit in both the second and third quarter. To put things in perspective, operating margins showed an improvement from 9.5% in 1QFY00 to 9.9% in 1QFY01. This was a creditable performance given the fact that first quarter tends to be the peak season for air conditioner companies (summer season).

However, in the second quarter, margins witnessed a sharp erosion from 6.7% in 2QFY00 to 4.7% in 2QFY01. The same holds true in the third quarter also, when margins declined from 5.0% in 3QFY00 to 4.9% in 3QFY01. As a result, margins at the operating level in the first nine months of FY01 dropped by 40 basis points.

We expect similar trends in 4QFY01 also, given the slow down in the economy. This is apparent from the industry production figures for FY01. Air conditioner production has slipped 3,400 units in March 2000 to around 2,900 units in March 2001. This could also be because of production cutbacks on account of rising inventory. With industrial slow down, companies have stalled their expansion (this is also a key growth driver for air conditioner industry). As a result, sales growth is expected to be on the lower side when compared with the first three quarters of FY01.

Meanwhile, the parent company, Carrier, has received the go-ahead from Foreign Investment Promotion Board (FIPB) for infusion of 100% equity in its Indian subsidiary (estimated at Rs 1.1 bn).

The scrip is currently trading at Rs 97 at a P/E mutliple of 10.7x the annualised nine months earnings.