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Voltas: Consumer durables hold the key - Views on News from Equitymaster
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  • Sep 8, 2000

    Voltas: Consumer durables hold the key

    Though a Original Equipment Manufacturer (OEM) supplier to companies like Cadbury, HLL, LG, Voltas is increasing its direct presence in the market. It plans to sell refrigerators (‘Voltas’ air conditioners have already hit the market) under its own brand when the agreement with Electrolux ends early next year.

    During FY98, the company divested its white goods business to Electrolux Voltas Limited (EVL). This includes the transfer of the Voltas brand and its refrigerators and washing machines manufacturing facility. This agreement with the Swedish major ends early next year. This would mean that the company would regain its Voltas brand. With this, Voltas is considering the re-launch of its own brand of refrigerators next year.

    The company recently received orders worth Rs 9 bn from LG Electronics to supply 1.2 m refrigerators over a period of three years. This is expected to contribute to better results both in terms of value and volumes in coming years.

    The company is also set to benefit indirectly, as it is a supplier of refrigerators to Cadbury, Amul, Pepsi, UB Group, Hindustan Lever and Nestle. All these FMCG majors have huge expansion plans especially for rural segments. This should add directly to the company’s topline. Aimed to meet its OEM obligations, the company has planned to increase its capacity at its Hyderabad unit to 0.5m units from existing capacity of 0.3 m units.

    However, the performance of its other divisions is at best mixed. For instance air conditioning systems, pumps and project divisions are set to witness strong growth in coming years as both telecommunications and power sector reforms gains momentum (Voltas manufactures specialised air conditioning equipment for telecommunication applications). In fact the order book for pumps and project business division (used in power plant) has shown a 250% jump last year. Focus on turnkey projects has also helped the division in significantly increasing profitability for this division and is expected to do so in FY01.

    However, for such a diversified company that has a presence in more than seven different segments, overall growth is not expected to be of high order except for certain segments like consumer goods and engineering divisions. Moreover, realisations have fallen by as much as 5% in the room air conditioners division, which account for 14% of sales. This is expected continue as competition is heating up in this segment. The prevailing demand scenario for textile machinery and mining divisions also are not encouraging.

    Nevertheless, apart from LG Electronics, it has won additional orders from Amul for supplying 110-ml capacity visi-coolers. There is no denying that the company is sitting on a healthy order book. The operational efficiency is also expected to increase as it is restructuring its business. In spite of all these favorable factors, the key lies in the company’s ability to tackle competition and grow simultaneously.

    The stock is currently trading at Rs 33.8 at a P/E multiple of 20.2x on the annualised 1QFY01 earnings.



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