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Carrier – Creditable turnaround - Views on News from Equitymaster
 
 
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  • Nov 6, 2000

    Carrier – Creditable turnaround

    Carrier Aircon had reported a disappointing performance in FY00. Sales had dropped by 5% and net profits by 68%. But a better quarterly performance and robust air conditioner sales has necessitated a re-look at the company.

    Manufacturing expenses as a percentage of sales shot up from 72% in FY99 to 84% in FY00. This was primarily because of non-recurring expenditures like to loss on sales of scrap arising out of fire at one of its factory. As a result, margins almost halved from 9.5% in FY99 to 4.5% in FY00. Besides, the company did not have enough inventories to meet demand due to labour problems at one of its manufacturing units.

    Half yearly performance
    (Rs m) 1QFY01 2QFY01 1HFY01
    Sales 1,512 1,001 2,513
    Other Income 3 29 32
    Expenditure 1,363 954 2,317
    Operating Profit (EBDIT) 149 47 196
    Operating Profit Margin (%) 9.9% 4.7% 7.8%
    Interest 11 14 25
    Depreciation 15 12 27
    Profit before Tax 126 50 176
    Tax 25 13 38
    Profit after Tax/(Loss) 101 37 138
    Net profit margin (%) 6.7% 3.7% 5.5%
    No. of Shares (eoy) (m) 23.4 23.4 23.4
    Diluted number of shares 23.4 23.4 23.4
    Diluted Earnings per share* 17.2 6.3 11.8
    *(annualised)      

    But things have started to look up for the company. It has posted a notable improvement in both net profits as well as on margins in the first quarter of the current year. While net profits grew by 27% in 1QFY01, there was a 40 basis points improvement in margins. Since the first quarter has a significant impact on the overall performance of the company (being summer season when demand for air conditioners perks up), we expect margins to be around 7%-8% for the full year. In the second quarter, however, margins have dropped significantly (by 200 basis points) due to an abnormal rise in staff cost and sub-contracting charges.

    If we were to consider the half-yearly performance of the company, though net profits have dipped by 6%, the company has managed to post significant improvement in operating margins. With room air conditioner market growing at the rate of 30% per annum, as a market leader with good brands and distribution network, Carrier has an upper hand. Added to this, industrial air conditioner demand is expected to go up sharply thanks to the information technology boom. As more and more technology parks and personal computers are sold, air conditioner demand is likely to witness exponential growth in coming years.

    However, this segment is witnessing severe competition, particularly after the entry of the Korean multinationals like LG and Samsung. Besides, domestic majors like Voltas and Blue Star have aggressive plans for the retail sector. Voltas, in particular, is sitting on huge order book as an original equipment manufacturer for LG, Pepsi and other FMCG majors. Therefore, Carrier will have to face competition from retail as well as on the industrial customers.

    Besides, one is not very clear about the company’s strategy on the sub-contracting front. Sales via sub-contracting have gone up sharply by 2,000% in FY00 (realisations have been falling). This, when compared to a negative growth in manufactured sales (where realisations have gone up by 11% in FY00) does not seem to be a proper mix.

    The stock is currently trading at Rs 100 at a P/E multiple of 8.5x the annualised 1HFY01 earnings. On the annualised sales turnover of Rs 5,026, market capitalisation to sales works out to 0.5 (Market Capitalisation = Rs 2,340).

     

     

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