Blue Star and Voltas, the home-grown electromechanical, air-conditioning and refrigeration majors, are feeling the heat this fiscal as margins remain pressured and projects get delayed due to an uncertain industry environment.
Blue Star has indicated that fiscal 2012 would be challenging due to weak macro environment, project delays, cost increases and fewer new orders. The company has seen a significant margin erosion over the last two quarters.
Voltas on Wednesday reported a 54.3% decrease in its net profit at `42 crore for the second quarter as against `92 crore in the same quarter last fiscal even as revenue grew by a meagre 3.3% at `1,108 crore. The company said its electromechanical projects business was impacted by severe cost overruns in projects overseas, particularly in Qatar, whereas domestic projects continue to grow.
The company’s cooling products business, too, witnessed a drop in revenues. Voltas officials were not available for comment and emails sent to the company did not draw any response.
Vir S Advani, president - electro mechanical projects group and executive director, Blue Star, said there was an evident slowdown in the commercial real estate projects (with the exception of hotels and hospitals), which was impacting company’s revenues, while raw material price escalation was severely impacting margins.
“Inflow of orders is slow too. Opposed to earlier when they (companies) were taking 3-6 months to finalise (projects), now they are taking 9-15 months, primarily due to financing constraints,” he said.
In the air-conditioning business, which witnessed a de-growth last quarter, manufacturers had planned for growth in excess of 40% and had accordingly set up inventory. “We had planned for 45% growth and not 20% what we saw. Consumer spending has been slowing down and we anticipate the market to be flat next year,” Advani said.
He said the power sector that was buoyant in the last 18 months is showing a slowdown now as companies are delaying projects or looking at reworking their plans.Refrigeration and water cooling products business is, however, doingwell, he
said.
“Another two quarters of pain with another two quarters of recovery is what it will take. So in another 4-5 quarters from now we will be much better-off. Commercial real estate and infrastructure will take about 12 months, in our estimate, to recover,” Advani said.
With subdued order inflows from the Middle East and weak airconditioning sales in the domestic market, Voltas is up against a sluggish period.
The company has earlier indicated that margins would continue to remain under pressure at least for the near term, while it was hoping for a healthier order flow towards the later part of fiscal 2012.
According to a recent report by Citi Investment Research & Analysis, Voltas was witnessing intense competition in Middle East, where its order pipe had shrunk by 35-40%. The company, which is currently bidding for `7,000 crore worth of projects globally, has seen project Ebidta margins come down to 4-5% compared to 7-8% earlier. It will have to improve margins by cost cutting, better design and procurement, the Citi report said.
Blue Star said it has changed its approach of accepting new orders and is highly cautious and is taking new projects that have tighter terms and better visibility on execution.
Star has three business segments: Electro-mechanical projects, air conditioning and cooling products, professional electronics and industrial systems. It is dominant in central large air-conditioning and electromechanical projects, while the refrigeration business is young. Voltas, a leading player in heating, ventilation and air conditioning market, is more focused on electromechanical projects in the international markets.
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