Blue Star, on the other hand, saw 19 per cent YoY growth in consolidated revenues during Q4, led by 21 per cent YoY growth in projects division and 19 per cent in the UCP segment. Operating margin expanded 240 bps, as fixed costs were expensed on a higher revenue base; gross margin at 25 per cent was flat YoY as rising commodity prices and rupee depreciation were only partially passed through to customers.
The major difference between their performances has been driven by the fact that Blue Star was able to take some price hikes in FY19. Blue Star also has a larger exposure to the more profitable inverter AC segment, while Voltas has been aggressive on volume growth and market share and has hence seen an impact on its margins. "Higher competition restricted the price hike for Voltas, as the firm maintains its leadership position with 23.9 per cent market share in FY19 (versus 22.1 per cent in FY18)," said Arafat Saiyed of Reliance Securities.
Road ahead appears comforting
Brokerages maintain their positive outlook for Blue Star, and also remain hopeful of a recovery for Voltas. Analysts at Anand Rathi say Blue Star has again showcased its robust and agile business model, developed over time. Its rising return on capital employed in challenging times, from 20.5 per cent in FY18 to 24.9 per cent in FY19, depicts its ability to deliver superior returns in FY20 and FY21.
Voltas may have seen sharp impact of unfavourable demand environment during FY19. However, FY20 has begun well with strong uptake in April, particularly in Central/North India and should drive encouraging growth, given reduced dealer inventories, say analysts at Edelweiss Research. Analysts add growth over the next two-three years should catch up after two bad years -for the industry as well as Voltas.
The Street will be watchful on margin recovery for Voltas. While price hikes will hinge on demand growth driving volumes, Voltas is setting up a facility in Tirupati to manufacture cooling products, which is likely to be operational by 2020 and drive operating profits. Analysts at Prabhudas Lilladher say Voltas will look at margin expansion through cost optimisation by launching new technology, AC products, savings in logistics, and distribution costs after the starting of the Tirupati unit and increased local sourcing.
With Voltas' shares having seen a correction of about 10 per cent since April, it has factored in the negatives. Valuations, thus, have become attractive, say analysts. The target price of Reliance Securities for Blue Star at Rs 829 indicates a 12 per cent upside, while for Voltas at Rs 647 indicates nearly 20 per cent potential gain from current levels.