Transforming from an air conditioner and refrigerator maker to a diversified electro-mechanical, engineering services and unitary cooling products company, Voltas has a vibrant business going. While the growth in the Middle East continues to aid growth, the domestic market is becoming an equally important driver. Thanks to the boom in the retail, entertainment and software sector to which Voltas provides electro-mechanical solutions, the company seems to be on a high growth track. Capex plans of companies in sectors like textiles and mining augur well for its engineering business.

In spite of stiff competition, the management is confident that the low cost operations at its new plant and some sops in the budget would drive its unitary business. Voltas posted a 49.73 per cent y-o-y net sales growth in December FY06 quarter, a 371.4 per cent growth in operating profit (operating margin up from 1.8 per cent to 5.67 per cent) and a 49.47 per cent growth in net profit.

Electro-mechanical remains the biggest business growing at 60.78 per cent, followed by unitary business (10.44 per cent growth), while engineering services saw a 80.09 per cent growth in December quarter. The Voltas' stock trades at a high P/E of 59.18x as compared to Blue Star (38.54x) and Videocon Appliances (3.67x). Business Standard spoke to the Voltas executive vice president-finance, MM Miyajiwala.

Your electro-mechanical business is strong in the Gulf. What growth prospects do you see in India?
The privatisation of Mumbai and Delhi airports may generate orders of the size of Rs 300-400 crore each. We plan to begin discussions soon in case of these two airports. Already we are involved in the modernisation project at Kochi airport and the domestic terminal in Mumbai. The Hyderabad airport project, which we have booked is of Rs 160 crore approximately. In future more such airport projects are expected to come up. In 2-3 years, even the India market will be as important to us as the Middle East market, for electro-mechanical projects.

The project sizes in India are increasing in areas like commercial complexes, software parks, malls, hotels, etc. The domestic air conditioning services, which form part of the electro-mechanical business, has seen a growth of 50 per cent in order book per end December 2005.

What is the share of multiplexes, malls, software parks, etc in the electro-mechanical business?
Malls, hotels, multiplexes, software parks and airports together, i.e., the comfort segment, account for about 80 per cent of the domestic air conditioning business of electro-mechanical.

New software complexes (like the ones planned by TCS and Infosys), hotels and malls in category 2 cities, etc., provide good growth potential for us. Going forward, along with HVAC (heating, ventilating and air conditioning), we will also get into complete electro mechanical services in the domestic market as well.

What are the drivers behind the huge growth in engineering services division?
Increased infrastructure funding, capex and manufacturing capacities by many companies from sectors that we cater to are driving growth for this business.

The capacity additions by many companies from sectors that we cater to like automobiles & ancillaries, textiles, light engineering and mining, has resulted in the growth. In the materials handling business, we manufacture forklifts, where our production has gone up from 40 per month to 80 per month over the past one-year. We now plan a second shift in that facility.

What are the growth projections for your engineering services business?
We have seen over 80 per cent growth in our engineering business order book per end December 2005.

What could be the impact of any delays in capex plans from major clients for your engineering business, like Coal India?
While Coal India is our biggest client in the mining segment of engineering business and any delays in their capex plans could affect our business. But, even private players are entering the mining business, which would help spread our risks.

What are the reasons behind the lesser growth (10 per cent) in unitary business?
The actual growth in the unitary business has been over 20 per cent in the nine months and in Q3. It is 10 per cent when compared to the previous quarter after including the high volume refrigerator business that existed then. In fact, the room air conditioner segment has seen a 30 to 40 per cent volume growth for the nine months to December 2005.

How does Voltas plan to face competition from LG, Samsung, Videocon and Chinese products in the unitary business?
We are the second biggest player in the room air conditioner segment with a market share of 15-16 per cent (LG has over 35 per cent).

In commercial refrigeration and cooling products segment we are the market leaders with a 40 per cent market share (Blue Star and Carrier are the other major players). At the same time, our strategy to face competition in future includes our recent move to have manufacturing facility in the excise exempt state of Uttaranchal. We would also have a research center there. In addition we will continue to provide best in class products which will be affordable and value for money.

There has been a 67 per cent rise in raw material costs in Q3 FY06. What do you expect in future?
The growth in Q3 raw material costs is in line with the business growth. Generally speaking, metals and plastics constitute our raw materials. Steel prices have been soft, while copper and crude oil prices have been going up. But for our future projects, we build in for a price rise, while estimating project costs.

What has been the VRS impact on the company's results? What would be the impact in future?
The VRS cost has been reflected to the extent of Rs 16 crore in the first half, while an additional Rs 49 crore is seen in the Q3 results. There would be no significant impact in the coming quarters.

How is the upcoming budget likely to affect your businesses?
The government has been taking steps to rationalise duty structure so as to balance the import duties levied on components and semi-finished products in our industry (which is currently high) and that on fully manufactured products. This move if implemented, augurs well for Indian manufacturers. This will help in indegenisation of some of the products. A reduction in excise duty is also expected in air conditioners.