AC, fan makers may not find their cool despite rising mercury


Chennai: Shares of companies engaged in producing cooling products such as fans, coolers, and air conditioners (ACs) come into focus with the onset of summer. In anticipation that rising temperatures would boost demand for such products, shares of Voltas Ltd, Whirlpool of India Ltd and Blue Star Ltd have gained by 5%-12% in the past month.

Here, the Indian Meteorological Department’s (IMD) forecast of March to May being hotter than usual in some parts of India augurs well. Even so, it remains to be seen if these companies can capitalize on the opportunity, given the stiff competition in the industry, which is leading to pricing pressure. Price hikes have not been meaningful. Voltas, which has a significant market share in ACs, has not taken any price hikes in the last two quarters despite elevated costs. It doesn’t intend to raise prices in the current quarter as well due to subdued demand.

ICICI Securities Ltd’s channel check feedback also suggests that there is no material change in consumer off-take. “Higher discounts (and not necessarily heat wave) are leading to slightly higher volume growth,” they added. ICICI Securities analysis of heat waves in the past three decades (FY92-FY22) and revenue growth of summer product companies (fan, cooler, AC, refrigerator) shows that the data doesn’t indicate a trend that revenue growth in heat wave years is higher than non-heat wave years. In short, there is no positive or negative correlation.

“We note the revenue compound annual growth rate (CAGR) for summer product companies was highest during FY02-12 when there was no heat wave,” the ICICI Securities analysts said in a 3 March report. “During FY92-FY02, India had three heat waves, but Voltas reported a revenue CAGR of just 3.7%,” they added. The chart alongside has details for the past seven years.

All said, in the near-term, investors looking for triggers in these stocks could be disappointed.There is some respite on the margin front from softening commodity costs, but the rupee depreciation poses a headwind. While the margin trajectory necessitates tracking, a pick-up in demand and hence, volumes is crucial.

“Only when there is a disciplined price hike, it can lead to meaningful improvement in margins. Until that happens, a rerating is not on the cards,” said Manoj Gori, research analyst at Equirus Securities. As things stand, shares of Havells India Ltd, Voltas, and Whirlpool are down by 14%-32% from their respective 52-week highs.

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Article Source:Money Control

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