AC stocks: Voltas, Blue Star to see growth momentum, Havells is a key pick

The manufacturers of air-conditioners (ACs) and air coolers are expected to have a dream run on the bourses following a surge in demand with temperatures set to be higher this summer season.

The Met office has warned of above-normal temperature in North India and in other parts of the country. It is not surprising then that AC makers such as Voltas, Blue Star, and Johnson Controls-Hitachi have gained 3-6 per cent on the bourses in March.

Havells, which has a presence in fans and coolers and has now diversified into AC through acquisition of the consumer business of Lloyds, too, would benefit.

Air cooler makers such as Symphony and Crompton Greaves Consumer Electricals, having a presence in high-end fan market, also stand to gain from  growth in demand.

Analysts at HSBC Global Research said the warmer-than-usual summer is positive for the under-penetrated room AC segment as weather remains the sole determinant of demand for these products.

The foreign brokerage expects aggregate primary volumes to grow at an average robust rate of 15 per cent in the next two quarters, with growth skewed heavily towards the June quarter of FY19.

Uncertainties on account of demonetisation and the implementation of the goods and services tax, which hit growth in the earlier quarters, are over for the industry.

 
But a few concerns remain. Increased competition, as manufacturers tried to clear inventories ahead of the implementation of a new efficiency rating system for ACs, effective January 2018, and higher raw material costs, pose a risk to profit margins of companies. Thus, strong demand growth is crucial both, in terms of operating leverage and pricing action.

Analysts at Jefferies said in case of a normal summer, rating change would pass off as a non-event.

IIFL had said given an aggressive pricing policy adopted by LG, the industry had not taken price hikes despite rise in commodity costs and change in energy ratings. Early onset of summer can boost demand and can lead to price rises (4-5 per cent) from March onwards.

Himanshu Nayyar at Systematix Shares said stronger demand could offset most of the challenges.

Among listed players, Voltas could see a steady 14-15 per cent earnings growth over the next few years. The market leader in the window AC segment had achieved 32 per cent 

growth for the segment in the December quarter, despite intense pressure in the room AC segment.

The inverter AC segment is considered as a major growth driver for the industry. Voltas has announced the launch of the country’s first window AC with DC (direct current) inverter technology. It is also gearing up to launch other consumer durable products such as refrigerators and washing machines in a couple of quarters. 

Blue Star and Hitachi, too, are looking at expanding their market share on a relatively lower base compared with Voltas.

For Blue Star, growth will not only be driven by ACs, but also by sales of commercial refrigerators, air and water coolers.

Hitachi, on the other hand, is focussing on high-end products and inverter ACs. It is targeting a 10-15 per cent compounded annual growth rate over the next three years and will be bidding for metro projects, too. The increased focus on the chiller market augurs well for the company, according to analysts at Antique Stock Broking.

Havells has emerged as a strong player after foraying into the AC space and will see the first season with its acquired range. The new segment is expected to drive its growth significantly.

Analysts at HSBC have forecast a 23 per cent compounded earnings growth over FY18-20, higher than 14 per cent pegged for Voltas.

Nayyar at Systematix Shares finds Havells better placed among listed stocks, given that it is a diversified play. Besides Crompton Greaves Consumer Electricals, Symphony— the largest air cooler company, will benefit from an increasing preference for branded category, with ICICI Securities pegging its earnings to grow by 22.5 per cent annually over FY17-20.

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