“The impact of higher expected sales in anticipation of a harsh summer is already seen in the stock prices of some listed air conditioning players,” said Deepak Jasani, head of retail research at HDFC Securities. “If there are strong heat waves and sweltering summers as expected due to the IMD forecast, then the last-minute AC buying could push up the stock prices further.”
In the last five days, Johnson Controls-Hitachi Air Conditioning surged 15.82% while Voltas and Blue Star rose 8.82% and 5.59%, respectively. Whirlpool of India and Amber Enterprises gained 9.88% and 0.33% respectively. The benchmark Nifty was almost flat in the same period.
The India Meteorological Department (IMD) forecasted that India could witness higher-than-normal heatwaves in the April to June period.
“With forecasts predicting hotter summers and potential heatwaves, demand for air conditioners is expected to rise and a short-term uptrend in these stocks of up to 15% can be expected,” said Siddhesh Mehta, research analyst at Samco Securities. Whirlpool of India is his top pick.
Analysts said that the summer heat in several parts of the country is already quite harsh leading to increased consumption of air conditioners due to a rise in discretionary spending. Companies in the air conditioning space are likely to remain in favour due to premiumisation trends and brand preference. Air conditioner companies typically report strong numbers in the March and June quarters and that trend is expected to continue this year too.”Historically, Q4 has remained the best quarter in a financial year for Voltas, and Blue Star with robust revenue performance,” said Mehta “These companies have exhibited a trend of higher year-on-year revenues during Q4, underscoring the significance of this period for their financial performance.”
Jasani said despite the competitive intensity being high due to low entry barriers, the volume upside is likely to compensate for margin issues.
A Summer Wager
Analysts said bets on air conditioners must be for the shorter term.
“The play in air conditioning stocks is a trading call at this point and likely to last for 2-3 months,” said Jasani, who sees a further 8-12% gains from the current levels.
Many of these stocks have advanced even in the past month, which may need investors to tone down their optimism. In the past one month, Voltas has jumped almost 14% followed by Whirlpool of India which gained close to 8%. Shares of Blue Star, Hitachi and Amber Enterprises rose 2-3% in the same period.
“While there is room for further upmove in these stocks, it is not likely to be as sharp as the run-up in the past three months,” said Varun Saboo, head of equities at Anand Rathi Securities. “A further up move of 10-15% could be expected but the sales would slow down post-monsoon.”
Air conditioning stocks typically experience a spike during the summer but since the demand is largely due to seasonality, the flare-up in share prices is expected to moderate after June and the onset of monsoon.
“Despite high valuations, AC stocks may not have seen their tops yet, but the remaining up move is not likely to be very large,” said Jasani. “Post June, there could be a selling at tops on profit taking.”