Rising temperatures improve the cool quotient of AC stocks

“Our channel checks suggest a sharp pick-up in air conditioner sales in the last couple of weeks, barring the election states. Work from home (WFH) is driving a shift to 5-star ACs versus 3-star in the metros,” said analysts from Jefferies India Pvt. Ltd in a report on 30 March. In fact, the broking firm has raised earnings estimates as well. “We raise our FY22-23E earnings per share by 2-7% for Voltas/ Blue Star to reflect higher sales in the June 2021 quarter,” added Jefferies’ analysts.

As such, shares of both these companies have outperformed the broader Nifty 500 index over the past one year. Over the last one year, shares of Voltas and Blue Star have risen about 110% and 100%, respectively.

To get an update on summer season stocking by dealers, JM Financial Institutional Securities Ltd recently conducted channel checks, surveying over 25 AC dealers across 15 major cities in India. “Dealers indicated that Voltas continued its dominance in North, East India and selective regions in South, while gained market share in Gujarat and Rajasthan. Voltas’s strong brand pull (Indian Brand), wide service network, compressor warranty of 10 years and comprehensive warranty (5 years) played in favour of the brand. Blue Star, Daikin and LG also continue to fare well,” pointed out JM’s analysts in a report on 24 March.

To be sure, even as Voltas appears to be on a relatively better footing, valuations seem to be capturing a good share of the optimism. Based on Bloomberg data, the Voltas stock trades at nearly 45 times estimated earnings for financial year 2022. While demand remains robust, investors would do well to track the impact of rising commodity prices on profit margins. To offset cost pressures, companies have taken price hikes. “Normally, we would have built-in a higher margin assumption given the shift to higher-value products. Given the rise in commodity prices, we refrain for now and will look for direction in 4Q results,” said Jefferies’ analysts.