AC stocks sizzle as temperature rises

The trigger was dealer information indicating strong sales in the last two to three weeks in most parts of the country, largely the central and southern regions. Photo: Hindustan Times

Shares of retail room air conditioner (AC) makers are on a roll as sizzling temperatures spell a severe summer. Stocks of Voltas Ltd, Hitachi Home and Life Solutions (India) Ltd and Blue Star Ltd have jumped by 10-15% in the last one month alone.

The trigger was dealer information indicating strong sales in the last two to three weeks in most parts of the country, largely the central and southern regions. And it comes after subdued sales in the last two years when an early onset of the monsoon weakened demand.

Given that nearly half the annual sales of air-conditioners comes from the peak summer months between March and June, companies like Blue Star Ltd and Voltas Ltd are confident of doubling sales growth estimates of 9-10% for fiscal 2017. Hitachi sales beat the industry average significantly, in spite of focusing on the premium segment.

A recent Motilal Oswal Financial Services Ltd report said that the growth will also be fuelled by the rising penetration of ACs in smaller cities, which is currently only 10% of the global average.

Higher sales and the resulting operating leverage would help improve profit margin, as raw material costs are still reasonable. Operating margin across the industry expanded in fiscal 2015 on the back of plummeting raw material costs.

That said, the three publicly traded firms mentioned trade at rich valuations of over 20 times one-year forward earnings. Hitachi, with its global brand equity commands the highest price-to-earning multiple of around 38 times one-year-forward earnings. Most of the upbeat outlook is already in the price.