Cruel summer, fierce competition ups earnings risks for AC firms

Milder summer results in lower than expected demand for AC firms; expectations riding on better conditions in June  


ac

The much-awaited summer season proved to be a dampener for the Indian air-conditioner (AC) industry. As per Emkay research, the season was dull till April. Further, the first two weeks of May weren’t any better with unseasonal rains and storms playing spoilsport in key markets.

Retailers and dealers had built-up large stock of inventories in anticipation of a strong season. However, dull season has led to a pile of unsold inventories.

However, ac companies expect Q1FY19 or rather the month of June to perform better on account of lower base & normalization of weather conditions in June.

Why is this important

The summer season is paramount for air-conditioner manufacturers as the highest demand is experienced during this period. However, a dull season has resulted in de-growth in revenues and piling up of inventories. For eg,  Voltas Ltd, which has significant share in the domestic AC market, reported a 2% drop in revenue at its cooling products division for the March quarter. Blue Star Ltd did relatively better. But unseasonal rains and a milder-than-usual summer season is clouding the outlook.

Stocks to be impacted

With fall in revenues due to lower demand in peak season, stocks like Voltas Ltd (CMP: Rs. 535, MCap: Rs. 17,700 crs, FY2020 PE: 27x ) & Blue Star Ltd. (CMP: Rs. 681, MCap: Rs. 6,540 crs, FY2020 PE: 23.7x ) have been negatively impacted.

However, normalization of weather in June can lead to a pick up in demand and improve the performance on the industry.

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