The India Meteorological Department has forecast above-average summer temperatures and increased heat waves. This is not surprising, as India is already facing rising temperatures.
The demand for cooling products is expected to lead to record sales this year due to the early arrival of summer. High temperatures will increase the demand for air conditioners, coolers and fans.
This will benefit companies operating in the cooling segment, with the market leaders Voltas and BlueStar expected to benefit significantly. One interesting fact is that consumer durable stocks run yearly ahead of summer in anticipation of demand. So will it be this time, too? How are these companies positioned this time?
#1 Voltas
Voltas, a Tata group company, operates in three core business segments, including Unitary Products (UPBG), which markets room air conditioners, air and water coolers and other commercial refrigeration products.
The company is a major player in the air conditioning segment, with a market share of around 20.5%. It also has a market share of 5.1% in refrigerators, 8.3% in washing machines, and 16.7% in semi-automatic washing machines.
UPBG contributes 63% to its total revenue, with the balance coming from engineering (5%) and electro-mechanical products (30%).
The revenue mix in the UCP segment was 61% from room air conditioners, 19% from commercial ACs, 15% from commercial refrigerators, and 5% from air coolers and water heaters.
Last year, Voltas sold over 2 million AC units–the highest ever AC sales and the first company in the domestic market to cross the milestone. The volume was huge, a 35% jump from the financial year 2023.
Besides room air conditioner sales, significant growth was also recorded in other cooling products, including air coolers and commercial refrigeration products.
Voltas Beko, Voltas’ home appliance brand, sold close to 2 million home appliances in FY24, and has a total market share of 10%.
Voltas’ financial performance stagnated between FY20 and FY22, with revenue ranging between Rs 71 billion and Rs 79 billion. Loss of market share and lower margins affected the company.
However, growth picked up pace in FY23, when its revenue surged 19% year-on-year to Rs 95 billion, followed by a 30% increase to Rs 125 billion in FY24.
Its profit surged from Rs 1.4 billion to Rs 2.5 billion over the same period. However, it remains low compared to its pre-pandemic FY19 profit of Rs 5.1 billion. This resulted in poor return ratios, with return on equity (ROE) and return on invested capital (ROCE) at 4.4% and 8.5%, respectively.
Looking ahead, the company expects strong demand and positive consumer sentiment, in a more decisive summer. Voltas expects positive sentiment to support volume growth.
To capitalise on the demand, Voltas has taken various initiatives and planned new seasonal launches across categories, which it expects will help improve its market share. It has also implemented cost optimisation to maintain sustainable growth profitably.
Additionally, the company has earmarked a capital expenditure of around Rs 5 billion for compressor manufacturing. It aims to increase production from one million to two million units in the next 12-18 months.
It is building a new AC facility in Chennai, which is expected to commence operation this summer. Operational efficiency is expected to boost business in the coming months.
Additionally, Voltas Beko is expanding its distribution reach, adopting channel-specific strategies to increase market share, and focusing on boosting e-commerce sales.
The stock is already bucking the trend, up 11% in the last one month.
Voltas share price
The company trades at a price-to-equity valuation of 68x, far higher than its 10-year median multiple of 42x. Relatively, it trades at a discount to Blue Star P/E of 77, and Johnson Control Hitachi P/E of 89.
Motilal Oswal has a target price of 1,640 per share, a 14% discount on the current market price (CMP) of Rs 1,445.
#2 Blue Star
Blue Star has a rich legacy of 80 years of operations in India. It manufactures air conditioning and refrigerators and serves residential, commercial, industrial, and infrastructure customers.
Blue Star has a presence in over 18 international markets, including the Middle East, Africa, and South Asia. To expand its global footprint, it is also expanding into North America, the USA and Europe.
The company operates in three business verticals: commercial air conditioning systems generate 56% of its total revenue, followed by unitary products, which contribute 41%. The balance comes from professional electronics services.
Blue Star is available at 10,200 outlets across India and is the country’s largest after-sales service provider for air conditioning and commercial refrigeration products. Its current market share in the AC segment is 14%.
Notably, 40% of Blue Star AC sales are through consumer finance schemes, particularly zero-interest financing. This is particularly notable as there has been a vast rise in unsecured loans to finance discretionary items.
Its financials have recorded impressive performance over the years. Its sales and profit have grown at CAGRs of 13% and 17% in the last five years, to 97 billion and 4 billion in FY24, respectively.
Impressive profit growth resulted in RoE of 16% and RoCE of 23.6%, reflecting strong ability to generate returns for shareholders and invested capital.
Looking ahead, Blue Star expects air conditioner sales to grow by 25-30% this summer. This is despite last year’s high base when its market grew by over 57%. Given the intense demand scenario, the company expects over 30% growth in Q4 of FY25.
BNP Paribas said dealers are aggressively stocking inventory to prevent stock shortages, and demand will pick up from March onwards. Notably, Blue Star is operating at full capacity across its plant, with a production capacity of 1.85 million AC units.
The company has also hiked prices by 3-4% to counter raw material costs across various models. It aims to maintain 8-8.5% segment margins while growing market share from 13.7% to 14.2% in FY26.
The company is expanding steadily and is targeting a production capacity increase of 1.75 m units next year.
Blue Star stock is also strong in this volatile market, up over 10% since February.
Blue Star share price
The company trades at a P/E of 77x, far higher than its 10-year median multiple of 49x. Relatively, it trades at a discount to Johnson Controls Hitachi, and a 13% premium to Voltas.
Conclusion
According to Voltas Annual Report for FY24, the room AC market in India is expected to grow at a CAGR of 12%, and reach a market size of Rs 50,000 crore by FY29.
The major factors driving the demand are hot summers, rising disposable incomes, and the quest for a better lifestyle. This is further boosted by easy access to consumer finance.
However, with multiple players in the sector, competition has intensified and will grow even further. Nonetheless, market leaders such as Voltas and Blue Star are expected to be the big beneficiaries of the changing demand dynamics.
Disclaimer
Note: We have relied on data from www.Screener.in throughout this article. Only in cases where the data was not available, have we used an alternate, but widely used and accepted source of information.
The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educative purposes only.
Madhvendra has been deeply immersed in the equity markets for over seven years, combining his passion for investing with his expertise in financial writing. With a knack for simplifying complex concepts, he enjoys sharing his honest perspectives on startups, listed Indian companies, and macroeconomic trends.
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