Heat wave over! AC stocks face rain-test after rallying 76% in 6 months

In the last 6 months, shares of - have jumped 76%. shares are up 72%, 46%, 51%, 47% and 29%.


"Rising aspirational demand coupled with increasing disposable income, increasing temperatures and easy availability of financing are aiding structural shifts towards residential air-conditioners becoming a necessity. The seasonality in demand pattern seems to be weakening with the non-peak season becoming less lean," Manish Valecha, Research Analyst, Anand Rathi Institutional Equities, told ET Markets.

Due to the extended summers and the lower channel inventory, the brokerage firm expects 1QFY25 volumes to continue the robust growth momentum of 4QFY24. Besides, recent price hikes of 3-4%, to offset current costs inflation, will also aid revenue growth. "We continue to remain positive on the sector. Key risk being continuing costs inflation," he said.

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Channel checks by Prabhudas Lilladher indicate that AC inventory levels are currently low. "Highest demand was experienced at the end of May-2024, in few states channels were unable to fulfill orders due to less supply. Currently, summer demand is at its peak and expecting to normalize after the onset of rain," the brokerage firm said.

Across various brands, there has been a price hike ranging from 3% to 5%. Voltas, which seems to be gaining market share, is expected to report robust volume growth in Q1 considering 9.5% revenue CAGR over Q1FY20-24, Praveen Sahay of Prabhudas said.

In FY25, the residential AC industry may register 25-30% YoY volume growth led by a favourable base of FY24 and strong secondary sales led by harsh weather conditions.

"While excess capacity is likely to hurt EMS players in FY26, strong growth in the RAC industry may reduce the impact of excess capacity. During peak season, OEMs continue to source RAC and components from EMS players. There are medium-term opportunities emerging for EMS players such as higher growth in component business, possibility of exports as Indian products are becoming cost competitive and are able to compete with some variants from China," said ICICI Securities.

However, one cannot ignore the element of cyclicality here. "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," says smallcase manager Shailesh Saraf of Dynamic Equities.

Saraf is of the opinion that AC stocks are quite highly valued. "These stocks have generated returns but have not grown their sales and profit apart from Blue Star. To conclude, we do not see much potential for further upside for these stocks as they are highly overvalued and cyclical in nature," the money manager said.

A section of the market also believes that the market growth in India is nearing its end as ACs will be owned by 59 million households by FY25. Further, states having higher heat wave days do have the highest cooler penetration in the country.

"On the surface, it seems that hotter temperatures mean a rise in AC purchases. However, on examining the relevant data from various government sources, it seems that higher temperatures have no correlation whatsoever with room AC penetration level. In fact, purchasing power rather than rising temperatures acts as the main trigger for buying room ACs. Rajasthan, Punjab, Haryana, Uttar Pradesh and Bihar, whose districts have experienced the most heat wave days, don’t seem to have a high AC penetration. Only 3.6 per cent, 8.1 per cent and 1.5 per cent of the households in these states, respectively, own ACs," InCred Equities said.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)