Cool prospects for consumer durable firms as temperature set to soar

Indian Meteorological Department (IMD) expects day temperatures to remain above-normal in select regions across the country between March to May 2021

Consumer durable makers, especially cooler, air conditioner and refrigeration system manufacturers are looking at raking in the moolah as temperatures are set to rise in north India over the next few months.

According to a summer forecast for the period March to May 2021 issued on Monday, the Indian Meteorological Department (IMD) has said that it expects day temperatures to remain above-normal in select regions across the country.

“During the upcoming hot weather season (March to May), above normal seasonal maximum temperatures are likely over most of the subdivisions of north, northwest and northeast India, few subdivisions from eastern and western parts of central India and few coastal subdivisions of north peninsular India,” the IMD said.

The possibility of this, say analysts, bodes well for cooling and refrigeration system makers over the next few months. The government’s production-linked incentive (PLI) scheme is another factor, they believe, which will help companies in this sector.

“Temperatures have just started warming, particularly in north India. Our dealer checks suggest a healthy trend in consumer durables demand, with optimism that air-conditioner (AC) sales will pick-up with the summer onset. Channel stocking in the December quarter helped dealers as prices rose 5-6 per cent since January 2021. Consistent higher temperatures in the next two – three weeks is important for the next leg up in Voltas / Blue Star from current levels,” wrote Lavina Quadros and Apoorva Bahadur of Jefferies in a February 25 note.

At the bourses, the consumer durables index has performed mostly in line with the frontline indices since the March 2020 low – rallying 85 per cent as compared to 89 per cent rise in the S&P BSE Sensex during this period. The surge in some individual stocks has been sharper with Dixon Technologies, Bajaj Electricals and Amber Enterprises surging 200 per cent – 400 per cent during this period, ACE Equity data show. Blue Star, Havells India, Voltas, Whirlpool have moved up between 45 per cent – 135 per cent since then.

Rising electricity prices and higher usage with work from home over (WFH) the past few months, according to Jefferies, has already seen customers willing to spend Rs 4,000-6,000 extra for a 5-star rated AC versus a 3-star one.

“Inverter ACs continue to gain share with non-inverter AC sales reducing substantially in Tier-I cities and declining in Tier II-III cities. LG has launched products with additional features and slightly higher pricing, auguring well for Voltas, which is seeing stock-outs in some locations. Blue Star, Havells-Lloyds and Hitachi are holding their ground on pricing/customer interest,” the Jefferies note said.

That said, investors should be mindful of the rising commodity prices, which can act as a catalyst for product manufacturers to pass on the rising cost to the consumers thereby denting sales. This, to some extent, is likely to be offset by a gradual rise in salaries of consumers of these products over the next few months.

“Consumer durable companies should do well going ahead due to the government's PLI scheme. Some companies who were earlier manufacturing in China have now started to manufacture locally. If they play their cards right, India can start exporting cooling systems in the future, especially ACs. Rising commodity prices will impact input costs, but are likely to be passed on to the consumers. Among the lot, I am bullish on Johnson Controls-Hitachi Air Conditioning India, Whirlpool, Voltas and Blue Star,” said A K Prabhakar, head of research at IDBI Capital.