With scorching summer temperature, air conditioner manufacturers are busy ramping up production to keep homes and offices cool expecting a sales growth of 20% this season as Indian Meteorological Department (IMD) has forecast above average temperature from March to May.
Leading AC makers Voltas, LG, Daikin and Godrej are all expanding production and the intense heat has come as a blessing for the industry that was facing lower sales of white goods due to introduction of Goods and Services Tax (GST) in July, 2017.
According to analysts India is set to witness an explosion in air conditioner demand in the next decade due to rising disposable income and hotter summers. This will necessitate setting up 300 new power plants, according to Lawrence Berkeley National Lab.
Amidst the growing demand for ACs in India, here is a look at the prospects of the listed players:-
# Blue Star Ltd (BSE: 500067, NSE: BLUESTARCO) Category: Mid Cap
Blue Star established in 1943 by Mohan T Advani for reconditioning of air conditioners and refrigerators, is now India’s leading air conditioning and commercial refrigeration company with an annual revenue of over Rs 4400 cr. It has 5 modern facilities, 2700 employees, 2200 dealers and 600 retailers. It caters to the cooling requirements of large number of corporate, commercial as well as residential customers.
Suneel M Advani, Chairman had informed the shareholders that 2016-17 was strong for the company despite the hiccups of demonetisation, poor investments in construction and manufacturing sectors. Operating income grew 22% to Rs 4425 cr while operating profit grew 20% to Rs 257 cr. Year-end net borrowings were reduced to Rs 120 cr from Rs 317 cr last year. Net profit fell to Rs 111.97 cr from Rs 126.90 cr the previous year.Blue Start has identified 5 new countries to market their air conditioning and refrigeration products taking the total count to 17.
In Q3 2017, the net profit rose 29.52% on annualised basis to Rs 18.78 cr while sales rose 8.58% to Rs 981.30 cr. It is trading at a PE of 59.67 indicating higher valuation by market. On a returns perspective, 5.35% quarterly, 6.16% half yearly and 44.33% annually compares well with industry and Nifty average.
Return on equity of 16.25%, assets of 4.66% , net profit margin of 2.80% compares favorably with peers while liquidity and cash flow ratios are cause for concern.
On technical charts, Relative Strength Index (RSI) of 70 indicates bullishness while MACD has witnessed a bullish crossover signalling buying opportunity while ADX of 21 indicates range bound trading.
Target: 850 Duration : 3 weeks
#Voltas Ltd (BSE:500575, NSE: VOLTAS) Category: Large Cap
Voltas Ltd set up in 1954 is considered to be India’s largest airconditioning company providing engineering solutions to a wide spectrum of industries in such areas as heating, ventilation, air conditioning, refrigeration and electro-mechanical projects. With factories in Thane, Dadra and Pantnagar, the company has the total capacity to manufacture split, room airconditioners, industrial air conditioning and refrigeration equipment among others.
The Tata Group firm is headed by Noel N Tata, Chairman and Pradeep Bakshi, Managing Director & CEO. They sold one million ACs in 2016-17, a first time in the industry. It has a 21% market share or 1 out of every 5 ACs sold in India bears the Voltas name.
The company reported a net profit of Rs 511.42 cr in 2016-17 compared to Rs 393.11 cr the previous year while sales turnover was Rs 6032.78 cr as against Rs 5719.82 cr the previous year.
In Q3FY18, the net profit rose 23.17% to Rs 100.44 cr while sales rose 16.21% to Rs 1364.95 cr. The scrip is trading at a PE of 43.62 indicating a higher valuation by market while financial parameters present a mixed scenario.
Return on equity of 15.39%, assets of 12.08% net profit margin of 8.43% is above industry average while liquidity and cash flow ratios are a cause for concern. On technical charts, RSI of 61.64% is bullish, ADX of 23 indicates range bound trading and MACD has witnessed a bullish cross over signalling buying opportunity.
Target: 688 Duration : 3 weeks
#Johnson Controls –Hitachi Air Conditioning India Ltd (BSE: 523398, NSE:JCHAC) Category: Midcap
Johnson Controls-Hitachi Airconditioning was established as a joint venture between Johnson Controls-Hitachi Air Conditioning in 2015. Hitachi Appliances carved otu and contributed its air conditioning business to the JV while Johnson acquired 60% of the carved out business venture. It operates out of 18 locations.
Its business includes commercial airconditioning and refrigeration, residential airconditioning, compressors, absorption and centrifugal chillers. The company has innovated with energy recycling from industrial waste heat and and won awards for global warming prevention. It has launched stainless steel home airconditioners with Kurashi Camera AI for monitoring each person in room.
The company posted a net loss of Rs 1.77 cr in Q3FY18 while sales rose 44.62% to Rs 377.40 cr. On a returns perspective, 19.59% half yearly and 57.73% annual ly is is above industry average.
In financial parameters, return on equity of 18.46%, assets of 7.38%, net profit margin of 4.11% are attractive while liquidty and financial ratios are discouraging. The scrip is overvalued with a PE of 75.43.
On technical charts, RSI of 48.61 is neutral to bearish, while ADX of 38.92 indicates uptrend and MACD has witnessed a bullish crossover signalling a buying opportunity. The scrip is trading below 50 day moving average indicating weakness.
The Indian air conditioning market-industrial, commercial and residential is witnessing an unprecedented growth thanks to rising disposable incomes, rising summer temperatures and innovation in energy efficient cooling systems.
The AC majors are vying with each other to introduce innovation in energy efficiency. Godrej Appliances launched the power saving green air conditioner with the highest ISEER rating of 6.15. It is based on the core principle of power saving and eco-friendliness with the Green inverter technology. Godrej also launched the R290 refrigerant, the world’s greenest with zero ozone depletion potential and minimum global warming potential of only 3.
India’s airconditioner market is set to grow at a compounded annual growth rate (CAGR) of 10% during 2015-20. The market domination by Voltas is expected to continue even as LG, Daikin and Samsung, Godrej are other major players showing fast growth in business. The key to maintaining market share for industry is to keep innovating with energy efficient solutions and offering competitive pricing for various category of consumers.
Investors may profit by having a selective exposure to this segment with a short to medium term perspective considering the good returns the industry is capable of providing.