Not so cool summer for Voltas, Blue Star; shares of AC majors fall

Subdued March quarter sales and seasonal impact do not bode well for volume growth for AC makers

Shares of air conditioning (AC) majors Voltas and Blue Star are down 14 per cent each over the past month on muted March quarter numbers. 

Despite expectations of strong show, performance was below estimates. Johnson Controls-Hitachi Air Conditioning and Havells, which owns the Lloyd brand, were down between 1 per cent and 5 per cent. 

CY18 commenced on a relatively dull note, with retail sales declining by 15-20 per cent in April, say analysts at Emkay Research. Their channel checks suggest that the first half of May has not been any better, with unseasonal rain, thunderstorms and dust storms playing spoilsport in the key markets of North and South India.

Since the March quarter show has seen a subdued and a seasonally strong quarter (April-June) under pressure, there could be more pain ahead. 

For Voltas, the March quarter was a weak one as the company, according to HDFC Securities, was behind the curve on the ramp up in inverter ACs (20 per cent of the mix in FY18 against 28 per cent for the sector), as higher channel inventory of 2017 models impacted fresh offtake. 

Similar trend was observed with Havells as sales of Lloyd remained flat in the quarter and analysts owe the same to pre-buying in the December quarter.  Even for Whirlpool, analysts say retail growth remained under pressure for the refrigerator and AC product categories due to unfavourable climatic conditions. Consumer off-take, thus, been weak, reflecting in volumes of Lloyd (Havells) and Blue Star’s Room Air Conditioner (RAC) volume growth in the fourth quarter of FY18.

The June quarter sales clearly remains crucial for volume growth. Nevertheless with half of the on-going quarter seeing slower momentum, the trends are not encouraging. Analysts believe if the weather doesn’t improve during the latter part of May and early June, the room AC industry is likely to be saddled with unsold inventories at the end of June, impacting FY19 revenue of all room AC companies.

For Havells, other segments such as electrical consumer durables, lighting fixtures and cables continue to drive growth, providing cushion, even though Lloyd AC sales are muted.

Despite near-term headwinds, analysts are hopeful of long-term volume growth, given the low penetration rate of 5 per cent and the strong replacement market. Increasing disposable income, cheap financing and lower running costs for ACs are expected to drive demand for ACs.