Better days ahead for air-conditioner makers

Lower base, better domestic market focus work in favour of Blue Star compared to Voltas

With the summer becoming more pronounced, the stocks of Blue Star and Voltas are seeing good gains. The shares have risen 18-22 per cent since March. Between the two, analysts prefer Blue Star, which surprised the Street posting 15 per cent earnings growth in the December 2015 quarter (Q3). Superior performance of its room air-conditioning (AC) business, which has been outgrowing the industry growth of 10 per cent in the past few quarters, aided its numbers.

Also, from a measly 1.5 per cent operating margin a year ago, margins were higher at four per cent in Q3 helping the company post a net profit of Rs 7 crore (versus Rs 12 crore loss in Q3 of FY15), thereby adding to the sentiment. An order book of Rs 1,605 crore, up 14 per cent year-on-year (y-o-y) is another positive. That apart, increase in market share, easing of its legacy order issues and its Electro Mechanical Projects and Packaged Air-conditioning Systems division posting 21.5 per cent growth in Q3, despite corporates holding back their expansion plans, are the other positives.

Analysts feel Blue Star is well placed to expand its current 10.5 per cent market share in the room AC space to 12-13 per cent by FY18. Analysts at Antique Stock Broking have assigned 17 per cent premium to Blue Star’s target multiple compared to Voltas, given the former’s ability to capture higher market share in room AC segment and its leadership in domestic industrials segment.

Although Q3 was disappointing, not all is down for Voltas. Even as revenues expanded by 37.5 per cent y-o-y, net profit at Rs 54 crore halved year-on-year in Q3’FY16. Operating margins at 4.5 per cent, too, dipped 157 basis points. Dismal performance, despite being the market leader in the room AC space, might be attributed to its exposure to international markets in its Electro-Mechanical Project and Services business, where it continues to face legacy issues. While Blue Star has similar issues, it has seen faster turnaround in its industrials segment. Also, Blue Star’s industrials business being more India-oriented is a positive.

That said, Voltas with an order book of Rs 3,154 crore in Q3 gives it better revenue visibility in FY17.

Going by analysts’ polls on Bloomberg for the month of March, a majority recommend ‘buy’ on both the stocks. However, Blue Star’s average target price of Rs 421 indicates an upside of 13.5 per cent, whereas Voltas at Rs 272.5 is already a tad higher than its target price of Rs 268.