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Last Updated : Feb 22, 2019 01:57 PM IST | Source:

Ideas for Profit | AC companies post decent revenue growth in Q3, but margins contract sharply

Krishna Karwa @krishnakarwa152

- Industry prospects are positive in the long haul
- Inverter air conditioners are witnessing strong demand
- Liquidation of stocks across trade channels is being undertaken
- Amber Enterprises is our top pick


In what was supposed to be a seasonally weak quarter (owing to prevalence of winter conditions), ACMs (air conditioner manufacturers), barring Voltas, registered decent top-line growth. This was attributable to product launches and festive season sales.

To clear unsold ACs of the earlier two quarters (the AC inventory build-up was mainly due to unseasonal rains in the summer months) and tackle competition, discounting schemes in the off-season had a noticeable bearing on margins. The impact was further accentuated by high input costs.


Considering the disappointment in the 9 months so far, ACMs will end FY19 on a subdued note. Going forward, the industry is expected to remain on a strong footing.



A bad FY19 may well be the opportunity for long-term investors.

Key trends to watch out for:

Sectoral prospects are robust because:
- India is characterised by tropical climatic conditions for most part of the year
- Disposable incomes of consumers have been rising
- ACs are no longer considered a luxury product
- Replacement cycles are getting shorter
- The penetration of ACs in India is very low
- Financing schemes are available

- Increased electrification and urbanisation has led to a boost in demand

New product variants will be introduced by ACMs at regular intervals. Given the demand uptick in inverter ACs, most of the new models will be under this category. Inverter ACs, by virtue of their higher realisations, could play a key role in improving margins.

Liquidation of unsold AC inventories (because of weak offtake by trade channels during 9M FY19) will be prioritised by ACMs in Q4 FY19, prior to the new season commencing in Q1 FY20 (i.e. summers).

Key risks
- Unfavourable summers, as was witnessed in Q1 FY19, could dent demand and top-line
- High competitive intensity necessitates taking price cuts on some occasions
- Increase in raw material prices can be hard to pass on to the buyers

- Technological obsolescence may result in an inventory backlog

Stock-wise outlook


Amber Enterprises: The company manufactures room ACs for eight out of the top 10 AC brands in India. There is a high degree of client stickiness too. Costlier imports of ACs and its components by brands would aid order book growth. Efforts are being made to ramp up AC volumes from 1.9 million units in FY18 to 2-2.5 million units by March-end.

Benefits of inorganic acquisitions undertaken in the past should help achieve backward integration (predominantly in connection with printed circuit boards) and save input costs. The company derives 70-80 percent of its revenues from high-margin original design manufacturing processes. Utilisation rates at manufacturing facilities are slated to improve (from 45-50 percent in FY18).

After a significant de-rating, the stock is reasonably priced vis-à-vis its peers. It trades below its ipo issue price of Rs 859 per share, thus leaving enough room for an upside. Therefore, investors shouldn’t overlook it.

Johnson Controls Hitachi: The demand for chillers, which are mainly used in HVAC (heating, ventilation, air conditioning) systems, has been on an uptrend of late. The company is exploring opportunities to bag such contracts from commercial, institutional and industrial clients. On the retail front, new distribution channels will be set up in Tier II/III markets and southern India. Cost rationalisation drives are underway as well.

The stock, despite being the most expensive of the lot, has corrected sharply from its 52-week high. A positive industry scenario, coupled with healthy fundamentals, makes it worthy of investment. Nevertheless, it is pertinent to note that trading volumes at stock exchange generally tend to be low.

Blue Star and Voltas: In spite of a weak performance in the unitary cooling segment (which includes ACs) in 9M FY19, the relatively capital-intensive electro-mechanical projects segment kept the financials of these two companies intact.

A well-established brand image, deep distribution network pan-India, demand uptick in commercial refrigeration/cooling and product extensions in related categories (for instance, Voltas' foray into air coolers and 'Voltas Beko' consumer durables) should provide a fillip to the unitary cooling segment of these two players.

In the electro-mechanical projects segment, both companies are being selective regarding choice of projects in the HVAC and MEP (mechanical, electrical, plumbing) space. Assignments relating to urban infrastructure, primarily awarded by the government, will be prioritised. Exposure to projects in international markets will be gradually reduced in due course.

Both stocks may be considered for accumulation on dips.

For more research articles, visit our Moneycontrol Research page

Disclaimer: Moneycontrol Research analysts do not hold positions in the companies discussed here

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First Published on Feb 21, 2019 04:26 pm
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