Many consumer durable and discretionary companies, without fail, make it to the much-talked-about "summer stocks" list every year. But are weather conditions enough to drive stock prices? Of course not, say analysts.
Goldman Sachs had busted the myth of ‘summer demand’ when Voltas shares ran up 15 percent in the span of a few days in February. It noted that even during peak warm years, industry growth had remained in single digits, showing a compound annual growth rate of only 6-8 percent over 10-15 years.
The historical returns of so-called summer stocks poked more holes in the myth. Stocks such as Voltas, Symphony and Amber Enterprises show no clear positive trend in the March-June months. The average return of popular summer stocks in the past 11 years, excluding the 2020 COVID-induced downfall, which was an aberration, is in negative territory. Even Coal India, which is said to be a big beneficiary of the surge in electricity demand, has given flat to negative returns more than six times in the past 12 summer periods.
“Seasonal surges in revenue for companies may occur during certain periods, but this doesn't necessarily translate into a positive stock reaction,” warns Manish Mishra, Virtual CFO. “The idea of summer stocks is a popular myth.”
Will it be different this year?
When India saw the hottest February ever, the Street assumed demand for cooling products would be higher. But March came as a washout month with consumer durable retailers witnessing few footfalls due to unseasonal rains.
“Secondary sales across product categories such as ACs, refrigerators, fans, and air coolers remained weak, down 20-30 percent YoY in March,” Nilesh Bhaiya of BNP Paribas pointed out in a recent report.
The trend did reverse in April, but dealers say sales of entry-level products are likely to remain soft as consumers defer their purchases. “Refrigerators worth Rs 25,000-30,000 are selling like hot cakes while those worth Rs 10,000-12,000 are seeing tepid sales,” said Sunil Kumar Sinha, Senior Director, India Ratings.
Furthermore, profit margins of consumer durable companies remain under pressure due to high input prices, notes Sachin Jasuja of Centricity Wealthtech. “The margin squeeze could continue for some companies,” he added.
Also Read: Varun Beverages: Is there any fizz left after the decent run-up?
The outliers
Analysts believe that Symphony does have an edge over other consumer durable companies on the back of 7-8 model launches this year. This season, it had launched power fans and exhaust fans, as well as personal coolers for residences, broking firm Anand Rathi noted after a call with channel partners.
The optimism, however, does not reflect in the share price, which has dropped 15 percent since March.
Pepsi bottler Varun Beverages may be the one stock in which price action, the summer story and analyst recommendations are in tandem. In Q1 FY22, it saw 43 percent volume growth and in Q1 FY23, the number stood at a whopping 97 percent. Driven by its energy drink Sting, analysts expect this double-digit volume trend to continue.
“The company is prepared to capitalize on summer opportunity led by capacity addition, about 30 percent increase in carbonated soft drinks by end-March 2023 and adequate stocks for the peak season, thanks to early ramp-up to peak utilization,” wrote analysts at Kotak Institutional Equities.
Since its listing in 2016, the stock has given positive returns five times. This year, too, it has risen 10 percent since March.
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