Competition, margin pressures may dull this summer for Blue Star, Voltas
With temperatures rising and reports indicating a hot summer ahead, expectations are that demand for air conditioners will rise
As last year’s harsh summer boosted air conditioner (AC) sales, shares of Blue Star Ltd and Voltas Ltd gained 17-40% in the first nine months of 2016. The stocks began the current season also on a positive note, beating the BSE 500 index in the past one month or so.
Both companies derive a substantial part of their revenues from cooling products. With temperatures rising and reports indicating a hot summer ahead, expectations are that demand for cooling products will rise. Pradeep Bakshi, president and chief operating officer (unitary cooling products business) at Voltas, told CNBC-TV18 that sales this time started a bit early due to rising temperatures. A channel check by Motilal Oswal Securities Ltd found a spurt in AC sales in Mumbai and Maharashtra. Bakshi expects Voltas AC sales to grow at least 15-20% in the current year.
Achieving double-digit growth in AC sales may not be a challenge for Voltas if temperatures remain high. Also, the company is expected to benefit from LG Electronics’ decision to exit the fixed- speed split AC business. In tune with changing energy norms, LG moved to variable speed or inverter ACs. They consume less electricity and are seeing good growth. However, this will not assure a profitable summer for Voltas. Competition is intense and the company is finding it tough to pass on the rise in raw material costs. The management said as much to CNBC-TV18.
Also not helping the matters is the aggressive pricing by LG. The entry-level inverter model is not only cheaper than the competition but is also almost equal to the top- rated fixed-speed ACs in the market. Like most companies, Voltas derives most of its sales from fixed-speed AC models. To make the fixed-speed ACs more appealing, the competition will have to either offer more freebies or keep the prices lower, at least in metros where the scope for inverter ACs sales is high.
Compared to Voltas, Blue Star has been pursuing the inverter AC opportunity more aggressively. The December quarter results note from Emkay Global Financial Services Ltd says Blue Star derived 15% of its AC sales from the inverter category, as against 12% for the industry. Tracking the shift towards energy-efficient products, Blue Star is hoping to keep up the growth tempo in inverter ACs.
But with LG introducing its inverter ACs at lower prices and setting a steep sales target (it aims to sell 900,000 units this year), analysts are concerned whether Blue Star will be able to withstand the competition. According to Motilal Oswal, Blue Star has cut prices of its inverter models. While analysts expect more measures in coming weeks, the concerns are weighing on the Blue Star stock, which has gained much less than the Voltas stock in the last month.