Untimely rains dent summer sales; to keep durable stocks in check: Analysts

With sales of cooling products turning out dismal this summer due to unseasonal rains, the stocks of related companies are now off their March highs.

Shares of fan and air conditioner makers such as Voltas, Symphony, Orient Electric, Johnson Controls-Hitachi Air Conditioning and Crompton Greaves are down 5-23 per cent since March when the summer season saw a firm onset.

In comparison, the BSE Sensex index is up 10 per cent.

Analysts expect the weakness to continue in the near-term as lower sales offtake will lead to companies missing their earnings estimates for the April-June quarter (Q1FY24).

However, they suggest that investors use the declines to add the stocks.

“The shares could underperform ahead as the intermittent rains and the onset of monsoon dampened demand for air conditioners (ACs) and other products. Q1 results will thus be weaker but the dips in the shares should be used to buy from a medium to long term perspective,” said Vinit Bolinjkar, head of Research, Ventura Securities.

V K Vijayakumar, chief investment strategist at Geojit Financial Services, also suggests to remain invested in the stocks from a long run as he believes the scrips currently are only reflecting the near-term challenges.

As per reports, overall sales of summer appliances including ACs, coolers, fans and refrigerators declined 25-30 per cent between April-May over last year, especially in the North India region, which accounts for 35-40 per cent of companies’ overall sales.

This comes against industry's expectations of 20-25 per cent volume growth for summer appliances this season.

While the latter half of June was likely relatively better, the onset of monsoon has not led to a meaningful pickup, experts believe.

Muted rural demand has also pushed discretionary spending back, but volumes will pick up once the monsoon ends and the festive season kicks in, they add.

“As crop sowing has been 30 per cent lower due to the delayed monsoon, rural sentiment has been impacted as a result of which, consumer discretionary products including the summer appliances have taken a back seat.

"This could continue for at least 6 months till the next sowing of rabi crop but there will be recovery once monsoon is over and we enter the festive season by Septemeber end,” said Amit Kumar Gupta, founder and CIO, FinTrekk Capital.

Q1FY24 scrorecard

Analysts expect Q1FY24 revenue to remain weak for consumer durable firms given another season of dampened demand following the poor October-December period in 2022.

From the listed space, Voltas and Blue Star are likely to report flat to mid-single digit revenue growth in Q1FY24 on an unfavourable base, as per Dolat Capital.

On the upside, margin expansion is expected to have continued in the quarter given the sustained ease in raw material prices, though this will be partially offset by elevated advertisement spends amid high competition, analysts note.

Prices of aluminum, copper, steel and high density polyethylene have corrected 5-16 per cent year-on-year and have declined on a quarterly basis too.

“Expect gross and operating profit margins to inch upwards on a YoY and QoQ basis in the June quarter on falling input and freight prices.

"There is a strong scope to see YoY expansion of 100-300 bps in operating margin across white goods and durables,” said ICICI Securities.