The India Meteorological Department has predicted a scorching summer ahead, with temperatures expected to rise above average and more frequent heat waves. This forecast comes as no surprise, given the current trend of increasing heat in India. Consequently, the demand for cooling products is anticipated to skyrocket, leading to record sales figures in 2024 as consumers rush to purchase air conditioners, coolers, and fans.

Rising Demand for Cooling Products

With summer arriving earlier this year, companies specializing in cooling solutions are likely to experience significant boosts in sales. Market leaders Voltas and Blue Star are poised to reap the rewards of this surge in demand. Historically, consumer durable stocks have shown a pattern of rising in anticipation of summer needs, raising the question: will this trend hold true in the current climate?

Voltas: A Market Leader in Cooling Solutions

Voltas, a prominent member of the Tata Group, operates across three main business domains, with its Unitary Products Business Group (UPBG) focusing on room air conditioners, air and water coolers, and commercial refrigeration.

• Market Share: Voltas commands a 20.5% share in the air conditioning market, alongside smaller shares of 5.1% in refrigerators and 8.3% in washing machines.
• Revenue Breakdown: The UPBG generates 63% of Voltas’ total revenue, with engineering and electro-mechanical divisions contributing 5% and 30%, respectively.

In a remarkable achievement, Voltas sold over 2 million AC units last year, marking a 35% increase from the previous fiscal year. This feat underscores the company’s dominance in the air conditioning sector.

Despite facing stagnation between FY20 and FY22, where revenues fluctuated between ₹71 billion and ₹79 billion, Voltas rebounded in FY23 with a 19% revenue increase, reaching ₹95 billion. This momentum continued into FY24, with revenue growing by 30% to ₹125 billion.

Financial Performance and Future Prospects

The company’s profit climbed from ₹1.4 billion to ₹2.5 billion during this period, though it remains below the pre-pandemic profit of ₹5.1 billion in FY19. Looking ahead, Voltas anticipates robust demand and consumer optimism this summer.

To capitalize on this trend, Voltas is implementing various strategies, including:

• New Seasonal Launches: Expanding its product range to capture more market share.
• Cost Optimization: Enhancing profitability while ensuring sustainable growth.
• Investment in Manufacturing: A planned capital expenditure of approximately ₹5 billion for compressor production aims to double output from 1 million to 2 million units within the next 12-18 months.

Additionally, the company is enhancing its distribution channels and focusing on e-commerce to reach more customers. Currently, Voltas shares have increased by 11% in the past month, reflecting investor confidence.

Blue Star: Expanding Horizons

Blue Star, with an impressive 80-year legacy, specializes in manufacturing air conditioning systems and refrigerators, catering to diverse sectors including residential and commercial clients.

• Global Reach: The company operates in more than 18 international markets and is expanding into North America and Europe.
• Revenue Segmentation: Blue Star’s commercial air conditioning systems contribute 56% of its total revenue, while unitary products account for 41%.

With a market share of 14% in the AC sector, Blue Star is recognized for its extensive after-sales service network, boasting 10,200 outlets across India. Notably, 40% of its AC sales are facilitated through consumer financing options, reflecting a shift towards accessible credit for consumers.

Strong Financial Growth

Blue Star has demonstrated strong financial performance, with sales and profits growing at compound annual growth rates (CAGR) of 13% and 17% over the past five years, reaching ₹97 billion and ₹4 billion in FY24, respectively. This growth translates to a return on equity (ROE) of 16% and a return on capital employed (ROCE) of 23.6%.

Looking forward, Blue Star anticipates an impressive 25-30% growth in air conditioner sales this summer, building on last year’s 57% growth. The company is operating at full capacity, producing 1.85 million AC units, and has implemented a 3-4% price increase to offset rising raw material costs.

Conclusion: A Bright Future for Cooling Giants

According to Voltas’ annual report for FY24, the Indian room AC market is projected to grow at a 12% CAGR, reaching a size of ₹50,000 crore by FY29. Factors driving this demand include soaring temperatures, rising disposable incomes, and an increasing desire for comfort.

While competition in the cooling sector intensifies, Voltas and Blue Star are well-positioned to benefit from these evolving market dynamics. With innovative strategies and strong financial backing, both companies are expected to thrive in the upcoming summer season.

For investors looking to capitalize on this trend, understanding the competitive landscape and the unique strengths of these industry leaders will be crucial in making informed decisions.