When I was thinking about the air-conditioning sectors, post their Q3FY20 earnings, it seemed little out of place to talk about room air-conditioners while we were experiencing a fairly severe winter. But, almost, in the blink of an eye, winter is over. Atleast in Mumbai! We had a super hot day yesterday with temperatures touching 38 degrees. It seems that we need to brace ourselves for a scorching summer and perhaps its just the right time to be talking about this space!
We are focusing on two companies Voltas and Amber Enterprise. Very different, in almost every way, and the reasons why I like them are, again very different!
Lets talk about Voltas first. This is definitely the larger of the two companies by far, with a market cap of almost Rs24000 crvs approximately Rs4900 cr of Amber.
Voltas has been making A/C for the past six decades, from 2011 they have the largest market share in the branded space, currently in the range of 24-27 per cent, their next competitor would have about 15-17 per cent market share, so the gap is fairly large.
In Q3FY20 the Unitary Cooling Products division delivered good numbers, it was the projects division was a bit of a drag. Going forward the company is confident of maintaining margins and market share where UCP is concerned. The company has also forayed into the air-cooler segment, they realized that there was a gap between the fan and room air-conditioners market that was filled by air-coolers, a market dominated by the unorganized players. Here they hope to grow their market share.
But the reason why I like the stock has more to do with their expansion plans and what that can do for the company going ahead.
The company recently showcased their facility in Sanand, near Ahmedabad in Gujarat. This is a joint venture with a Turkish company. The JV called Voltas Beko has an absolute state of the art facility from where they intend to manufacture refrigerators this year followed by washing machines and then launch other appliances like microwaves and dishwashers.
The aim is to equal the A/c business in the next 5 years. According to the management the non-A/C consumer durables market has much larger numbers than A/C and combined they can be more than the A/C business.
This I think is a significant development for Voltas. It is a way in which the company will stay relevant in a market where it is difficult to sustain with only one product – air conditioners. Now they will soon have a range of consumer durables and they will be able to tap on their existing marketing capabilities to get volumes for their other products. This therefore is definitely a stock to watch and buy on dips in this space…my first conservative target would be about Rs 750/-
When it comes to Amber Enterprise, we have a business model is very different from that of a Voltas or a Blue Star. They are essentially contract manufacturers of air-conditioners. Q3FY20 was a very good quarter for the company, revenues up 52 per cent. EBITDA grew 87.4 per cent, while profit was at Rs 24.8 cr v/s 4 crYoY, the result beat analysts expectations by 30 per cent. Certainly an outlier in what has been a muted quarter for a whole host of companies. Also, what should be noted that this performance beat was aided by a 35 per cent growth in Room Air Conditioners.
Amber Enterprises manufactures air conditioners and components for big brands like Voltas, Godrej and Hitachi. The company has focused on acquiring clients and getting a better product mix so that margins can be better. Subsidiaries (EVER and Sidwal) are being scaled up. What seems to be working for them is that brands prefer domestic sourcing to importing.
Sales of non-AC components are also strong. But what really works for the company is that established brands are increasingly outsourcing a bigger chunk.Brands are dealing with the slowdown in the consumption space by adding volumes without investing too much in building capacities and taking on capex. Among contract manufacturers Amber’s market share is at about 55 per cent, indicating a high degree of client stickiness. Amber manufactures for about 16 AC brands in India.
This model of contract manufacturing in an environment where consumption companies are under stress seems a good way dodge the slowdown. You are in a position to cater to all brands and focus on volumes without getting into branding, marketing etc. The stock has had a good run, but definitely can deliver 15-20 per cent returns from current levels, try and buy the stock on dips.
AC’s in general have a promising future ahead. It is no longer considered a luxury item. Higher electrification coverage and higher disposable incomes and better financing options have meant that more AC’s are getting sold.
The industry demand is for a lower rate of GST, but even as things are the growth of the segment seems almost a given. As we brace ourselves for what promises to be a scorching summer we can consider these two stocks with a long term horizon. The valuations of both have run up a fair bit, so it would be prudent to do a staggered buying and use dips to invest in both.