The Met department's prediction of a heatwave in India has put traders in the hunt for stocks that can outperform in an overvalued market. But do summer stocks shoot up with shooting mercury? ICICI Securities says while the narrative of ‘heatwaves result in higher growth of summer products such as fans, air coolers, air conditioners and refrigerators is popular", historical data does not support this.
The brokerage expects near-term performance of white goods companies to be muted. "There were no heatwaves in India in FY02-FY12 whereas there were four heat waves during FY12-FY22. However, revenue CAGR during FY12-FY22 was lower than revenue CAGR during FY02-FY12. We also note there is negligible correlation between heatwaves and revenue growth of companies selling summer products even on an annual basis," the brokerage noted.
Nevertheless, stocks to watch include Voltas, Blue Star, Havells India, Johnson Controls-Hitachi Air Conditioning India and fan maker Crompton Greaves Consumer Electricals Ltd.
“We continue to remain positive on air conditioners,” said Nikhat Koor, an analyst with Dolat Capital Market. She cited low penetration, rise in residential and commercial projects and consumer finance options as reasons to see an increase in demand.
Dealers expect 15% to 20% growth in sales during the peak months through May, she wrote in a note last month.
IMD sees heat waves to last 10 to 20 days in different areas during the three-month summer, longer than the usual four to eight days. The country often sees the mercury cross 45C in some parts during the season.
Maximum power demand is projected to rise to 250 gigawatts during the period, an increase of almost 3% from a year earlier, the power ministry said. The ministry also asked plants to continue importing coal to make up for any shortfall in local supplies.
Shares of Adani Power and Reliance Power , operators of thermal power plants, posted gains of at least 15% each this week.
Consumption of soda, ice creams and dairy products typically jumps sharply during the summer. Companies in India, especially the larger players such as Hindustan Unilever Ltd. and ITC Ltd., have been focusing on demand revival in rural areas by offering smaller-sized products at lower costs.
Varun Beverages Ltd., one of the world’s largest bottlers for PepsiCo Inc., climbed more than 6% this week, taking gains this year to about 20%. Other stocks of interest include dairy firms Hatsun Agro Product Ltd., Parag Milk Foods Ltd., ice-cream maker Vadilal Industries Ltd.
“Beverages companies are upbeat about the summer demand,” said Shah at Geojit Financial Services, adding that companies are looking to introduce new products targeting different consumer groups.
Analysts are also watching Emami Ltd., which sells Navratna oil, popular for cooling massages.
Potential market boosts aside, hotter summer can strain the country’s energy supplies and hit wheat crops. Even before temperatures shot up, the tech hub of Bengaluru has struggled with water shortages amid a drought.
In 2022, several states suffered prolonged blackouts as heat waves boosted energy demand at a time of dwindling coal stockpiles. As sources of water dry up, some companies, especially operators of huge plants, have had to suspend operations in previous years.
“There is risk associated with extreme climate events,” said Jigar Shah, chief executive officer of MIB Securities India. If the prediction that heat waves will last longer than usual comes true, it will have serious problems for industries that are dependent on groundwater and their supply chains, he said.