Voltas/Blue Star has partly corrected in a weak market on fear of rise in compressor import duty. Branded AC players in India primarily import compressors from China. In a media interview, Blue Star chairman mentioned they have enough inventory until year end and will pass on pricing when needed. Hence, we believe the industry will gradually take a price hike of 0.5-1% as the impact is across companies. We believe recent correction offers a good entry point.
Event: The Government of India has raised import duty on AC (air conditioner) compressors from 7.5% to 10% and on ACs from 10% to 20%. Refrigerators and washing machines have seen duties rise from 10% to 20%.
Impact should be passed on: Compressors comprise 18-30% of costs depending on the specific AC product. We believe the industry will gradually pass on this impact as it impacts all top 7 players which account for 95% share. Hence, we believe FY19e-21e profit expectations of Voltas and Blue Star will remain intact.
Finished goods impact negligible for these companies: Key AC players have assembling facilities in India and should not be materially impacted by the duty raised on the finished AC product. Daikin does import some of its high-end ACs, but at a higher price point and move will not benefit lower price point players. We have not factored in any earnings from Voltas-Beko JV. They will indigenise manufacturing once their factory is commissioned in H1FY20e. Their current launch will only materially ramp up once their domestic facility is commissioned. Hence, we do not see a change in their medium-term prospects. We remain positive on Voltas (CMP Rs 537, PT Rs 750) and Blue Star (CMP Rs 579, PT Rs 800).