(Bloomberg) — A hot spell is forecast across India, giving traders fresh food for stocks that can outperform in an overvalued market.
Stock prices of cooler manufacturers and power generation companies rose this week after the Japan Meteorological Agency warned that temperatures would be above normal until the end of June. The sectoral gains came amid concerns that broad stock indexes are lacking momentum following record gains.
Over the coming months, hundreds of millions of voters will also attend election rallies and head to polling stations in parliamentary elections that will begin in mid-April and last several weeks. This increase in activity could amplify the effects of extreme weather events and increase demand for heat protection products.
Although several sectors may benefit, the impact of the heatwave on the overall market is more complex. Food prices will continue to rise due to water shortages and the risk of crop damage, potentially delaying the Reserve Bank of India’s timing for interest rate cuts. A surge in energy demand could worsen power shortages in some regions.
Read more: India’s central bank maintains key interest rates as inflation risks persist
Sectors to watch include:
air cooling
Stock prices of companies that make air conditioners, coolers, and electric fans were quick to react to the weather warning. An equal weighted cohort of eight companies that make air-cooled products surged more than 8% this week.
“Demand for consumer durables and white goods is expected to increase not only in metros but also in semi-urban and rural India,” said Gaurang Shah, strategist at Geojit Financial Services.
In comparison, the benchmark NSE Nifty 50 Index has gained less than 1% in the last five sessions. The index trades at about 20 times forward 12-month earnings, compared with just over 14 times the MSCI Asia Pacific Index, and above the company’s five-year average of 19.2 times.
Notable stocks include Voltas, Bluestar, Havells India, Johnson Controls-Hitachi Air Conditioning India, and fan manufacturer Crompton Greaves Consumer Electricals.
“We remain positive on air conditioning,” said Nikat Kuru, an analyst at Dorat Capital Markets, citing low penetration rates, an increase in residential and commercial projects, and consumer financing options as reasons for the increase in demand. Ta. Dealers are expecting 15%. Sales increased 20% in the peak month through May, she wrote in her note last month.
energy company
The India Meteorological Department has predicted that the heat wave will last for 10-20 days in various regions during the summer months, longer than the usual 4-8 days. In this country, the mercury often exceeds 45 degrees Celsius (113 degrees Fahrenheit) in some areas during the season.
Read more: India considers emergency rules on gas power generation to meet summer demand
According to the Ministry of Electricity, peak electricity demand during the period is expected to increase to 250 gigawatts, an increase of about 3% from a year ago. The ministry also asked factories to continue importing coal to make up for local supply shortages.
Shares of thermal power plant operators Adani Power and Reliance Power each rose at least 15% this week.
consumer goods
Consumption of soda, ice cream, and dairy products typically spikes during the summer. Indian companies, especially big players like Hindustan Unilever and ITC, are focusing on reviving demand in rural areas by offering smaller products at lower costs.
Varun Beverages, one of PepsiCo Inc.’s biggest bottlers in the world, is up more than 6% this week, bringing its gain this year to about 20%. Other notable stocks include dairy companies Hatsun Agro Products, Parag Milk Foods and ice cream maker Badilal Industries.
“Beverage companies are positive about summer demand,” said Geojit Financial Services’ Shah, adding that companies are looking to introduce new products targeting different consumer groups.
Analysts are also keeping an eye on Emami, which sells Navratna oil, which is popular for cooling massages.
weather risk
Aside from the potential market boost, the summer heat could strain domestic energy supplies and hurt wheat crops. Even before temperatures soared, the tech hub of Bengaluru was suffering from water shortages due to drought.
In 2022, several states suffered prolonged power outages as coal stocks dwindled and a heat wave increased energy demand. As water sources dry up, some companies, particularly those operating large plants, have been forced to shut down operations in recent years.
“Extreme weather conditions come with risks,” said Jigar Shah, chief executive officer of MIB Securities India. If predictions that the heatwave will last longer than usual come true, it will create serious problems for groundwater and the industries that depend on it. Their supply chain, he said.
–With assistance from Chiranjivi Chakraborty.
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