Invest in stocks of firms who do good business in summers

The sun has begun to blaze. As the summer months set in and the mercury begins its incessant rise, it is a desperate search by many for the ideal cooling solution or the long trip to some cooler locale. The sought-after summer solutions lead to brisk business by companies in the consumer durable space selling cooling appliances and travel-related companies, perking up the stocks of the listed companies in these spaces. If you are an equity investor, and you are able to time it right, you can make a neat pile by investing in some summer-demand related seasonal stocks that normally register an uptrend between the months of May and October.

Market experts feel that both consumer durables and tours and travel business should do well this summer. With expectation of normal monsoon, the economy overall should grow at a healthy rate of 8-9% leading to significant increase in demand for products and services in these sectors. However, one needs to evaluate the fundamental story behind the specific stocks prior to making the investments.

Among consumer durables, stocks like Whirlpool, Bajaj Electricals, Videocon, Voltas and Blue Star, all of which sell cooling products such as coolers and ACs, are listed on the stock exchanges. Air-conditioning and cooler scrips have around 30% weightage for white goods in the BSE Consumer Durables index.

Generally, a durable good is one that does not wear out soon, or that yields utility over time rather than being completely consumed in one use. Consumer durables such as refrigerators and air conditioners usually continue to be useful for three or more years at least.

On the other hand, travel-related scrips like Cox and Kings, International Travel House, Thomas Cook, Trade-Wings and Transcorp International are available for investing.

WHAT'S IN IT FOR INVESTORS?

Since its inception in 1999, the BSE consumer durables index gained on seven occasions during the summer months till 2010 (see table on the performance of the BSE CD index).

During May-October 2010, the BSE Consumer Durables index surged 1,860 points, or 40%, to 6,544.48 against 45.59% to 6,239.69 during the financial year 2010-11. The index gained 1,516 points, or 83%, to 3,348.21 during May-October 2009 against a full year growth of 153% to 4,220.71 during the financial year 2009-10.

"Season-related products particularly air-conditioners, refrigerators, fans and coolers are in high demand during the summer months for obvious reasons. With increased prosperity in semi-urban and rural areas, coupled with generally increasing income and aspiration levels, consumer durables stocks are expected to perform well on the back of increased demand during the summer months, says Sudip Bandyopadhyay, managing director and chief executive officer, Destimoney Securities. He feels that these stocks could get a boost towards the end of the summer season due festival-season demand.

According to a McKinsey Global Institute (MGI) study titled 'Bird of Gold': The Rise of India's Consumer Market, the total consumption in India is likely to quadruple making India the fifth largest consumer market by 2025. Urban India will account for nearly 68% of consumption growth while rural consumption will grow by 32% by 2025.

"On an average the country has witnessed decent hikes in salary across various sectors such as IT and Pharmaceuticals etc. This can lead to a rise in purchasing power of consumers which can help consumer durables segment to remain firm," says Vikrant Kashyap, research head-equity, Delhi-based research house Stop Loss.

During May-October 2010, air conditioner and air-cooler majors, Whirlpool soared 62.12% to Rs 300.25 followed by Voltas (37.95% to Rs 245.20), Bajaj Electricals (20% to Rs 271), Blue Star (10% to Rs 454.10) and Videocon Industries (Rs 9% to Rs 253.15).

However, due to the global financial crisis in the year 2008, all consumer durables majors failed to perform. For example, Whirlpool dipped 24% from Rs 48.45 to Rs 36.80 and Videocon Industries dipped as high as 68.42% from Rs 378.08 to Rs 119.41 during May-October 2008. On April 28, 2011, Whirlpool and Videocon Industries were trading at Rs 281.15 and Rs 189.80, respectively. Demand for summer related products are seasonal or cyclical.

Alex Mathews, head of research at Geojit BNP Paribas Financial Services says, "Different strategies should be adopted while investing in cyclical stocks and most of the cyclical stocks' performances are positively correlated with the economy hence during a crisis period they dip heavily."

Behind the success of seasonal products, Rajesh Jain, executive vice-president and head of retail research, Religare Securities says, "Seasonal factors influence the consumer durables goods segment."

"For a short-term investment, Voltas and Bajaj Electricals can be good picks," says Jain. Demand for consumer-related goods has remained buoyant as evident from the use-based break-up of the index of industrial production (IIP). The pace of growth of consumer durables and intermediate goods in the IIP remained steady in February 2011 at 23.4% (23.3% in January 2011) and 8.4% (8.3% in January 2011), respectively. The growth of basic goods and consumer non-durables eased somewhat in February 2011 to 5.9% (from 7.6% in January 2011) and 6.1% (from 7.7% in January 2011).

Anand Kuchelam, vice president for research, Padmakshi Financial Services says, "The sales for products such as air-conditioners, refrigerators and coolers can grow multifold during the summer season." Market experts believe that before investing in consumer durables goods investors should look into distribution strength and spread with particular focus on reach in semi-urban and rural areas, market positioning of the products (leadership or otherwise) and track record and credibility of management. Also, don't forget to measure the relative valuation of the company in the context of similar other stocks.

ANOTHER DESTINATION

Other than consumer durables, during summer months many start surfing tour and travel websites or approach the offices of travel agents to plan their trips which can benefit these companies too. For tour and travel companies, the summer months are the peak business season as it coincides with school holidays when families undertake leisure travel.

Anil Khandelwal, chief financial officer, Cox and Kings says, "The summer months are the peak holiday season, beginning in April and stretching to July in some markets in North India. These months account for nearly 65% of the holiday bookings of the entire financial year."

Anuj Razdan, manager, Flight Centre India, an arm of Australia's largest travel company Flight Centre, says, "We generally experience an upsurge of business to the tune of 40-50% during the April-June quarter over the previous quarter. Domestic travel has also been increasing. If we look at the industry trends, domestic travel is increasing at about 20% annually. Domestic travel contributes in tune of about 40% to our total travel business."

"Towards the end of the summer season, festivals stimulate incremental demand for consumer durables." Sudip Bandyopadhyay MD & CEO, Destimoney Securities "Stocks in the travel and tourism space are likely to do well due to increase in domestic tourism." Anand Kuchelam VP-Research, Padmakshi Financial Services

The increased business prospects also result in a buoyant outlook for the stocks. During May-October 2010, stock prices of travel companies such as International Travel House surged 61% to Rs 279.20 followed by Transcorp International (25.33% to Rs 72), Cox and Kings (14.61% to Rs 564.75).

However, Mega Corporation registered modest gains of 1.74% to Rs 1.17, while stocks of Thomas Cook and Trade-Wings failed to perform like their peers. Thomas Cook and Trade-Wings declined 1.41% and 32% to Rs 66.65 and Rs 131.35, respectively. Stocks such as International Travel House, Mega Corporation and Thomas Cook had also shown strength during May-October 2009 with a jump of 50%, 146% and 29.67% to Rs 110.95, Rs 1.92 and Rs 54.40, respectively.

"Tours and travel companies do significant amount of incremental business during the season. While the frontline companies in this segment may be fully valued, investment in stocks such as Transcorp International at current levels is looking attractive," Sudip Bandyopadhyay of Destimoney Securities added.

During quarter-ended June 2010, Cox and Kings registered net sales of Rs 78.64 crore, up 71%, against Rs 46.02 crore in the March quarter of the same financial year. Other tour and travel companies Thomas Cook, Trade-Wings and International Travel House booked top-line figures of Rs 80.55 crore (up 60.49%), 3.60 crore (up 24.14%) and Rs 32.98 crore (up 0.33%) respectively against the quarter ended March 2010.

Anand Kuchelam of Padmakshi Financial Services says, "Stocks in the travel and tourism space are likely to do well due to increase in domestic tourism. Among the top picks in the space, Thomas Cook and Cox and Kings are likely to outperform." So, if you are chalking out your plans for the summer months, investing in some of these stocks might get you back some money that you would be spending either to protect yourself from the heat or to enjoy a break from the sun.