Carrier Aircon: Hold

Anup Menon

At around Rs 98, the stock of Carrier Aircon trades at a PEM of around eight times.

It was ruling firm at these levels in the recent past. The company's financial performance is not very heartening, though there has been positive growth in some of the key parameters. On the other hand, competition is high and the company has been able to withstand the pressure. The increasing focus on quality and the streamlining of operations, should help the company keep its revenue stream stable.

Earnings performance: The company's earnings performance for the first half of fiscal 2000-2001 was fairly good. Sales revenues rose 22 per cent to Rs 251.3 crore compared to the corresponding previous period. In the same time-frame, operating margins remained stable at around 9 per cent. Post-tax earnings fell by 3 per cent to Rs 14.11 crore.

The company's performance for the third quarter will be critical as, normally, this is the lean period for the air-conditioner industry. The question is whether the company will be able to better its full-year performance compared to the previous year.

Business profile: Carrier Aircon is one among the largest players in the domestic air-conditioners business. It has a collaboration with Carrier Corporation, US, which gives it access to latest technologies and a wide product base in the industry. The capacity utilisations levels have been consistently high.

Prospects: The near-term prospects for the company seem stable, if not very bright. Air-conditioners are treated as luxury products. This has had a deep impact on the tax treatment of the products, leading to an overall increase in the total cost. Since this cost is passed on to the consumer, the cost for the end-user would be fairly high. Therefore, the demand for the product depends on the buyers' ability to allocate their resources for this purpose.

Under such conditions, a downturn in the economy is not likely to be favourable for AC manufacturers as it will not get priority in the spending budgets. This apart, the high level of competition in the industry puts pressure on performance. Carrier has shown in the past that it has the determination to face up to competition. However, the key question is: What will be the impact of this on margins?

If the earnings come under pressure on account of a fall in margins, the stock price may come under pressure. Fresh exposures can be avoided at this point in time. Shareholders can stay invested and watch closely the company's third-quarter performance and wait for improvement in valuation levels.