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We initiate coverage on the Indian Air Conditioner (AC) space, with BUY on both, Voltas – with TP of Rs1,600 (upside: 23%), and Blue Star (BLSTR) – with TP of Rs2,400 (upside: 19%). We believe the RAC category offers the best longterm/secular growth play, led by benign penetration levels (~14% vs ~208% in China; refer to China Case Study), improving affordability/falling TCOs, rising finance penetration, and improving power availability. Summer 2024 appears to have been a pivotal inflexion point, with demand continuing to surge in 2025 vs a broader slowdown across other consumer segments (RAC volume up ~30- 35% YoY vs ~7-10%/~3-6% for refrigerators/washing machines in FY25E). Contrary to fear of supply-chain constraints, our analysis suggests that industry players are well poised to handle an expected ~20-25% YoY rise in demand (Emkay: ~22% for Q4FY25E and ~16% CAGR over FY25E-27E) during Summer 2025 (refer to our Expert Roadshow note: Summer 2025 to be another record year). Moreover, unlike past episodes when few players engaged in price wars, the industry is now exhibiting a more cohesive approach toward price hikes (several players undertook hikes in Q3FY25; hikes also expected in Q1FY26, per dealer checks; refer to our note: Demand outlook robust with supply a potential irritant), mitigating any cost pressure which augurs well for overall profitability.

RAC – Perfect push-pull interplay to drive AC penetration in the longer run

India’s room AC penetration at ~14% now (vs China/global average of ~208/40-45%) represents a long growth runway. We highlight that ~2.7x improvement in the AC affordability quotient over the past decade (with variable/running costs down ~19% in the last decade, amid introduction of more energy-efficient models and upfront costs being largely stable, with incremental ~5% savings expected from CY26-28), rising financing penetration, and power availability (power deficit near-zero now vs over 10% till 2012) have made AC products more accessible. The 2024 summer season appears to have been an inflexion point, with industry volume up ~30-35% in FY25E, and with another over-20% growth expected in Q4FY25 (despite last year’s high base). AC demand has been strong and early across major cities, with Jan/Feb-25 RAC volume up ~35–40% YoY. Despite supply concerns, players appear well-prepared for a ~20-25% YoY demand surge (Emkay est: ~22% for Q4FY25E/~16% CAGR over FY25E-FY27E).

Industry profitability improving, with consolidation to play out in the long run

The RAC industry, with ~45 brands and a long tail of smaller players (top-5 players form ~60% of the market), remains highly fragmented. Even market leaders like VOLT continue to operate at a single-digit EBIT margin. Key players (like BLSTR, Daikin, LG, and now VOLT) are scaling up and insourcing production for crucial components like compressors, to enhance product differentiation and strengthen cost structures. While full-scale industry consolidation remains an optionality, its eventual play-out could mirror the trajectory seen in China—where early movers investing in component manufacturing gained a long-term competitive edge. Also, unlike past periods of price wars, the industry is exhibiting a cohesive pricing approach, thus balancing cost pressure/aiding profitability.

CAC, MEP – Sizable potential amid rising physical infra needs

The Indian Commercial AC (CAC) market, valued at ~Rs50-60bn, is seen logging CAGR of ~15% over FY25E-27E, amid i) rising requirement from data centers (a robust ~38% CAGR), and ii) growth in other physical infra segments like commercial buildings and airports. Moreover, increasing infrastructure investments/urbanization are also expected to be a growth driver; here, order book for players like BLSTR is witnessing a fall in share of longer gestation projects, thus leading to improving incremental RoCE. India’s Commercial Refrigeration market (~Rs40-45bn) is expected to see CAGR of ~15% due to higher demand from QSRs for products like visi-coolers and beverage displays.

We initiate coverage on the AC sector with BUY on VOLT (leadership position; attractive risk reward with an implied 1-year forward UCP P/sales at 2.9x, which is below its 10Y average of 3.5x); SoTP-based TP of Rs1,600, implying 43x FY27E PER (~23% upside). We also initiate coverage on BLSTR (a HVAC play; strong RAC contender); SoTP-based TP of Rs2,400; implied PER at 51x FY27E (19% upside).

Key risks: RAC demand seasonality, rise in competitive intensity, supply-chain disruptions during peak season sales.

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