Predictions of scorching heat across India are giving fresh fodder to traders as they hunt for stocks that can outperform in an overvalued market.

Shares of air cooler makers and power generators rallied this week after the nation’s weather agency warned of hotter-than-usual temperature through the end of June. The sectoral advance comes amid concerns that the broader equity indexes lack momentum following a record-breaking rally.

The coming months will also see hundreds of millions of voters attend campaign rallies and head to the polls in a parliamentary election that lasts for weeks starting mid-April. Such increased activity will likely amplify the impact of extreme weather and boost demand for products to tackle heat.

While several sectors may benefit, the heat wave’s overall market impact is more complex. Risks of water shortage and crop damage may keep food prices elevated, potentially pushing back the timing for the Reserve Bank of India’s rate cut. A spike in energy demand could exacerbate power shortages in some regions.

Also read: What heat waves spell for India: Impact on RBI, biz, food & GDP

Air Cooling

Shares of companies that make air conditioners, coolers and fans were quick to respond to the weather warning. An equal-weighted cohort of eight firms that make air cooling products jumped more than 8% this week.

“Demand for consumer durables and white goods appliances is expected to go up, not only from metro cities but semi-urban, rural India,” said Gaurang Shah, a strategist at Geojit Financial Services Ltd.

In comparison, the benchmark NSE Nifty 50 Index advanced less than 1% in the last five sessions. The gauge is trading at a multiple of around 20 times its 12-month forward earnings estimate, versus the MSCI Asia Pacific Index’s reading of a little over 14, and higher than its own five-year average of 19.2 times.

Stocks to watch include Voltas Ltd., Blue Star Ltd., Havells India Ltd., Johnson Controls-Hitachi Air Conditioning India Ltd. and fan maker Crompton Greaves Consumer Electricals Ltd.

“We continue to remain positive on air conditioners,” said Nikhat Koor, an analyst with Dolat Capital Market. She cited low penetration, rise in residential and commercial projects and consumer finance options as reasons to see an increase in demand. Dealers expect 15% to 20% growth in sales during the peak months through May, she wrote in a note last month.

Energy Companies

India’s weather department expects heat waves to last 10 to 20 days in different areas during the three-month summer, longer than the usual four to eight days. The country often sees the mercury cross 45C (113F) in some parts during the season.

Maximum power demand is projected to rise to 250 gigawatts during the period, an increase of almost 3% from a year earlier, the power ministry said. The ministry also asked plants to continue importing coal to make up for any shortfall in local supplies.

Shares of Adani Power Ltd. and Reliance Power Ltd., operators of thermal power plants, posted gains of at least 15% each this week.

Consumer Goods

Consumption of soda, ice creams and dairy products typically jumps sharply during the summer. Companies in India, especially the larger players such as Hindustan Unilever Ltd. and ITC Ltd., have been focusing on demand revival in rural areas by offering smaller-sized products at lower costs.

Varun Beverages Ltd., one of the world’s largest bottlers for PepsiCo Inc., climbed more than 6% this week, taking gains this year to about 20%. Other stocks of interest include dairy firms Hatsun Agro Product Ltd., Parag Milk Foods Ltd., ice-cream maker Vadilal Industries Ltd.

“Beverages companies are upbeat about the summer demand,” said Shah at Geojit Financial Services, adding that companies are looking to introduce new products targeting different consumer groups.

Analysts are also watching Emami Ltd., which sells Navratna oil, popular for cooling massages.

Weather Risks

Potential market boosts aside, hotter summer can strain the country’s energy supplies and hit wheat crops. Even before temperatures shot up, the tech hub of Bengaluru has struggled with water shortages amid a drought.

In 2022, several states suffered prolonged blackouts as heat waves boosted energy demand at a time of dwindling coal stockpiles. As sources of water dry up, some companies, especially operators of huge plants, have had to suspend operations in previous years.

“There is risk associated with extreme climate events,” said Jigar Shah, chief executive officer of MIB Securities India. If the prediction that heat waves will last longer than usual comes true, it will have serious problems for industries that are dependent on groundwater and their supply chains, he said.