Commercial Vehicle Stocks Face a Small Threat. But these 4 Stocks Stand to Benefit from Government's AC Mandate

Within the automobile segment, the demand for commercial vehicles (CVs) is slowly picking up.

For instance, in November 2023, overall sales reached 66,507 units, showing a 2% year-on-year increase. On a month on month basis, the CV segment saw an impressive 18% jump.

Recently, the ministry of road transport and highways came up with a new mandate which may benefit some players but can also be detrimental for a few.

Let's understand what the mandate is about.

Mandatory ACs in Trucks!

You see, long hours on the road can be extremely tiring for truck drivers, specifically during extreme weather conditions.

Keeping this in mind, the ministry of road transport and highways has issued a new mandate to solve this problem faced by truck drivers.

The mandate states that all the trucks that are manufactured on or after 1 October 2025 must have air conditioned cabins for drivers. This will enhance working conditions and ensure safety of truck drivers.

The key question on investors' minds is which players might benefit from this move and who will be on the losing end...

Let's find out.

Top Stocks to Benefit from Government's Mandate for ACs in Trucks

#1 Amber Enterprises

Amber Enterprises stands to benefit from this new mandate as the company is a market leader in manufacturing commercial air conditioners and is an original equipment manufacturer for several companies.

What sets the company apart is its unique product portfolio which includes setting up heating, ventilation and air conditioning systems (HAVC), driver cab AC and more for buses, railways, and metros.

So, in the long haul, the company might benefit from this new mandate of setting up air-conditioned cabins in trucks as there are very few names catering to this segment.

The company's stock price is currently very close to its 52 week high.

In the recent September 2023 quarter, the company reported strong numbers with revenue rising 23% to Rs 9.3 billion (bn) compared to the same quarter last year.

Earnings before interest, tax, depreciation and amortisation (EBITDA) increased 25% in the quarter under review, driven by a change in product mix.

Recently, the company was also in news because its subsidiary company, Sidwal Refrigeration, manufactured HVAC systems for Namo Bharat trains.

#2 Subros

The second company to benefit from this move is Subros, a leading auto ancillary company.

It manufactures and supplies auto air conditioning products for all major automakers in the passenger vehicle and commercial vehicle segment.

Moreover, it has a market share of 42% in the passenger car air conditioner segment and 51% in truck aircon and blower segment.

From the commercial vehicle segment, the company offers refrigeration trucks to big names in the industry like Tata Motors, Maruti Suzuki and Ashok Layland.

Subroc share price rallied 14% in a single trading session on Monday, 11 December 2023 after an update on the government's mandate.

In the recent quarterly results, the company's revenue grew 17% to Rs 8.1 bn which is the highest ever quarterly revenue recorded by the company. This growth was driven by higher sales volume and softening material cost.

EBITDA increased by 66% in the recent quarter and profit after tax soared 183% YoY.

The company's management remains optimistic for the future.

The CEO mentioned that he anticipates the AC fitment ratio (number of trucks with ACs) to go up 100% once the regulation on truck cabin AC comes into implementation. Currently, the ratio stands at 23%.

#3 SRF

Traditionally we have known air conditioners to be harmful for the environment. But this has changed with ozone friendly refrigerants coming into play.

SRF claims to be the only Indian manufacturer of ozone-friendly refrigerant. The company offers a wide range of refrigerants suitable for different needs of HVAC applications.

Under the recent mandate, truck cabins might have to make use of ozone friendly gases.

SRF is among the very few fully backward-integrated players in this space. Hence, they can have a greater control on their product quality.

The company reported weak September 2023 quarterly numbers. The net profit of the company declined 37% to Rs 3 bn from Rs 4.8 bn during the same period last year.

The operating performance (EBITDA) was also weak. However, the company approved a capex plan of Rs 2.3 bn to set up a new facility.

The management attributed the poor performance to the after effects of destocking and inventory rationalisation phenomenon in their business.

#4 Navin Fluorine

The next company which could benefit from this move is Navin Fluorine which is engaged in a similar business as SRF.

The company produces speciality fluorochemicals which is a type of gas which leads to zero ozone layer depletion.

The company has been in this sector for over 40 years.

So, at the time of implementation of this new mandate, the companies manufacturing ozone friendly gases may experience an inflow of orders.

In the September 2023 quarter, the company reported a 12.5% increase in sales while profit surged 4.8% YoY.

Companies Which May Feel the Heat from this Mandate

On the flip side, after implementation of this regulation, all companies who are into manufacturing commercial vehicles will have to face higher production costs.

This will in turn put pressure on the end customer as the company would pass on the cost to its customers.

Back in June 2023 when this new mandate was under discussion, the CEO of Eicher Motors mentioned an estimate that truck prices could go up by Rs 30,000 to Rs 50,000 after implementation of this mandate.

Moreover, several companies like Tata Motors, Dalmer Trucks and BharatBenz are already offering an AC cabin version of trucks to their customers.

For CV manufacturers, this will be a one-time cost that they'll have to bear from now on so that might affect margins, at least for the near term.

In Conclusion

The mandated introduction of air-conditioned cabins for trucks by October 2025 presents both opportunities and challenges.

Companies specialising in air conditioning solutions stand to gain, while commercial vehicle manufacturers may grapple with increased production costs.

While investing in the automobile sector, do note that the industry may always encounter such difficulties, including increasing fuel costs, shifting customer tastes, and escalating international rivalry.

On the flip side, India aims to become a global leader in shared mobility, emphasising electric and driverless vehicles as a means of cutting emissions.

The sector is expanding in response to the rising demand for automobiles, particularly in India given the growing middle-class income and the young population of India.

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