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Air Conditioners

A Mixed 1HFY20

A close look at sales figures of 1HFY20 versus 1HFY19 reveals interesting trends with the underlying fact that summer of 2019 was favorable for cooling products.

The CE, HA, and AC sector has more or less staved off the kind of acute slowdown beleaguering many consumption-linked sectors, with air conditioners, refrigerators, and washing machines proving to be sweet spots, clocking a double-digit growth. The flat sales in TVs were witnessed owing to the shift of discretionary spending from TVs to ACs due to the hot summer, as well as the growing preference for mobile phones over TV as the primary media consumption. Even the Cricket World Cup did not boost the demand for TV sales. Summer 2019 has been favorable for cooling products. Unlike last year, which had unseasonal rains in pockets of the country during the peak summer season of April–June, this year has seen one of the harshest summers and hence suction of AC has been good.

Televisions. While overall television sales remained flat in the first half of the financial year, 1Q was better than 2Q. Online sales in the period April to September 2019 (1HFY20) versus April to September 2018 (1HFY19) may have gained by 8–10 percent, taking share from offline, by volume. By value, the segment declined by about 7–8 percent.

The consumer displayed a distinct shift in buying habits. The offline channel continued to face challenges. Even as the offline channel players tried to match their offers in line with the online players, they fell short of the attractive deals that a consumer could grab in the online space and were still dealing with leftover inventory from previous quarters. Consumer inquiries and footfalls were relatively slow at the retail counters compared to the previous years.

Online brands saw traction. The value segment, the entry level sets available at extremely competitive prices, particularly on Amazon and Flipkart, saw an 8–10 percent growth over the same period last year, 1HFY20 over 1HFY19.

Tier-II and Tier-III cities are now major contributors, with 24-inch gradually making way for the 32-inch models. With increasing internet penetration in these cities, modern retail is also gaining foothold. The expansion of these stores, especially Reliance Digital, is hurting the traditional dealer network in the smaller towns.

Price erosion was seen over the entire distribution spectrum, offline, online, and modern retail. Displaying a preference for larger sets, the consumer was able to get larger screens at 15 percent or so lower price points, thus diluting the value impact of the shift in favor of larger screens for the industry.

Refrigerators and washing machines. These segments saw a 7-8 percent growth in 1HFY20 compared to the same period last year, by volume, with upgrades tilting in favor of high-capacity, fully automatic washing machines and the frost-free, 330-liter-and-above segment for refrigerators. The discerning customer is opting for side-by-side and bottom-mounted models, resulting in a 25 percent increase in value in this segment for many brands, albeit the base is small. While refrigerators are not yet popular on e-commerce sites, modern retail is giving stiff competition to the brick-and-mortar stores for this product.

Air conditioners. With a strong heatwave starting in March 2019, the AC makers were bullish in the two quarters, April to September 2019, indicating a 15–20 percent growth for most brands. Sales grew, driven by premium inverter air-conditioners.

Some planned investments.

  • A global design and development center is expected to be set up in India by Johnson Controls-Hitachi Air Conditioning India with an expected investment of Rs 1.40 crore.
  • Blue Star is aiming to double its capacity to one million units per annum by 2022. This increase in capacity will happen post the commissioning of the proposed plant in Andhra Pradesh. The company is targeting to start work on the Rs 1.8 crore plant in Andhra Pradesh by 2021.
  • Livpure is set to venture into the air conditioners market in India. The company plans to launch a range of smart air conditioners with air-purification functions in FY20.
  • Daikin India is in the final stages of commissioning its third manufacturing facility in South India.
  • Unilever-owned company, Blueair, aims to expand in the Indian indoor air-purification market by utilizing the distribution and sales strength of Hindustan Unilever (HUL).
  • Blue Star plans to commission its greenfield plant in Sri City, Andhra Pradesh, by FY22. The company aims to commence construction of the plant by FY21. The installed capacity of the unit is expected to be 500,000 units per annum.

Post 1H, October 2019 onwards
The festive season did not disappoint. Diwali brought the much-needed sparkle to companies and retailers. The crucial Dhanteras to Bhai Dooj period saw sales grow 6–8 percent over the last year, led by metro markets and large-format stores. The growth for premium products has been impressive. For TVs, there was a good surge in demand for large-screen sets, that is, 43-inch and above. In washing machines, there has been a very good sale-out for high capacity machines of 7-, 8-, 9-kg and above, both in front- and top-loading segments. Similarly, in refrigerators, there is a good traction for 330 liter and above. A strong product portfolio backed by good offers for consumers and attractive consumer financing options are key drivers.

Starting September, demand for white goods improved after the government made certain announcements in the area of credit and direct taxes. By the time the festive season began, banks were lining up with cashbacks and EMI schemes, while brands reconciled to lower prices and retailers primed to make good the previous months’ lost opportunity.

The smartphones market shipped a record 46.6 million units in the third quarter of 2019, with 26.5 percent QoQ and 9.3 percent YoY growth. With increasing awareness on air pollution, the fairly small, residential air-purifier base in India is poised for a double-digit growth this year. Demand is more or less restricted to North India, due to higher pollution levels there. Pegged at about Rs 312 crore, it is expected to grow to about Rs 900 crore by 2023.

Rural demand, which lagged due to lower incomes during harvest time in some regions, may receive some impetus with the government planning to invest significantly in rural electrification. The previously underserved regions in India have come into coverage now with government initiatives toward urbanization and transmission network augmentation along with electric supply channels.

Furthermore, when it comes to TV, the digital disruption of the television industry is at its peak. Streaming video is changing every existing relationship in the TV value chain, redefining the role of TV from the traditional ecosystem. Also, with growing awareness, easier access to credit and lower interest rates, improving standard of living and changing lifestyles, higher disposable incomes in the hand of rural population on back of possible higher MSPs for crops, and normal monsoon during FY20, the consumption is expected to register a growth going forward.

Despite stellar sales by e-commerce majors, the footfall in malls continues to increase. Historically, growth in consumer durables has closely related with the growth in GDP. Going forward, whether the country’s GDP improves from 6.8 percent in FY19, thus propelling the CE, HA, and AC market to growth on back of improvement in domestic consumption or falls in line with RBI, IMF, and Moody’s expectations, which forced the rating company to downgrade India’s rating from stable to negative, will determine the fate of this industry. We would like to go with the optimists, DSP Merrill Lynch and Mobius Capital Partners!

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