The air conditioners industry outperformed the air coolers industry in FY18, with demand shifting in favor of split ACs within the segment.
The summer of 2018 started on a weak note, completely defying the Indian Meteorological Department predictions. Consumer off-take has so far been weak, as evident in the performance in 4QFY18 of cooling products, both air conditioners and air coolers. The industry has seen several headwinds in the last financial year, led by GST transition and the change in energy efficiency ratings.
For the air conditioners industry FY18 was a year marked by disruptions by GST pre-buying (1QFY18), modest festive season due to GST pre-buying, rating change pre-buying (3QFY18), IMD forecast for a harsh summer in 2018, and pre-monsoon showers pan India that resulted in a weak summer.
The air coolers industry saw two bad quarters (Q1 and Q4) in FY18, primarily owing to an erratic summer. With the pre-monsoon showers and storm, March and April in the southern region were a complete washout. Mid-May onward, temperatures had started rising in the northern and western regions of India, on an average by 1°C. This was driven by an extended summer. Higher temperatures have resulted in a recovery in consumer off-take primarily for air conditioners, since air coolers require consistent heat.
What transpired in summer 2018 and the way forward
The air conditioners industry outperformed the air coolers industry in FY18. Amidst a challenging environment (demonetization, GST, energy rating change, and weak start to the summer) the air conditioners industry grew 11 percent in FY18. Leading players posted double-digit value growth during the year. However, the air coolers industry witnessed de-growth.
Industry production grew in high single digits. As per Bureau of Energy Efficiency (BEE), the production of air conditioners increased at a modest 7 percent in volume terms during FY18 to 6.9 million units versus 37 percent growth in FY17. Slower growth was attributed to GST disruption, change in ratings criteria (change in energy efficiency norms), and the high base of last year. In order to gauge the quality of data, the air conditioners industry production numbers with revenue growth of listed players were compared. Directionally the trend is prevalent in previous years (FY13-18). Interestingly, inverter air conditioners continued to gain share at a handsome pace (28 percent volume share in FY18 vs. 11 percent in FY17).
Summer 2018 was erratic. Cooling companies reported a weak 4QFY18 performance. To correlate their performance with the weather, temperature data of 110 days was collected (March 1–June 17) for the top 25 cities across India. Summer was only slightly weaker for pan India (–0.09°C y-o-y). North India (+0.22°C y-o-y) and west India (+0.27°C y-o-y) were hotter, while the southern (–1.08°C y-o-y) and eastern (–0.35°C y-o-y) regions witnessed a washout summer as compared to last year.
MNCs are bullish on the air conditioners industry in India. The leading MNC players reiterate that growing incomes will drive penetration, and the industry will sustain a 10 percent plus CAGR (in volume terms).
India is the second fastest growing room air conditioners’ market. In the top 10 room air conditioners markets across the world, Vietnam grew the fastest with 21 percent CAGR in a 10-year period, while India ranked second with an 11 percent CAGR. In terms of annual demand (units), India ranks fourth in the world. The country offers immense potential owing to low air conditioners penetration coupled with the second- highest number of households in the world. India can sustain more than 10 percent air conditioners volume CAGR driven by affordable financing options, growing disposable incomes, rising temperatures, affordable financing options, increasing up-country penetration of electricity, improving energy efficient products, low penetration (~5 percent), and an increasing number of households (~4.8 members/ household, which is the highest in the world).
Insights on summer 2018
Non-seasonal rainfall led to lower summer temperature, which resulted in weak sales of air conditioners from March to June, 2018.
Northern region. North witnessed an erratic summer with unseasonal showers and dust storm in March and April resulting in lower mercury levels. However, once unseasonal showers abated mercury levels started rising in late May resulting in a hotter summer. Key cities in the north witnessed a hot summer, that is, Delhi (+0.55°C y-o-y), Chandigarh (+0.06°C y-o-y), Indore (+0.92°C y-o-y), and Bhopal (+0.75°C y-o-y).
Western region. The West witnessed a consistent hot summer driven by harsh summer in cities like Ahmedabad (+0.37°C y-o-y), Rajkot (+0.75°C y-o-y), Jaipur (+0.90°C y-o-y), and Jodhpur (+0.51°C y-o-y).
Southern region. South on a y-o-y comparison witnessed a washout summer owing to unseasonal rain. South plays a critical part for 4Q performance for cooling products since the summer sets in March. March on a y-o-y basis was cooler which impacted performance for companies in 4QFY18. Cooler summer was witnessed across cities in the southern region like Bengaluru (–1.36°C y-o-y), Chennai (–0.85°C y-o-y), Madurai (–1.35°C y-o-y), Coimbatore (–1.08°C y-o-y), and Kochi (–0.75°C y-o-y).
Eastern region: East witnessed a cooler summer driven by a soft summer in Kolkata (–0.34°C y-o-y) and Ranchi (–1.75°C y-o-y).
Inverter air conditioners continued to gain share at an impressive pace (28 percent in FY18 vs. 11 percent in FY17).
Based on Sector Update: Consumer Durables Cooling Products – HDFC Securities Institutional Research