The air conditioners industry has witnessed several headwinds during FY19, led by GST transition and the change in energy efficiency ratings.
Urbanization, rising temperatures, and more frequent heat waves due to climate change are intensifying cooling demand across the globe. Paired with increasing electricity access and the growing middle class, especially in rapidly developing nations like India, these factors are driving the use of air conditioners. The Indian economy is currently witnessing an upswing due to increased economic activities and the enhanced purchasing power has moved air conditioning products from the earlier luxury category to being an essential item today. After some overall sluggishness in the Indian economy over the past several years, the Indian air conditioning market is expected to grow by 9 percent in 2018. By 2020, the market is expected to exceed a value of over Rs. 42,210 crore (USD 6.3 billion).
Climate change is playing its part in increasing the demand. The use of ACs will increase by 3x by the year 2030. According to the World Economic Forum, India is now the world’s fastest growing economy. Its population is expected to exceed China’s by 2022. More significantly, India’s middle class doubled in size from 300 million in 2004 to 600 million in 2012. The direct expansion of the AC market has seen the biggest gains in India due to lower installation costs, flexible space, and ventilation requirements. Increased energy efficiency is also a strong driver. Inverter ACs with cost saving advantages are likely to grow at the highest CAGR followed by split ACs. Window ACs, on the other hand, are no longer products of high focus with market size falling to 2 percent by 2022.
Challenges amid growth opportunities
The AC industry has witnessed several headwinds during FY19, led by GST transition and the change in energy efficiency ratings. Additionally, the summer of the current financial year started on a weak note, despite the Indian Meteorological Department (IMD) predicting a harsh summer. As a result, the ACs players increased their production to make the most of it. However, several regions in India witnessed unseasonal showers, subduing the demand for air conditioners.
Inventory in channel high post weak Q1 FY19 sales. Lower than expected industry sales in Q1 FY19 post unseasonal rainfall across north, south, and east India has resulted in high inventory (1-2 months) across players. This may take up to one quarter to clear out; in turn, this will remain an overhang on production and pricing, as players resort to price cuts and discounts to liquidate excess inventory.
Expect mid-to-high single-digit growth for AC industry. April and May were hit by unseasonal rains across the country. With secondary sales witnessing a dip in both these months, primary sales too were cut. While June was better than the previous 2 months, it has not been enough to offset the decline seen in the previous 2 months. As against the earlier expectations of double-digit growth in FY19, a mid-to-high single-digit growth is more likely, with growth reverting to 12–15 percent CAGR from FY20.
Inverter share at 40 percent of total industry sales; to rise to ~60 percent in FY19. There has been a sharper than expected transition from fixed speed to inverter ACs over the past 2 years, with inverter ACs now at 40 percent of industry sales. Adoption has been faster in the metros, where power quality is better than tier-II and tier-III cities. Three key factors are driving the shift to inverters: merger of energy ratings for fixed and inverter compressors from January 2018; fall in price differential between fixed and inverter ACs; and AC manufacturers’ push to inverter models by offering 10-year compressor warranty and comprehensive 5-year warranty. The share of inverters is expected to rise to 60 percent in FY20, and the introduction of new energy ratings in January 2020 would take it even higher in FY21.
Price cuts offset by higher volumes, lower compressor, and PCB prices. To promote inverter ACs, most players have resorted to price cuts to make their models more competitive and reduce the price gap with fixed speed ACs – on an average inverter models have seen price cuts of 8–10 percent over the last year. The reduction in prices has been largely offset by: lower sourcing costs on higher volumes – inverter volumes grew to 40 percent of industry sales from 12 to 15 percent last year; cut in compressor prices by one of the largest Chinese supplier to Indian manufacturers; and lower PCB prices.
Despite the weak FY19 summer, the ACs market is indicating to be optimistic because the country is growing; it is yet to be built. New buildings are coming, and they are going green. And there is a lot of green entering India right now. In China, in the last 10 years, the AC industry has already grown. But in the next 10 years the same growth spurt happening in India will be seen. There has been a rise in middle-class families along with a rise in income. So they are shifting to air conditioning. Now what is happening is that they are looking out for the window or split ACs. Now the trend is that they are going with the most efficient air conditioning system. Prices are expected to come down. It is not the initial price that is hitting the market now. It is the running cost. People are getting aware that buying an air conditioner is not an issue. Running it is an issue because power cost is going up, and so a lot of efficiency-related features are coming into play. Middle-class families have been taught the differences in 3-star, 4-star, and 5-star ACs and they make choices based on how often they need to run the systems.
The scope of growth is enticing major brands to focus on the Indian market. The government of the day is actually proactive; there are more proactive schemes that are coming in for development and for building new infrastructure, and they are inviting people from all over the globe to set up industries in India. So global players coming in and setting up factories here can be seen to not only to cater to the current local population but also make it a manufacturing hub to the world. So they make it at a cost-effective price at the same international quality, and products are sold across the globe. Hence, the ACs industry will sustain its secular long-term growth.
Based on Consumer Durables: Sector Update – Room Air Conditioners – A Motilal Oswal report