Excess AC inventory may be a blessing in disguise, says B Thiagarajan of Blue Star

Soaring temperatures were to drive demand for air-conditioners (AC) by 15% this year but that didn’t happen. The AC industry de-grew 18% thanks to the unpredictable weather conditions this summer. B Thiagarajan, joint managing director, Blue Star Ltd, in conversation with Ashish K Tiwari, speaks about the issues and challenges facing the industry, among other things.

How has the air-conditioner market performed this summer?

Despite the heat wave scenario in some parts of the country, markets in the South and East region witnessed continuous rains, as a result of which night temperature did not shoot up much. The market has de-grown. The West and North regions did well in the month of May. North region is doing well in June too. But overall, the market witnessed de-growth in April by around 18%, as per a Gfk report; we de-grew 13%. This summer may not be a very promising one.

There were reports about capacity building in anticipation of a very good business.

In fact, there was a news report about a possible shortage of raw materials to keep up with the potentially increased demand for air-conditioners this summer. We did not read much into it and continued with our planned growth of 15% to 20%. And now the market is going through de-growth. This situation happened five to six years ago as well but I don’t think it will be a de-growth scenario for the full year.

AC makers must be sitting on excess inventory then.

There will be excess inventory of around 6-7 lakh units. But AC makers won’t be worried much because the commodity prices and exchange rate have gone up. So that excess inventory may also be a blessing in disguise.

Will the stocks be largely with dealers or companies?

My estimate is that 50% of the stocks must be sitting with the companies and the balance with the dealers/distributors. In our case, dealers have around 30% of excess inventory and the balance is with us.

Will AC makers take to discounting for liquidating the excess inventory?

No. The prices were revised only in January where in they went up by 6%-odd. The prices were to go up again in the month of July. I have a feeling the decision will get extended to August keeping in mind the overall market condition. I don’t think AC makers will offer any discounts but further price increase will definitely get delayed.

Will the shutting down of Vedanta’s copper plant have any impact on the AC market?

Not really as the industry is not dependent on that copper. I don’t think consumer durable industry parse will be much worried. Wire and electric cable makers are the ones who will be impacted the most.

Is crude and exchange rate a matter of big concern?

It is a concern for sure but not to me personally. My sense is that this combination of commodity prices going up, oil prices on a record high and depreciating Indian rupee will not survive for long. Two of them will correct and we are seeing that happening with oil prices and this will be followed by commodity prices, and the exchange rate. In 39 years I have come across this situation of hopelessness where everything is going wrong. It never happens. There will be a period like that but something will quickly correct. We always feel that the Indian rupee will depreciate 5% every year and would end up at 68 by the year-end. That’s a trend. But what’s new is that the (depreciating/recovering) scenario is very volatile depending on the market situations and that’s where companies are losing money. The reason being they are unable to hedge and plan for the same, and that’s a big problem.

So there is cost pressure as of now?

There is some pressure. If you are in business you have to cope with market conditions. There is always some thing or the other that one will have to deal with.

On the policy side, what more needs to be done?

While ease of doing business is something that’s happening, we are being over-regulated by things like energy efficiency, refrigerant, non-tariff barriers, e-waste, etc. Regulations can grow with the market but it should not be one-sided wherein regulations are growing but the market is not in the same proportion. There needs to be a right balance. We are only asking the government to also help us grow the market. We want to be energy-efficient, environment-friendly and so on but all that should be compensated with market growth. For example, if inverter five-star AC consumption has to grow in the market, that product category has to come in the 12% goods and services tax (GST) bracket instead of 28%. That’s the only way industry/market will grow and businesses will become profitable. That’s how other countries have done it in the past so we are not saying anything new.

How is the market sentiment for consumer durable industry in a pre-election year?

I think people are least bothered. The corporate sector is worried with questions like what will happen, whether we should invest or not and so on. But slowly, they are also getting used to it because consumption will drive the growth story and that’s what everyone is really banking on. While there will be short-term hurdles, I am of the opinion that one should always look at the long-term story. There are enough checks and balances in the system and there are global conventions/compulsions related to trade that needs to be followed.