Companies such as Voltas and Blue Star have seen their overall inventory levels come down in the December quarter
After witnessing a 4% degrowth in the nine months of fiscal 2019, the air-conditioning (AC) industry is expecting a normal business season this summer as inventory with distribution channels and manufacturers have reached normal levels. In fact, AC market leader Voltas, which enjoys 24% market share, has already signalled that inventory levels have come down from 75 days in the September 2018 quarter to 60 days in December 2018 quarter.
“With higher inventory in the channel as well as with manufacturers, the pressure on prices and thus on margins continued to be high. Increasing costs and depreciated rupee added to the industry's troubles. However, we are coming off from a very high base of the previous year, with the same quarter last year recording sales growth of 32% due to pre-buying on likely changes in energy efficiency norms for split ACs. All of this has led to the industry de-growth,” said a company executive during an earnings call last Friday.
The current inventory scenario is positive for the overall AC industry that witnessed degrowth due to numerous challenges including erratic weather conditions, excess production, weak summer sales and sluggish festive season. Adding to the high channel inventory challenges was higher competitive intensity from multinational companies like LG and Daikin. In fact, production volumes for the nine months of this fiscal also remained muted owing to bloated channel inventory.
Speaking to DNA Money, B Thiagarajan, joint managing director, Blue Star Ltd, said that the overall inventory situation in the market has normalised compared to excess inventory scenario last summer. “As far as Blue Star is concerned, we do not have any excess inventory situation in the market as well as in the company. While weather conditions continue to be erratic, we are hoping for a normal business season this summer,” said Thiagarajan, adding that AC sales should start gaining momentum from mid-March while reaching its peak in June.
According to Sandeep Tulsiyan, research analyst, J M Financial, Blue Star's room air conditioner (RAC) inventory at the company level has come down in the third quarter and the management expects the fourth quarter to be better and report 8-10% growth in FY19.
"We believe an industry-wide correction in RAC inventory is likely to pave the way for price hikes in FY20, coupled with healthy volume growth and a favourable sales mix on the rising share of inverter ACs," said Tulsiyan in a company note on Blue Star.
The AC industry typically witnesses strong sales in the first and the fourth quarter while the second and third quarter are considered lean months for business. According to Nirmal Bang Institutional Equities, the nine months of the current fiscal was a difficult period for the AC industry as weak summer season (unseasonal rains and floods) impacted sales.
“This apart, the rise in input costs, rupee depreciation, hike in customs duty and intense competition to clear out inventory affected margins. Lower sales in the summer season led to higher unsold inventory with Voltas having an inventory of over two months, leading to a rise in capital employed to Rs 770 crore in 3QFY19 versus Rs 260 crore year on year, although it was down 9% quarter on quarter,” Nirmal Bang research analyst Chirag Muchhala said in a company note.
At around 5 million units, India is the second-fastest room air conditioners (RAC) market in the world among large economies. While the split AC segment accounts for 83% of the market, window AC forms 15% and multi split is 2%. However, India has the lowest AC penetration among the top 10 RAC markets.
“We believe India can sustain over 10% AC volume compounded annual growth rate (CAGR) driven by cheaper financing options, growing disposable incomes, rising temperatures and increasing number of households – around 4.8 members per household, which is the highest in the world,” said Naveen Trivedi and Siddhant Chhabria, research analysts at HDFC Securities in their company note on Voltas.
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- 5 million units – India’s room air conditioner market
- 83% – market share of split ACs
- 15% – accounts for window ACs
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