Heatwave has turned ACs from a luxury to a necessity – but margins remain muted for the players

  • According to a report by BNP Paribas, 8% Indian households had an AC in fiscal year 2020.
  • The cost of ACs and the energy they consume is the main reason ACs are considered luxuries.
  • Increased commodity inflation and intense competition have limited the AC companies’ ability to increase their margins.

Air conditioner sales have still not reached its full potential as it is still a luxury item for most Indian households. While several major brands such as Voltas, LG, Daikin, Hitachi, Blue Star and Lloyd have sold ACs over the past five to seven decades, they have still not been able to achieve higher margins in this emerging segment.

However, this year could be a good year. Demand for air conditioners is expected to increase due to scorching heat in various parts of India, according to a report by international financial services firm BNP Paribas. The mercury has passed 45 degrees Celsius in several places and reached 49 degrees in Delhi, so people are rushing to buy air conditioners to keep themselves cool.

“We estimate the market size of the Indian AC industry at ₹180 billion (₹18,000 crore) with a potential CAGR [compound annual growth rate] of 15% over FY21-25,” the report said.

BNP Paribas noted that 8% of Indian households had an air conditioner in 2020, with 7 million units sold in the same year. This is quite low compared to the fact that four in ten — or 42% — households around the world have an air conditioner.

BI India

The cost of ACs and the energy they consume is the main reason ACs are considered a luxury item – making it unaffordable for many Indian households. The rise in raw material prices is hurting manufacturers even more.

High Competition Limits ACs Companies in India

Covid-19, the ensuing lockdown and the ensuing conflict between Russia and Ukraine have had a major impact on commodity prices. Even a bag of detergent now costs 20% more than last year, but FMCG companies have the opportunity to increase the price of their products and pass them on to customers.

Heatwave has turned ACs from a luxury to a necessity - but margins remain muted for the players
BI India

However, the same price increase was not possible in the white goods space such as air conditioners, refrigerators or washing machines, as they are already expensive compared to other fans or coolers, and the competition in the industry is extremely high.

In addition, the Indian white goods industry is highly competitive given the presence of large multinationals such as Samsung, LG, Whirlpool, Haier, Daikin, Hitachi, etc., as well as strong Indian brands such as Voltas, Lloyd (Havells brand), Blue Star, IFB to just to name a few. Such high competition intensity also limits the ability to raise prices,” said BNP Paribas in its latest report.

Change in gross margins (bps) FY2018 FY2019 FY2020 FY2021
blue star (361) (62) 13 (177)
Volta (110) (255) 133 (129)
whirlpool (344) (46) 161 (255)
Johnson Controls-Hitachi Air (10) (70) 83 94
IFB Industries 178 (247) 187 74

Source: BNP Paribas, Corporate Data
Note: BPS stands for Base Points, a unit of measure to describe the percentage change in value.

The top six white goods companies are Voltas, LG, Daikin, Hitachi, Blue Star and Lloyd, which cumulatively held 70-75% of the market share by volume in fiscal year 2020.

“Over the long term, we expect the market to consolidate in favor of the top 4-5 companies,” noted BNP Paribas, citing the Production Linked Incentive Scheme (PLI) as one of the main reasons for this expected consolidation.

High price isn’t the only thing dampening demand

The industrial size of air conditioners in India is almost double that of fans, which has left a mark on 80% of households in India, yet margins remain low on this white product. One of the main reasons is that AC is a seasonal item and has higher inventory costs due to the volume of the product.

Heatwave has turned ACs from a luxury to a necessity - but margins remain muted for the players
BI India

Second, since 2016, the market has been affected by distortions such as demonetization and the introduction of Goods and Services Tax (GST). The Covid-19 wave, which forced people to stay at home for almost two years, also hampered demand.

ALSO SEE
ITC, Aditya Birla Fashion, LIC Housing Finance are among the stocks to watch out for on May 19
Delhivery IPO: This is how you can check the allocation status
Reliance Jio vs Bharti Airtel – four charts showing how India’s telecom giants were streamlined in 2022