Air conditioner market set grow on the back of government’s PLI scheme

• The domestic room air conditioner market had a volume of 6.4-6.8 million units and value of ₹17,000- 18,000 crore in FY22.
  
• The industry has significant growth potential considering its low penetration of 7-9% of total urban Indian households.
  
• Currently, RAC manufacturers in India have only 30-40% localisation levels.
  

The Room Air Conditioner (RAC) industry volumes is expected to grow by a further 15-20% in FY24, following a strong growth of 26-28% in FY23. This growth is due in part to the government's Production Linked Incentive (PLI) scheme, which has received a positive response from both global and domestic RAC companies. These companies have committed a capital outlay of ₹4,806 crore, which will help to reduce imports and support industry margins through backward integration, says a report by rating agency ICRA.

The research also revealed that the domestic RAC market had a volume of 6.4-6.8 million units and a value of ₹17,000-18,000 crore in FY22, after recovering from the low caused by the pandemic in FY21.

In FY23, the industry experienced a substantial increase in sales volume due to an extended and intense summer season, as well as pent-up demand.

“ICRA foresees a healthy 15-20% jump in RAC volumes in FY24 supported by an underpenetrated market and expected harsh summers this year. The industry has significant growth potential considering its low penetration of 7-9% of total urban Indian households, compared to 90% in developed countries. Increasing urbanization, growing disposable income, improving consumer finance availability and increasing RACs per household are further expected to support the volume, as well as revenue growth,” says Sheetal Sharad, VP and sector head, corporate ratings, ICRA,

Demand for air conditioners to further pick up during summer

The pickup in demand for air conditioners was slightly delayed in January due to cold weather, but enquiries have picked up since then, reveals a sector update by BOB Capital Markets. Sales have increased month-on-month, with March showing particularly strong growth.

As temperatures rise, April and May are expected to see further improvement in demand. Dealers anticipate 10-15% y-o-y sales growth for the summer season, with rural markets expected to grow by 10-15% and urban markets by 30-40%.

Corporate sales have been better than retail sales, and are expected to remain strong throughout the summer season (March-June). In March, AC prices were raised by 4-8% (₹2,000- ₹2,500).

Heavy dependence on imports for essential components

However, ICRA research says that RAC manufacturers rely heavily on imports for essential components. The Central Government's PLI scheme for the AC sector, which provides manufacturers with incentives worth ₹6,238 crore, has received a positive response.

ICRA predicts that this scheme will lead to capacity expansion over the medium to long term, decreasing import dependence from the current 60-70% to 20-30%, and ultimately promoting AC exports.

Currently, RAC manufacturers in India have only 30-40% localisation levels. Key components like compressors, controllers, motors, fans, heat exchanger coils and PCBs are imported from China, Thailand and Malaysia.

RAC manufacturers have been facing input cost pressures since the beginning of FY 22 given the elevated prices of commodities like copper and aluminum, and high import dependence.

Moreover, adverse forex fluctuations impacted the cost structures of players. Consequently, the industry had to pass on the cost increases through multiple price hikes in FY22. In FY23, with softening of commodity prices, these cost pressures are estimated to have moderated to an extent.