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 ACs in fiscal year 2020.
• The cost of ACs and the energy they consume is the main reason why ACs are considered luxury items.
• The increase in commodity inflation and high competition has been limiting the AC companies’ ability to increase their margins.

The business of selling air conditioners has still not reached its full potential as it continues to be a luxury item for most Indian households. Even though several large brands like Voltas, LG, Daikin, Hitachi, Blue Star and Lloyd have been selling ACs for the past five to seven decades, they have still not been able to enjoy higher margins from this about-to-boom segment.

This year however may be a good one. The demand for air conditioners is expected to increase due to scorching heat across several parts of India, according to a report by international financial services company BNP Paribas. The mercury has crossed 45 degree celsius in several places and touched 49 degrees in Delhi, so people have been rushing to buy ACs in order to keep themselves cool.

“We estimate the Indian AC industry market size 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 AC in 2020, with 7 million units being sold in the same year. This is quite low when compared with the fact that four in ten — or 42% — households across the world have an AC.

The cost of ACs and the energy they consume is the main reason why ACs are considered a luxury item — making it unaffordable for many Indian households. The increase in commodity prices is hurting the manufacturers even further.

High competition is limiting ACs companies in India

Covid-19, the resultant lockdown and the Russia-Ukraine conflict that followed 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 option of increasing the price of their products and passing it on to the customers.

However, the same price increase has not been possible in the whitegoods space like ACs, refrigerators or washing machines because they are already expensive compared to other fans or coolers, and competition in the industry is extremely high.

“Moreover, the Indian whitegoods industry is highly competitive, given the presence of large MNCs like Samsung, LG, Whirlpool, Haier, Daikin, Hitachi, etc. as well as strong Indian brands like Voltas, Lloyd (Havells brand), Blue Star, IFB to name a few. Such high competitive intensity also limits the ability to hike prices,” BNP Paribas said in its latest report.

Source: BNP Paribas, Company Data
Note: BPS stands for Basis Points, which is a unit of measure to describe the percentage change in value.

The top six companies in the whitegoods space include Voltas, LG, Daikin, Hitachi, Blue Star and Lloyd, which cumulatively controlled 70-75% of the market share by volume in the fiscal year 2020.

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

High price is not the only thing muting demand

The industry size of air conditioners in India is almost double that of fans, which have made a mark on 80% households in India, but still the margins continue to be low on this white commodity. One of the main reasons is that AC is a seasonal item and has higher inventory costs due to the volume of the product.

Secondly, the market has been affected since 2016 due to the disruptions such as demonetisation and introduction of goods and services tax (GST). The Covid-19 wave, which compelled people to stay at home for almost two years, also hindered the demand.

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