MOSL: INDIA ROOM AIR CONDITIONERS-New energy ratings come into effect from January 2018-Multifold impact on pricing

​INDIA ROOM AIR CONDITIONERS: New energy ratings come into effect from January 2018; Multifold impact on pricing, volumes and market share likely

The Bureau of Energy Efficiency (BEE) has mandated new energy ratings from January 2018 (see Exhibit 2). These norms were last changed in January 2014 and the new ratings would imply a two-star upgrade across the ratings table alongside a convergence of fixed-speed and inverter AC ratings. We present our views on the likely impact on the room air conditioner industry following this change.

Pre-buy likely, as prices typically go up 8-10% with each rating change

Rating changes are usually followed by price hikes. Fence-sitting consumers usually rush to buy before price hikes are effected. Voltas’ sales volume grew 45% in 3QFY14 (ratings changed with effect from January 2014) and 19% in 3QFY12 (ratings changed with effect from January 2012). With the impending rating change from January 2018, pre-buying is likely in 3QFY18. Volume growth for 3QFY18 would also be boosted by a weak base – demonetization had led to a decline in air conditioner (AC) sales in 3QFY17. On the flip side, there could be some destocking by dealers, starting 3QFY18, as they begin clearing old stock before the new ratings to come into effect.

After a surge in 3QFY18, volumes likely to be subdued in 4QFY18

A logical outcome of price hikes following rating changes is subdued volumes post the price hikes. Voltas’ sales volume grew just 6% in 4QFY14 and declined 3% in 4QFY12. The subdued volumes are both because of pre-buying in the earlier quarter and impact of higher prices on demand. We would expect a similar situation to play out this time as well. While it’s too early to call out the industry volume growth for CY18 (largely dependent on the summer season), we see downside risks as: (a) both CY16 and CY17 had strong summers, which is unusual – empirically, a good summer season is usually followed by a weak summer, and (b) price hikes are likely to dampen consumer demand.