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MOSL: ROOM AIR CONDITIONERS-Inventory in channel high post weak 1QFY19 sales

Room Air Conditioners: Inventory in channel high post weak 1QFY19 sales

 

We interacted with listed and unlisted air conditioner (AC) manufacturers at a recent industry conference. Our key takeaways:

 Inventory in channel high post weak 1QFY19 sales

Lower than expected industry sales in 1QFY19 post unseasonal rainfall across North, South and East India has resulted in high inventory (1-2 months) across players. This may take up to one quarter to clear out; in turn, this will remain an overhang on production and pricing, as players resort to price cuts and discounts to liquidate excess inventory.

 Expect mid-to-high single-digit growth for room AC industry

April and May were hit by unseasonal rains across the country. With secondary sales witnessing a dip in both these months, primary sales too were cut. While June was better than the previous two months, it has not been enough to offset the decline seen in the previous two months. As against the earlier expectations of double-digit growth in FY19, a mid-to-high single-digit growth is more likely, with growth reverting to 12-15% CAGR from FY20.

 Inverter share at 40% of total industry sales; to rise to ~60% in FY19

There has been sharper than expected transition from fixed speed to inverter ACs over the past two years, with inverter ACs now at 40% of industry sales. Adoption has been faster in the metros, where power quality is better than tier-2/3 cities. Three key factors are driving the shift to inverters: (a) merger of energy ratings for fixed and inverter compressors from January 2018, (b) fall in price differential between fixed and inverter ACs, and (c) AC manufacturers’ push to inverter models by offering 10-year compressor warranty and comprehensive 5-year warranty. The share of inverters is expected to rise to 60% in FY20, and the introduction of new energy ratings in January 2020 would take it even higher in FY21.