The much-awaited summer season proved to be a damp squib for the Indian air-conditioner (AC) industry. Voltas Ltd, which has significant share in the domestic AC market, reported a 2% drop in revenue at its cooling products division for the March quarter. Blue Star Ltd did relatively better. But unseasonal rains and a milder-than-usual summer season is clouding the outlook.

To recap, retailers and dealers built-up inventories stocking ahead of the March quarter expecting a strong season. But as Emkay Research points out, the season was rather dull till April. Tertiary sales are said to have declined in April.

The first two weeks of May weren’t any better with unseasonal rains and storms playing spoilsport in key markets, analysts at Emkay add.

The weak sales trends in May and muted outlook has led to cuts in earnings estimates for the stocks.

Shares of both Voltas and Blue Star saw losses in the crucial months of April and May against a rise in Sensex.

Managements of both the companies expect the current quarter (Q1 FY19) to be better helped by favourable base and a recovery in weather patterns. “Like Blue Star management, they (Voltas) highlighted that June should be a strong month if the weather normalises," Jefferies India Pvt. Ltd said in a note.

Even so expectations are tempered. According to Motilal Oswal Securities Ltd, Blue Star now expects the room AC industry to grow 15% in FY19, against earlier estimate of 15-20%. Some remain wary.

Analysts at Emkay warn the industry will be saddled with unsold inventories impacting revenues of all AC companies in FY19 if sales do not gain traction in June.

Of course the big pull for AC companies is urbanization and increasing demand for consumer durable products and not the immediate season.

But competition is rising. “All the Chinese room AC companies are looking at India as a market. GREE is coming up with a plant near Pune while MIDEA and Haier are already well established in India," Motilal Oswal said in a note after meeting the Blue Star management.

“Blue Star expects the Chinese companies to scale up their presence significantly over the next few years. GREE targets $1 billion of sales in India (against the size of the Indian room AC market of $2 billion)."

The expanding Indian market does provide opportunities to all air-conditioning companies. However, competition can emerge as a headwind for profitability clouding future earnings expectations.

“We believe weak summer coupled with rising competition (in the premium product category) would cap unitary cooling products (ACs) segment margin, going forward," ICICI Securities Ltd said in a results review note on Voltas.

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