Restocking boosts AC sales, all eyes on summer demand now
Change in energy efficiency norms, and rise in raw material costs will put upward pressure on AC prices in the upcoming summer season
Room air conditioner (AC) makers had a cool winter. Voltas Ltd and Blue Star Ltd, which released their December quarter results this week, reported a 31.9% and 27.5% rise in revenues, respectively, from cooling products. According to Motilal Oswal Securities Ltd, other notable AC makers such as Hitachi and Lloyd Electric also saw double-digit sales growth.
The performance was aided by a favourable base and normalization after the goods and services tax disruption in earlier quarters. Dealer stocking ahead of the change in energy efficiency norms from 1 January also added to sales.
What is a pleasant surprise is the improvement in profitability. Both Voltas and Blue Star reported a significant expansion in margins at their cooling products divisions. Blue Star implemented a price hike of 4-6% to offset the rise in input costs. According to Motilal Oswal, Voltas may have benefited from a better product mix.
The strong show by the cooling products business and improved performance by the electromechanical projects division drove the earnings beats of Voltas and Blue Star. Profitability at the electromechanical projects division, the other large business segment for Voltas and Blue Star, improved on better product mix and reduction in low-margin legacy orders.
But the outlook for the electromechanical projects segment is clouded by muted investments by the private sector.
“The management indicated that the overall market has been muted,” SBICAP Securities Ltd said in a note on Blue Star.
Voltas is holding a conference call with analysts on Friday where its views on the electromechanical projects division will be aired.
That said, given the lumpy nature of the electromechanical projects business, the focus for now will be on the coming summer season. Change in energy efficiency norms—an AC which had a five-star rating until a year ago will become a four-star AC now, effectively raising the price of the latter—and a rise in raw material costs will put upward pressure on AC prices this season. Navigating this can be a major challenge sans a healthy demand recovery.
Dealer checks in the northern part of the country by John Perinchery, an analyst at Emkay Global Financial Services Ltd, shows that consumer demand was rather subdued in the December quarter. Sales during Diwali were soft. If consumer demand does not see a noticeable recovery in March, then dealers may well reduce product offtake in the current quarter (Q4), which will weigh on company sales, says Perinchery.
Much therefore depends on a consumer demand recovery in the summer season. That will not only decide the prospects of AC makers but will also provide clarity about consumer demand trends, he adds.
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