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Weak sales till date, but summer outlook appears promising

We recently conducted channel checks, surveying over 25 AC dealers across major cities in India, to get an update on summer season stocking by dealers. Our checks suggest that retail demand was low in first two months of 4Q22 due to fear of 3rd Covid wave and elections in 5 states, but dealers have built up inventory in anticipation of a strong bounce back after 15th April with commencement of auspicious period (post Holi festival). Key takeaways are as follows: a) Primary sales to witness growth of 20-25% in 4Q22E given pre stocking by dealers (90 days inventory) in anticipation of robust summer, b) Secondary sales to pick up from mid- April, on resumption of activities at commercial offices, malls, multiplexes and international travel, c) another round of price hike expected to the extent of 10-12% in 1HFY23 due to rising commodity prices and new energy efficiency (BEE) norms and d) Voltas continues to dominate the markets in North and South India; other preferred brands are LG and Daikin, while Blue Star remains preferred brand in commercial spaces. We believe summer’22 would be a healthy season for AC manufacturers, given higher minimum temperatures, fear of sharp price hikes and normalisation of commercial activities. However, we believe price pass through may be delayed to some extent, as dealers may rush to clear inventory and only partial absorption of prices may take place in FY23. We maintain BUY on Amber Enterprises and Blue Star, while Voltas remains a HOLD

Current demand weak, summer to be robust: Primary feedback indicates that compared with Jan-Feb’21, demand in all major cities like Delhi, Chennai, Hyderabad and Kolkata witnessed de-growth, whereas Mumbai, Bengaluru and certain pockets in Ahmedabad also witnessed a dip due to fear of 3rd Covid wave. Dealers are expecting a strong growth in summer season, as dealers in North India anticipate growth of c.25-30%, whereas dealers in South and West India are expecting growth of c.15-20%. This growth would be led by a) sharp increase in temperatures in majority of the northern cities, b) higher operating hours as last two consecutive summer seasons were wash out, c) price increases of 10-12% across brands and SKU’s, d) demand pickup from commercial spaces as most cities are moving towards normalisation. New energy norms to further push sales of inverter ACs, which is visible by faster sales growth in 5-star ACs vs 3-star ones

Normal peak season expected: The Indian Meterological Department (IMD) expects the minimum average temperature to be warmer than usual in most parts of West, North and South-Eastern coast, while some parts of East, Central and South India to witness lower minimum temperatures. However, when we look at maximum normal temperatures – it is likely to be lower in most parts barring, West, North and North Eastern India.

Rising prices unlikely to hurt demand: All AC players undertook price hikes of 10-15% in past 1 year to curb inflationary pressure, but shown some reluctance in 4Q22 due to weak consumer sentiments. Going forward, companies have indicated dealers of further price hikes to the extent of 10-12% on the back of elevated copper, aluminium prices (major commodities for manufacturing AC’s), higher freight rates and increased costs due to new energy efficiency norms.

Voltas continue to maintain its position, Blue star catching up quickly in North: Dealers indicated that Voltas continued its dominance in North and East India especially in lower tier cities. Reasons listed were lower prices vs peers, better aftersales service and compressor warranty of 10 years and comprehensive warranty of 2 years played in favour of the brand. For refrigerators, Voltas is offering 2 years warranty for comprehensive damage vs others players providing 1 year. It also gives 12 year warranty on compressors, while LG, Samsung and Whirlpool give 10 years. Blue star continued to be preferred brand in Southern markets; however presence in North is also increasing. Few dealers indicated commercial customers prefer Blue Star due to better cooling and durable copper coils as it comes with anti corrosion coating. Other players such as Lloyd and LG continue to be preferred brands of choice for customers in South India whereas Daikin, Hitachi, LG and Panasonic are prominent in West India.

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