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Compressor shortage seems well managed

The RAC industry seems to be witnessing a good start to the summer season of CY25 after a strong performance in the last season. Our recent interaction with industry participants suggests that secondary sales too have started picking up in the South and West regions. The industry faced a shortage of high-value intermediaries – compressors and copper – during 3QFY25/Jan’25, which came as a surprise to RAC manufacturers, as BIS certifications for certain players were not extended and imports got impacted. However, as per our interactions, most players have addressed this issue with alternate supply arrangements, and it is expected that the situation would ease further in the coming months. In the near term, this can impact the volumes of certain OEM and EMS companies during 4QFY25 as the industry was not fully prepared to deal with this shortfall of compressors, though the impact on secondary sales might be limited (peak demand is during Apr-Jun). The industry has made representations to the government to extend BIS certifications for certain compressor and copper suppliers until domestic capacities are not available to meet the entire demand, and we expect a favorable decision on the same. We maintain BUY on Amber Enterprises and Voltas and Neutral on Havells.

4Q/1Q are peak demand periods for AC manufacturers and AC EMS players

AC industry has seen good demand so far in FY25, driven by rising temperature and increasing disposable income. In FY24, industry volumes grew by 12% YoY to around 9.4 million units. We expect a 19% CAGR in industry volume over FY24-27, with 35- 40% YoY growth expected in FY25. With annual AC demand growing at such a healthy pace, the demand for high-value components such as compressors and copper tubes would also grow correspondingly. Peak production for AC occurs normally during the December-June period, accounting for nearly 80% of the annual output. Any disruption during these months can impact overall production volumes for AC OEMs and ODMs.

AC compressor shortage cropped up in 3QFY25/Jan’25

The Indian RAC market was impacted by the shortage of AC compressors during 3QFY25/Jan’25 due to 1) BIS certification expiry for a large Chinese player, which has led to a halt in shipments to India since Oct’24; 2) increased AC demand in China due to government subsidies; and 3) fears of US tariffs resulting in supplies being diverted to the US. This could have resulted in production loss for few players during this period. Companies with stocked inventory or alternative arrangements were better placed at this time. As a result, companies had to shift to alternative suppliers such as Highly and GMCC, both of which are already operating at the maximum capacity in India and China. Among the domestic AC OEMs, major players like LG and Daikin have in-house compressor manufacturing units and were better placed. Both are also ramping up their in-house compressor production.

Current compressor capacities in India still too small

The compressor requirement in the Indian RAC industry is around 1.05x to 1.1x of AC demand, reflecting the need for additional compressors due to replacements, and maintaining buffer stock. Presently, domestic AC OEMs do not have compressor manufacturing capacities, while MNC OEMs have in-house compressor manufacturing capacities. The industry meets its compressor requirements of 6- 6.6m units domestically through GMCC, Highly, LG, Daikin, and Mitsubishi, while the remaining (total requirement: 13.5-14m units) is met via imports. The requirement of compressors will increase in line with growing AC demand (12-15% YoY). If BIS certification for Highly (certification expiring by Jun’25) and GMCC (certification expiring by Jan’26) is not extended, then the industry will be further constrained in terms of compressor shortage. As per our discussion with industry participants, AC industry players are expecting the continuation of BIS certification for these companies until the domestic industry becomes capable of in-house manufacturing.

Imports and in-house production ease compressor shortage

The industry is handling this compressor shortage via imports from other countries such as Taiwan, Japan, and Thailand and is also hopeful of importing compressors from China on expectations of easing of BIS certifications for key players like GMCC and Highly. Various OEMs and ODMs are currently well positioned until May’25 to take care of peak demand. Beyond that, expansion plans for compressors are already lined up by GMCC, Highly, LG, Daikin, and PG Electroplast over the next 1-2 years. Improved compressor manufacturing in India would also result in an increase in local value-addition in AC manufacturing to 75% from 60% currently. AC manufacturer VOLT is managing the situation with strategic tie-ups, proactive procurement, and inventory optimization. AC ODM players, Amber Enterprises and PG Electroplast, are currently not much impacted due to their diverse client profile, MNC customer base and stocked-up inventory of compressors.

Similar situation was seen for copper tubes

The government extended the quality control order (QCO) for plain copper tubes, allowing temporary imports to mitigate shortages. Domestic production is still ramping up, with major players like Adani Copper, Hindalco, and Mettube working to increase capacity, though they are not yet fully operational. By Oct’25, additional capacity is expected to come online, which may ease the supply situation. Until then, the industry continues to rely on imports to meet the growing demand, driven by the increasing production of ACs.

Positioning of players in the current scenario

* AC manufacturers – VOLT and HAVL: We expect VOLT and HAVL’s RAC business to continue to benefit given the expected strong demand in the summer season. They are also seeing inventory stocking happening in the south region, which will be followed by the west, east and later the north region. Though the pace of aggression is moderate, the industry witnessed price increases from Dec’24 MoM, which could help to improve margins. Further, the compressor shortage, if any, due to the above-stated reasons may be felt only in Jun’25.

* AC ODMs – Amber Enterprises: We expect Amber’s RAC division to continue to benefit from strong AC demand as the summer season has started well and channel inventory filling is also aiding overall volumes. Amber is actively working with key clients such as LG, Samsung, Mitsubhi, Fujitsu, and Daikin among the MNC names and leading domestic players. Global players were not impacted by the compressor shortage during 4QFY25 due to their in-house compressor manufacturing; hence, Amber was not impacted by the compressor shortage issue even though it was only for a short duration. The company has sufficient inventory to take care of demand until Apr-May’25 and expects the situation to ease out as the industry has already made representation to the government to extend the BIS certification for compressor suppliers. If needed, Amber is adequately placed to put up a compressor facility.

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