With COVID-19 pandemic refusing to fade away and heading towards first anniversary celebration, the consumer durable industry in general and air conditioner segment in particular is struggling to come out of uncertainties. Because of general elections in 2019 followed by outbreak of COVID-19 in 2020 AC manufacturers were unable exploit fully two consecutive busy summer seasons with no clarity about the immediate future.
Local lockdowns is a worrying factor
The AC segment is headed towards a total washout as peak summer sales from mid-March to mid-June are being impacted. With the partial lifting of the lockdown in mid-May, some manufacturers faced several hiccups recommencing their production. Inventories were piled up in warehouses while the entire retail channel was fully stocked up, since March. Most brands offer discounts and incentives to clear up inventory in the channel. However, most companies have seen healthy recovery post relaxation of lockdown led by pent up demand. Path could be smooth provided there are no intermittent local lockdowns and second wave of COVID does not become a reality during festival season.
WFH may lead to reduced demand for commercial AC
Apart from COVID-19 leading to nationwide lockdown and demand disruption, the pandemic spread has affected the industry in another way too. Many companies are planning to cut down their office spaces (due to emergence of work from home concept), post lockdown, affecting the demand for commercial air conditioning. Commercial air conditioning demand is likely to be subdued in the next few quarters due to travel restrictions and reduced stepping out of the home approach. Hospitality and the real estate sector are also badly impacted which again may take several quarters to recover. Medium sized offices, educational institutes, entertainment, banquet halls, etc. are severely impacted. However, sectors like BFSI, Healthcare, and Pharma are gaining traction and provide some demand respite for commercial AC.
There are some opportunities too
Also, the current pandemic situation and the consequent emergence of work from home concept have thrown some unexpected opportunities for room AC manufacturers. Emergence of WFH concept among Indian corporates and employees may create a need to develop office-like atmosphere at home and in turn, may contribute to the rising demand for RACs in the Indian Market. However, potential demand may get punctured due to reduction in public spending in turn due to job cuts and cash conservation.
The overall market size for air conditioning products in India is estimated at around Rs17500-18500 crore. Of these, Room air conditioning (RAC) accounts for major portion, nearly 2/3rd of the market. Rest of the market include market for central air conditioning, including central plants, packaged and ducted systems, and VRF systems and other ancillary equipment. In terms of volume the industry size is estimated between 6.5mn and 7.5mn units.
Demand projections go haywire
Announcement of lockdown coincided with AC’s busiest season as a result of which demand projections of the industry have gone haywire. Despite the reopening of the market subsequently, damage had already been done and its estimated that RAC industry would report a steep decline of 20% in FY21E, before bouncing back to FY20 levels in FY22.
Though, the near-term performance will shape up depending on upcoming festival season, intermittent lockdown in various pockets, second wave of COVID-19 and intensity of summer season in 4QFY21E; the long-term outlook of the industry is fairly positive.
Global trade tension add to worries
Adding salt to the injury are the global trade tensions involving China and the recent border tensions with China-India and its impact on the trade relations between the two countries. Emerging geo-political situation has further added to the uncertainty to the trade. Meanwhile, some of these events have thrown some unexpected opportunities for the industry. COVID-19 outbreak and the subsequent closure of Chinese factories have exposed the risks of depending on one source of supply for components and materials which has alerted global brands to explore a substitute/diversification for their supply chains. Thus, most companies are looking towards China+1 strategy for their product sourcing. India being one of the low-cost manufacturers other than China, is seeing a strong export opportunity in the current scenario. In order to reduce dependence on China and to strengthen local manufacturing our government is pushing companies to source locally by increasing import duties and is incentivizing Indian companies for export.
Most of the RAC brands have already started considering higher local sourcing/manufacturing. Though India lacks in the RAC components ecosystem at present, industry is actively working to develop and nurture one with the help of the government. Industry body along with government is already in talks with companies to supply aluminum, copper and motors etc locally. Further, for compressor, Highly is expanding capacity and GMCC’s green field plant is expected to start from December 2020 onwards. Thus, in the short run, though the industry may face some hurdles due to supply disruptions, ongoing steps will create a solid foundation for the long term growth.