AC market: The coolest one

As commercial real estate growth remains sluggish, companies foray into booming room air conditioner segment.

Like the auto industry, domestic consumption is driving India’s air-conditioner market, too. The household appliances industry (comprising televisions, refrigerators, washing machines and room air conditioners) grew over 15 per cent in 2009-10 to Rs 26,400 crore from Rs 22,900 crore in 2008-09. The industry is expected to grow at a compounded annual growth rate (CAGR) of 18 per cent to touch Rs 60,000 crore by 2014-15.

Of this booming household appliances market, 24 per cent will be accounted by the room air conditioners. No prizes for guessing that sales of room air conditioners will zoom at the onset of summer, but all this will not immediately translate into bottom line growth.

Even though the opportunity is huge, companies like Hitachi, Blue Star and Voltas have either been posting flat to negative profit after tax (PAT) in recent times, due to sluggishness in offtake of commercial projects.

Also the competition in the commercial cooling market is that much higher. Analysts believe restricted investment in commercial infrastructure, retail and IT & ITES put pressure on the commercial air conditioner business.

Consequently, large players are now focusing on the room AC segment from the commercial cooling solutions. However, analysts expect the ductable AC market has revived in 2010-11 and could grow further in the years to come.

While cooling solutions for the commercial space may revive this year, air-conditioning companies have worked out strategies to develop the large room AC market. Blue Star and Hitachi have plans to launch new products and develop their brand. Many other large players are also looking at developing the room air conditioner (RAC) market, as it’s the best way to participate in India consumption story.

The RAC industry grew 19 per cent and 13 per cent in value and volume terms, respectively, in FY10 primarily driven by split air conditioners.

The growth in the industry is attributed to an extended summer, low penetration rate and increasing disposable income. However, penetration of room air conditioners is only 3 per cent. Management gurus would call this a blue ocean opportunity.

Split air conditioners are expected to grow at 20 per cent CAGR in terms of volume over the next five years, while window air conditioners are expected to grow at 12 per cent CAGR in terms of volume over the same period.

A report by Microsec Research on the air conditioner market, says: “It is evident that the financial performance of Hitachi (PAT down 45 per cent) and Bluestar (PAT down 26 per cent) were very poor whereas Voltas and Lloyd Electric performance were flat. However the performance of Fedders Lloyd (PAT up 38 per cent) and Whirlpool (PAT up 36 per cent) were pretty good. We have a buy rating on Blue Star, as the company is scaling up its domestic AC segment.” HDFC Securities, meanwhile, is betting on Hitachi.