For companies selling air conditioners (ACs), seasonality plays a crucial role. With erratic rains in India in the last two-three months, FY24 has begun on a dull note. This would mean AC companies will likely face heat in the June quarter (Q1FY24).
Channel checks by various brokerages show that demand in India’s north and central regions was the most impacted by the weather. “Channel checks in the National Capital Region (Delhi, Uttar Pradesh and Haryana)—a large market for room ACs—indicate a muted Q1FY24 for room ACs, with volume declining by about 25-30% y-o-y,” analysts at Nirmal Bang Equities said in a report on 26 June.
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This would hurt companies in the room AC segment, such as Voltas Ltd, Havells-india-share-price-nse-bse-S0003090″ class=”autobacklink-topic” target=”_blank” data-name=”Havells India” >Havells India Ltd (through Lloyd) and Blue Star Ltd.
Demand was weak in the western region as well, though south India was comparatively better. Channel check by Prabhudas Lilladher across India shows the inventory level is around 45 days in June. “This is concerning given that inventory is on the higher side at the fag end of the season,” Praveen Sahay, an analyst at Prabhudas Lilladher, said.
In view of the overall muted demand conditions, companies shied away from taking price hikes. Given this and the expected volume decline in room ACs, revenue performance will likely be subdued in Q1. Though softening input costs may cushion margins, it may not amount to improvement from a year earlier. Moreover, amid stiff competition, there could be an uptick in advertisement and promotional expenses, which can further weigh on margins.
To be sure, the margin performance of the cooling segment in consumer durable companies has been a pain point.
For instance, the Ebit (earnings before interest and tax) margin of Voltas’ unitary cooling products segment has fallen 221 basis points y-o-y in FY23. Havells’ Lloyd is still in the red at the Ebit level, with a margin of –6.6% in FY23 versus -3% in the previous year.
Note that the Lloyd segment also includes other appliances, such as refrigerators and washing machines, but room ACs form a significant portion of its revenues.
But companies with diversified product offerings should be better off. For Havells, the Lloyd segment formed only 20% of FY23 operating revenue.
The strong momentum in other verticals, such as cables and wires, would offset the weak operating performance in Lloyd to some extent. Against this backdrop, Havells’ shares have risen by 17% in the past year.
For Voltas, the unitary cooling products segment, consisting mainly of ACs, formed 68% of consolidated operating revenue in FY23. Voltas is losing market share in the room AC segment. In Q4FY23, Voltas’ market share stood at 21.9%, which dropped to 18.4% in April, points out Sahay. The company’s shares have fallen by nearly 23% in the past year.
With the peak season for room ACs being underwhelming, a pick up in demand across other products is crucial to drive investor sentiments for the stocks. Investors will also watch how margins shape up.
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Updated: 28 Jun 2023, 12:06 AM IST