Every summer, stock prices of companies manufacturing air conditioners soar. As investors expect rising mercury levels to fuel demand for cooling solutions, the story is being repeated this year too.
However, instead of focusing on immediate benefits, investors should take a long-term view in this segment. Year-round humid weather and a large untapped market provide the ideal platform for AC manufacturers.
At present, room AC penetration stands at a mere 4-5%. Moreover, climate patterns suggest that mercury levels will only rise in the region, with summers getting increasingly hotter. This year, the India Metrological Department has predicted that the summer months will be warmer than normal.
In several parts of north India, it would be at least a degree hotter than average. Coupled with this, rising disposable incomes and better availability of electricity are likely to buttress demand for sophisticated cooling solutions. Conservative estimates suggest that room AC sales will cross the 10 million units annually mark in 2022 from 5 million units today. “Given the growth in disposable income, better availability of electricity, higher propensity to spend coupled with hot and humid climatic conditions, the room AC segment will grow at 12-13% CAGR for the next 5-6 years,” reckons Renjith Sivaram, analyst, ICICI Securities.
Clearly, there is potential for secular growth in this segment that investors can tap into for the long term. However, given the intense competition in this segment, investors will have to pick carefully. Apart from leading Indian players like Voltas, Blue Star, Lloyd and Godrej, the market is also crowded by global firms including LG, Daikin, Hitachi, Carrier and Whirlpool, among others. Going forward, product mix and distribution reach will play a key role in deciding which players will make the most of the opportunity.
The market is undergoing a rapid transition towards energy efficiency, with consumers shifting to inverter split ACs from regular or fixed-speed split ACs. With more stringent energy efficiency ratings kicking in from this year, manufacturers are shifting their product mix in favour of inverter models. In fact, LG has completely shifted from fixed speed ACs to inverter ACs, gaining the first-mover advantage. Others are also shoring up their product suite. The share of inverter ACs in the entire AC market has already crossed 25% and is expected to grow. “Shift to inverter market will be a key development and companies that are able to adapt and cater to this with more inverter SKUs are likely to dominate in the medium- to long-term,” says Sivaram.