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Voltas : Time to cool off window ACs? - Views on News from Equitymaster
 
 
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  • Jun 21, 2013

    Voltas : Time to cool off window ACs?

    The economic slowdown has not had much impact on the market for consumer goods particularly air conditioners; which has remained buoyant over the years. The demand for ACs has grown manifold over a decade driven by factors such as easy availability of finance, rising per capita and disposable income. The market penetration of ACs at as low as 2-3% speaks volumes about the opportunity for AC manufacturers.

    Currently, as per industry sources, the annual size of the Indian AC market is estimated to be Rs 75 bn (3.4-3.6 m units). A striking development in the AC market has been demand and supply side shift towards split ACs as compared to window ACs. Over the years split AC has surpassed demand for window AC dramatically. The total production capacity for ACs of 8 largest manufacturers is approximately 7.2 m units. Out of this around 25% is exported. So the capacity dedicated towards domestic sales is 5.4 m units. Of this, approximately 70- 75% of the capacity is utilized for split ACs. This apparently leaves very little market for window ACs.

    One big structural change in the AC market is likely to be brought by Bureau of Energy Efficiency (BEE) through its new energy norms. According to the new norms, current 2.2 table ratings assigned to ACs will be upgraded to 2.3 with effect from January 1, 2014. This simply means that split ACs will have an energy rating downgrade by one notch e.g., current four star split AC will become a three star AC and five star split AC would become a four star and so on.

    Unfortunately, manufacturers of window ACs will suffer more as the current table being implemented is 2.1 for window ACs. This suggests that window ACs will need to be scaled up by two notches from 2.1 to 2.3

    Impact on pricing

    As per the industry sources, the upgradation in rating would entail a price hike in both split and window ACs. Adding to the woes of AC manufacturers; window ACs will have more price hike as compared to split ACs since the up gradation cost will be more in case of window ACs.

    In past two years, many manufacturers have learnt their lessons from these inevitable structural changes and declining share of window ACs. They have either exited or are in the process of exiting window AC category in coming years. For instance, Samsung and Panasonic India do not sell window ACs anymore. LG had also cut production of window ACs by 10% in 2012 and shall now focus more on split ACs.

    However the most pertinent question is... should the market leader Voltas also make a complete exit in years to come?

    Voltas has emerged market leader in the AC segment as per Feb 2013 report by Gfk Nielsen, (an agency that tracks retail sales of consumer products). It currently boasts of market share of 18.5% (volume wise). As per industry reports, Voltas rules the roost in Window AC segment at 35.3% market share. While; its share in split AC was low at 14.8%.

    Let's look at some demand side factors which may wipe out window ACs in few years.

    1. Split units have increasingly become more popular owing to their aesthetics and designs and energy efficiency. As per few AC manufacturers, there is no innovation possible in Window ACs anymore. Moreover, market is flooded with numerous innovative models of split ACs which is more appealing to consumers. It also renders high pricing power to AC manufacturers.

    2. In metro cities, in new residential buildings/ homes it is easier to install Split ACs than window ACs as the former does not need proper casement windows. Moreover, as per an industry report, most of the new constructions do not usually have provision for window ACs particularly in cities. This has adversely impacted the demand for window ACs in a big way.

    3. Also, the price gap between window and split ACs has lessened over the years; it was about 30% three years ago and has declined to 10% presently. With such a minor difference in price, many consumers prefer split to window.

    4. As per recent study published by Live Mint in April 2013, 90% of the consumers ask for split ACs nowadays (as per managing director of Vijay Sales - a chain of consumer electronics stores). This ratio was as low as 50:50 three years back.

    Now let us look at the other side of the fence; where we find some arguments in favor of window ACs. Window ACs have strong potential demand from rural India. Most of rural people are slowly moving away from air coolers to window ACs. Therefore, the smaller towns and few areas in cities still have demand left for window ACs. Secondly, the owners of old homes still prefer window units to avoid the installation work for split ACs. Also, people living in rented houses mostly prefer window ACs as these can be easily shifted from one house to the other. This suggests that there will be a decent demand for window ACs for at least coming three to four years.

    Looking at the developments in the AC market, Voltas does face an inevitable dilemma of continuing with the window AC segment; which has always been its forte. Window ACs' share in total Voltas sales is approximately 11-12%. Voltas also admits to window ACs segment shrinking slowly. Earlier Window ACs contributed 60-70% to the room AC segment sales; which has lowered down to around 35-40%.

    However, according to the company; there is still an opportunity to tap tier II and III markets. In these markets first time buyers largely prefer window ACs as they want a low cost product with simpler features. Voltas; in fact; has launched more power efficient units for these markets recently.

    To conclude...

    Undoubtedly Voltas has a stronger hold in the window AC market and it aims to capitalize on it. We however, believe, keeping in line with changing industry trend, Voltas will ultimately have to shift to split AC completely. But before the energy efficiency norms fully play out, it has an opportunity to fairly capture the untapped potential of the rural market which may continue to have demand for window ACs at least for couple of years. But beyond that; complete shift to split ACs will be vital if Voltas were to save itself from resorting to discounts in order to clear its window AC inventory; which may also hurt its profitability.

     

     

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    1 Responses to "Voltas : Time to cool off window ACs?"

    A.SENTHILKUMAR

    Sep 13, 2013

    if any qury pl contact A.SENTHILKUMAR S/O AYYARU., 42/75 SATHAPPADI&PO., KAMMAPURAM VIA VRIDHACHALAM T.K CUDDALORE DIST TSAMILNADU INDIA PIN 606103 EMAIL zenthil043@gmail.com cell 9514555969

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