Carrier Aircon – Gearing for the top spot

Carrier Aircon Limited, the largest manufacturer of air conditioning equipment, has chartered out aggressive plans to regain its market leader position from Korean majors like LG and Samsung. It includes an e-business strategy as per which 30% of its supplies would be procured through B2B E-commerce. This is expected to reduce both the re-order levels and lead-time. It is also working on an electronic order transmission system from branches to factories through an ERP package, which is expected to increase the order fill rate. Moreover, it has tie-ups with number of portals to sell products on-line (the company has managed to sell Rs 10 m worth of its products through jaldi.com). This will create a new channel of distribution with considerable marketing reach.

Carrier Aircon has posted a commendable performance in 1QFY01. The net profit of the company has gone up from Rs 80 m in 1QFY00 to Rs 102 m in 1QFY01. Surprisingly, the operating margins have improved from 9.5% in 1QFY00 to 9.9% in 1QFY01 considering the fact that the air conditioning segment is becoming extremely competitive with prices of RACs declining with the entry of Korean companies.

However, there are some serious threats

• Since India is a signatory to Montreal Treaty, post FY03 all producers of cooling systems have to cease using ozone-depleting compressors. Though India has time till 2003 companies have to start investing in technology to comply with new environmental regulations. Moreover, indoor air quality is also emerging as a critical issue, which may lead to a paradigm shift in technology for cooling air. This would pressurize companies like Carrier to upgrade technology and introduce new products.

• Korean multinationals like LG, Samsung have been aggressive in introducing new products, enhancing their distribution network and more importantly on the pricing front. Room air conditioner prices have come down drastically in the last one-year. This may affect realisations of Carrier Aircon. Though the company has taken initiatives to improve its operational efficiency, the erosion in realisations is expected to be higher.

However the long perceived ‘luxury attitude’ towards RACs market is changing due to rising income levels and double income families. This, along with its well supported 360 strong dealer network and 22 service stations should help the company in posting better topline growth.

The stock is currently trading at Rs 87.5 at a P/E multiple of 5 on the annualized 1QFY01 earnings.