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Carrier: Strained prospects

Dec 21, 2001

There seems to be no respite for the consumer durable companies in the current year. While there has been a rise in CTV and refrigerator demand in the festive season, air conditioner demand has remained lacklustre. This has had a significant impact on profitability of Carrier Aircon, one of the market leaders in the Indian air conditioners segment. The company derives more than 73% of its revenues from the room air conditioners (RACs) segment, which comprises of window and split A/Cís. Though the company managed to report a 25% rise in volumes for FY01 in the RAC segment, it came at the expense of lower prices. Average realisation per unit fell by 3% in FY01. Given the competitive nature of the industry, RAC prices are expected to fall further.

The first half performance of the company vindicates the trend. While sales fell by 13.7% to Rs 1,824 m, Carrier recorded an operating loss of Rs 73 m as compared with a profit of Rs 183 m in the corresponding period last year. Similarly, operating margins in 1QFY02 stood at 2.6% as compared to 9.9% in 1QFY01. We expect RAC prices to come down by 3%-5% in the current fiscal.

Usually, air conditioner manufacturers a higher offtake between January and June on account of summer season. But demand has remained subdued in the last two years in these quarters because of unfavorable monsoons and natural calamities in some key states. Agricultural output, the lifeline that has a bearing on demand for durables in rural India, also has remained subdued. The slowdown has also resulted in a downward revision of growth estimates from 1.5 m units by FY05 to 1.1 m units as of the same period.

On the positive front, with the increase in computer usage in India, the air conditioner industry has promising growth prospects, as demand from this sector is expected to benefit from the same. Also the growing number of software technology parks and the extent of importance to more of these facilities by states would definitely provide a big push to the air conditioning industry. Carrier, as a leader, has an upper hand.

Its strategy to increase the number of Carrier outlets is a step in the right direction the company has a long way to go when one considers Carrier Airconís performance at the operating level. Manufacturing expenses account for 81.6% of sales in FY01 and have been on the rise over the years primarily led by higher raw material costs and adspend. Given the possibility of threats from imports and an unlikely price increase, to safeguard margins, lowering costs is important.

The stock currently trades at Rs 88 implying a P/E multiple of 20x annualised 1QFY02 earnings. We expect Carrier to report a net loss of Rs 157 m. The prospects for FY03 and FY04 also seem challenging. Though it has a strong brand value, given the state of the economy and increasing competition, growth might continue to remain strained.

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