Rising inflation to hit margins of air-conditioning segment

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High commodity inflation will dent the operating margins of the air-conditioning segment, which are likely to remain under pressure in the current financial year ending March, as well as in the next financial year.

The forecast of a scorching summer and pent-up demand from the last two years is expected to result in higher sales of air-conditioners in the coming summer season. However, it will take a few quarters for companies to pass on the recent commodity price inflation onto the customers, which will impact the margins.

The prices of the key inputs such as copper, aluminium, steel and plastics have increased sharply over the past 18 months. The industry was mulling a price increase in the range of 4-5% in January to offset the commodity price inflation seen in 2021. However, the Russia-Ukraine conflict has further pushed up aluminium and copper prices by 54% and 18%, respectively year-to-date.

“We estimate this will require another 3-5% hike with some efficiency on production, taking the overall price hike needed to 7-10%,” analysts at Jefferies said in a recent report.

Daikin hiked prices in January as raw material prices went up, but added some new features to its products for new star ratings. Consequently, for various models of split room ACs, prices soared by around 7-10% compared with last year.

Despite the price hikes, such hyper-inflation is expected to keep the cost pressure on consumer durable companies elevated. “While we do expect the companies to pass on some extent of price hike in the upcoming summer, we believe it will be insufficient to return to the pre-Covid margin levels considering the competitive intensity,” analysts at a domestic brokerage said.

Also, as this price hike will take about two quarters to be passed on, the margins of AC makers like Blue Star and Voltas will be impacted to the tune of 100-300 basis points in the coming quarters, according to analysts.

Nevertheless, AC manufacturers like Daikin, Blue Star, Panasonic and Voltas among others are hoping for a good summer season, after two years of dull sales due to sluggish demand and the impact of lockdowns.

B Thiagarajan, managing director, Blue Star, recently told FE that compared to 2019 summer, the residential AC industry would grow 20% this summer due to pent-up demand and anticipated heatwave conditions.

“For two summer seasons, people did not buy ACs due to Covid. And now the temperatures are soaring. The company would be definitely growing faster than the industry this summer. I think we will be growing by 25%,” he said.