Sector Update | 19 October 2020
Consumer Durables
Indian AC industry breakdown
(FY20: 7.2m units)
Indian AC industry: Time to scale up
The Government of India released a notification dated 15
th
October 2020 to effectively ban
the import of ready-to-install air conditioners. Here are our thoughts on the development:
Source: MOFSL, Amber prospectus
FY20 imports split between Room
AC and Components
Components,
60%
Source: MOFSL, DGFT
Top 5-6 brands have ~80% market
share, with the other 20% shared by
rest
Source: MOFSL, Industry, Top 6: Voltas,
LG, Daikin, Hitachi, Lloyd, Blue Star
India bans ACs with refrigerants:
In a surprising move, India banned the import
of air conditioners – both split and window – with refrigerants. Notably, total
imports under the banned HS Code of 84151010 & 84151090 stood at INR36b in
FY20. The Indian AC industry is sized at INR180–200b, with INR45b of finished
goods imports and a similar value of component imports. Thereby, the
industry’s total import dependency is ~50%. The HS Code pertains largely to
CBUs (Completely Built Units) and ODUs (Outdoor Units).
Clear indication to industry to ramp-up Make in India efforts:
While some
action on restrictions on AC imports was anticipated, the total ban appears to be
a stricter step. Import duty hikes were expected on components and finished
goods, moving toward gradual import substitution. We view this as a clear signal
to the industry to scale up Make in India efforts. We expect more
announcements to curb loopholes such as unbundling. This may be a near-term
disruption for the industry, but a very good move over the longer term from the
industry evolution perspective.
Move could prove disruptive for industry:
While one may argue that the
industry could unbundle and continue with imports, our understanding is that
such a step may lead to input cost pressures, thereby eroding the economic
sense. Also, we view the sudden ban as a precursor to more announcements
from the government, including the raising of import duties on components as
well. Thus, we would like to believe that over the next 5–7 years, India would
perhaps be able to reduce its import dependency to almost nil.
Medium-term impact – beneficial for OEMs and leading brands:
India’s AC
industry is highly competitive, with 35–40 brands playing the penetration story
in India. While the Top 6 players enjoy 75–80% market share, the tail end forms
the remainder and largely operates on a trading business model. We believe
such business models would be massively impacted as India shifts toward
becoming more self-reliant in the AC industry. In the short run, this would imply
greater business to OEMs (tail-end players would opt for Indian OEMs at first) as
well as consolidation-led gains for leading brands (Top 5–6 players).
We note
that some of the brands (Panasonic, IFB, etc.) are also contemplating offering
their excess capacities to other brands.
(Also, refer
to later sections for
takeaways from Amber Enterprises Conference Call).
Expect complete revamp in industry’s functioning in longer term:
Near-term
gains notwithstanding, over the longer term, we see disruption even for leading
brands. Note that the business models of the Top 5–6 players also vary
drastically. In fact, leading brand Voltas is also highly flexible with its sourcing
strategy. We see capital intensity going up for leading brands as well. However,
we note that some brands have already set up their factories in India. Thus, such
disruption may allow them to regain some lost ground v/s leader Voltas. Thus,
even Voltas would have to adjust its business model to maintain its leadership
position.
Nilesh Bhaiya – Research Analyst
(Nilesh.Bhaiya@MotilalOswal.com)
Pratik Singh – Research Analyst
(Pratik.Singh@MotilalOswal.com)
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on
www.motilaloswal.com/Institutional-Equities,
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