Sector Update | 23 March 2017
Room Air Conditioners
Refer to our report
on Room ACs, April
2016
Daikin India continues to focus on inverter ACs
Targets 20-22% growth in room ACs in FY18
We met the senior management team of Daikin India, one of India’s top-5 room air
conditioner (AC) manufacturers. Our key takeaways:
Achieves 40% growth in room ACs in FY17; targets 20-22% growth in FY18
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Daikin India witnessed a strong FY17, with room air conditioner (AC) sales up
40%, commercial/packaged AC sales up 15%, and VRV sales up 27-28%. In
4QFY17, the company is likely to see 40% growth in room AC sales.
Daikin India sold 0.6m units in FY17, against industry volumes of 4.5m units.
Despite demonetization, it achieved good sales in November-December; the
impact of demonetization was felt more in new housing unit sales in the real
estate sector, especially premium housing.
In FY18, the management expects the room AC market to grow 15% and Daikin
India to grow 20-22%.
Daikin is starting its new factory at Neemrana (Rajasthan), which would expand
its capacity to 1.2m units (currently 0.5m) by September/October 2017. The
increased capacity would be used for the domestic market as well as for exports
to Sri Lanka, Nepal, Bangladesh, and Africa.
For the industry, inverter ACs would account for a larger proportion of overall
sales in CY17 – likely at 25-30% against 12-15% in CY16.
Adoption would be faster in the metros/tier-1 cities than in tier-2/3/4 cities,
where relatively poor power quality and lower pricing of fixed-speed ACs may
entice customers to continue buying fixed-speed ACs.
For Daikin, inverter ACs account for 25-30% of sales; this should rise to 50% in
CY17/FY18.
Inverter ACs to account for 50% of Daikin India’s room AC sales in FY18
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Losing share to LG in inverter ACs, but gaining share in fixed-speed ACs
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Within inverter ACs, LG may take some share from the Japanese brands, given
its aggressive push and pricing during CY17. However, LG is losing share in fixed-
speed ACs to the benefit of Voltas, Daikin, and Lloyd.
Daikin has received enquiries from LG dealers that want to continue stocking
and selling fixed-speed ACs, as LG has discontinued fixed-speed models.
Daikin India could take price hikes post GST implementation in July 2017
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LG is present at the lower end of inverter ACs, with its 3-star models, whereas
Daikin India’s target segment is higher-end inverter ACs.
Daikin has not taken any material price cuts in CY17. Though it is providing some
incentives on its 3-star inverter ACs to push sales, it has had no promotional
schemes for its 4/5-star inverter ACs during the year. The company could take
price hikes post GST implementation in July 2017.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
8 August 2016
1
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Ankur Sharma
(Ankur.VSharma@MotilalOswal.com); +91 22 3982 5449
Amit Shah
(Amit.Shah@MotilalOswal.com); +91 22 3029 5126

Capital Goods
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Daikin India’s inverter ACs are priced ~15% higher than LG’s models. Though
Daikin is reducing the price gap with peers, it intends to retain some premium.
Commercial AC sales sluggish; demonetization impact on real estate visible
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The real estate sector in India was seeing a slowdown over the past few years.
Demonetization aggravated the situation in the latter half of CY16.
Daikin India does not see a near-term recovery.
Daikin India aims at market leadership in room ACs by 2020
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In its 5-year strategic plan, ‘Fusion 2020’, Daikin India aims to be the number-1
room AC player in India by 2020.
Some of the key initiatives under this program include (a) higher localization, (b)
increased distribution reach, (c) improving brand recognition and visibility, and
(d) reducing price premium.
Daikin India has already reduced the price gap with peers to 10-15% and the aim
is to further narrow this to 5%.
Exhibit 1: Split air conditioner energy ratings (fixed-speed)
Description
Star Level
1 Star *
2 Star **
3 Star **
4 Star ****
5 Star *****
Energy Efficiency Ratios (Watt)
Minimum
Maximum
2.7
2.89
2.9
3.09
3.1
3.29
3.3
3.49
3.5
Source: BEE, MOSL
Exhibit 2: Inverter air conditioner energy ratings
Description
Star Level
1 Star *
2 Star **
3 Star **
4 Star ****
5 Star *****
ISEER
Minimum
3.1
3.3
3.5
4.0
4.5
Source: BEE, MOSL
Maximum
3.29
3.49
3.99
4.49
Exhibit 3: Rating-wise split of air conditioner sales in India
Others, 10
5 Star, 20
Exhibit 4: Player-wise sales of inverter air conditioners
Description
Industry
Daikin
Blue Star
Voltas
Lloyd
Hitachi
% of total
10%
25-30%
13-14%
5-7%
5%
40%
Source: Industry, MOSL
Inverter, 10
3 Star, 60
Source: Industry, MOSL
23 March 2017
2

Capital Goods
NOTES
23 March 2017
3

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Capital Goods
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