The summer season for the cooling products which begins in March and ends in May accounts for nearly half of the total sales volumes during a year.
ET Intelligence Group: The manufacturers of air cooling products such as fans, air coolers and air conditioners are likely to face a second consecutive year of lower sales volume given the possibility of an extended winter. According to the Indian Meteorology Department, winter is expected to linger a little longer than usual due to western disturbance — a low pressure in the Atlantic Ocean and Europe that results in a cold wave.
The summer season for the cooling products which begins in March and ends in May accounts for nearly half of the total sales volumes during a year. Hence, any change in weather condition impacts the performance of companies.
In the current winter season, the frequency and intensity of the western disturbance is the highest in a decade, according to the Indian weather forecaster. Voltas has the highest share of revenue from cooling products at around 50 per cent, followed by Crompton at 46 per cent and Havells at 25 per cent, according to brokerage CLSA.
Voltas is the market leader in air conditioners while Crompton dominates the fan segment. The expected slippage in the volume growth in the fourth quarter may aggravate earnings downgrade for these companies. For instance, Voltas’s revenue growth for the cooling products division was just 0.9 per cent in the first nine months of FY19. Therefore, it would be a difficult task to meet the analysts’ estimated growth of 5 per cent for the full fiscal.
To make matters worse, the inventory levels are elevated at 2-2.5 months compared with an average inventory of 1-1.5 months due to weaker sales in the summer of 2018. It is the highest for air conditioners.
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In a conference call after the December quarter results, Havells said that channel inventory is still higher than what distributors would prefer. Voltas, too, reported a higher inventory across distribution channels. The growth of the air-conditioning segment which is the most under-penetrated cooling product is expected to drop to low single digit in FY19 against 13 per cent average growth in the past three fiscals.
There is not much relief on the raw materials front as well. The raw material costs increased after the government raised customs duty on air conditioners and condensers in September 2018. The companies were unable to pass on higher costs to the consumer due to subdued demand, which affected profitability. The operating margin (EBIT margin) of Voltas’ cooling products division fell by 450 basis points year-on-year to 8.5 per cent in the December quarter.
On average, share prices of these companies have dropped by 12 per cent in the past six months compared with the 6 per cent drop in the Nifty50 index. The trend is likely to continue in the medium term considering the demand slack.
