The forecast of a scorching summer and pent-up demand over the past two years is expected to lead to higher air conditioner sales in the coming summer season. However, it will take several quarters for companies to pass on recent commodity price inflation to customers, which will affect margins.

High commodity inflation will dent operating margins for the air conditioning segment, which are likely to remain under pressure in the current fiscal year ending March, as well as the fiscal year ahead.

The forecast of a scorching summer and pent-up demand over the past two years is expected to lead to higher air conditioner sales in the coming summer season. However, it will take several quarters for companies to pass on recent commodity price inflation to customers, which will affect margins.

The prices of key commodities such as copper, aluminum, steel and plastics have risen sharply over the past 18 months. The industry was thinking of a 4 to 5% price increase in January to offset commodity price inflation in 2021. However, the conflict between Russia and Ukraine has further pushed up aluminum and copper prices by 54% and 18% respectively. years to date.

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

Daikin raised prices in January as raw material prices rose, but added some new features to its products for new star ratings. As a result, prices for different models of split room air conditioners increased by about 7-10% compared to last year.

Despite the price increases, such hyperinflation is expected to keep cost pressures on consumer durables high. “While we expect companies to pass on some of the price increase over the coming summer, we think it will not be enough to return to pre-Covid margins given the intensity of competition,” analysts at a domestic brokerage said.

Since it will take approximately two quarters to pass this price increase, analysts say the margins of AC manufacturers such as Blue Star and Voltas will be impacted by 100-300 basis points in the coming quarters.

Still, AC manufacturers such as Daikin, Blue Star, Panasonic and Voltas are hoping for a good summer season after two years of sluggish sales due to weak demand and the impact of lockdowns.

B Thiagarajan, general manager of Blue Star, recently told FE that compared to the summer of 2019, the residential AC industry is expected to grow by 20% this summer due to pent-up demand and projected heat wave conditions.

“During two summer seasons, people didn’t buy ACs because of Covid. And now the temperatures are skyrocketing. The company was sure to grow faster than the industry this summer. I think we will grow by 25%,” he said.


This post Rising Inflation To Hit Air Conditioning Segment Margins was original published at “https://www.financialexpress.com/industry/rising-inflation-to-hit-margins-of-air-conditioning-segment/2464744/”

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