An extended summer and the possibility of hotter-than-usual weather due to El Niño are expected to provide a boost to India’s room air conditioner (RAC) market. However, the industry is unlikely to witness the 20-25% growth that many had anticipated at the beginning of the season, primarily because dealers have remained conservative in stocking inventory.

According to Praveen Sahay, PL Capital while consumer demand at the secondary level has been encouraging since mid-April, weak primary sales have prevented the industry from fully capitalising on the seasonal opportunity.

Secondary Demand Strong, But Primary Sales Lag
Sahay noted that channel checks indicate healthy off-take at the retail level throughout May, but manufacturers have not seen a proportional increase in shipments to dealers.”On the RAC, we did a channel check recently, and definitely the secondary demand has been very good post-15th April throughout May. That led to good traction at the secondary level. However, we also got to know that the primary sales have not been as expected, even though the summer is continuing. Expectations were for nearly 20-25% growth, but that is not happening at the primary level because inventory in the channel was lower. Dealers were not very enthusiastic about the extended or harsh summer in terms of building inventories.”

He added that the industry’s volume growth has remained below expectations.
“Nearly around 15% growth is what we had envisaged based on our channel checks as well as data published by secondary sources, so that is below expectations.”
El Niño Could Extend the Seasonal Boost
Although the first quarter may not deliver the anticipated growth, Sahay believes the extended summer could benefit the industry during the traditionally weaker second quarter.

He expects RAC sales to recover to around 58 lakh units in the first quarter, compared with approximately 51 lakh units last year, but does not foresee volumes exceeding that level.

“Coming to the El Niño impact, it may extend the summer, especially into July. Q2 is usually a lean quarter for RACs. In good years, the industry sold nearly 17-18 lakh RAC units in the secondary market, while last year it was around 15 lakh. We expect that, with the El Niño impact, sales may reach 18 lakh. Altogether, Q1 and Q2 growth would be nearly around 17% plus, not the 20-25% that was expected.”

He also pointed out that performance differs significantly across brands.

“Brand-to-brand, these numbers are varying. Some companies are very aggressive and are doing very well in terms of volumes, and one of them is Voltas right now.”

Partial Price Hikes Could Squeeze Margins
While inflationary pressures and rising commodity costs prompted manufacturers to announce price increases, Sahay said only part of those hikes has been implemented because of intense competition and soft consumer sentiment.

“The first price hike was taken in January to adjust to the BE norms, and all brands absorbed it because the GST reduction gave them some leeway. Ultimately, consumers did not face any price hike. In April, the announced price hike was around 10% to 11%. In our channel checks, we found that only 5% to 6% has been implemented so far. Some discounting and rollbacks have also happened.”

He believes companies have struggled to fully pass on higher costs.

“Competitive intensity has increased. Maybe consumer demand is also getting impacted because of inflation. Those are the reasons why the entire price hike has not been taken, and that will definitely lead to some margin pressure for all the players because they are not able to pass on the entire commodity cost increase.”

Dealers Playing It Safe
The industry’s biggest challenge this year has been the cautious approach adopted by dealers despite favourable weather conditions.

Sahay said dealer inventory levels remain significantly lower than in previous years.

“Our channel checks show that secondary demand has been good, but primary demand is still lower. Earlier, dealers were carrying inventories of more than 30 days. Right now, what we get to know is that inventory is nearly 10 days lower, at around 20 days. That has led to softness in primary sales. Expectations were for 20-25% growth, looking at the harsh summer, extended summer and El Niño impact, but dealers were quite cautious in building inventory. That has led to softer demand. Nearly around 15% growth is what we are estimating so far.”

Q1 Growth Seen at Around 15%, Margins Remain Under Pressure
Looking ahead, Sahay expects the industry to deliver around 15% volume growth in the first quarter of FY27, while profitability is likely to remain under pressure because companies have not been able to fully recover rising input costs through pricing.

“Earlier expectations for volume growth were higher. So far, for Q1, we are estimating around 15% growth. On the margin front, as I highlighted earlier, commodity inflation required a price hike of around 10-11%. The players announced it, but the absorption has been only 5% to 6% so far. There is a gap of nearly 5%, which will definitely impact the margin profile for all the players.”

While the extended summer could provide additional support in the coming months, the industry’s overall performance will largely depend on whether dealers become more confident in rebuilding inventories and whether manufacturers can protect margins amid competitive pricing.