This week’s increase in the customs duty on air-conditioners, washing machines, and refrigerators could boost localisation as the companies seek to enhance their cost competitiveness.
Localisation content in ACs, refrigerators and washing machines is currently in the range of 65-70 per cent. The most significant impact of the change could be in the air-conditioning sector as imports account for more than 30 per cent of total volumes, while import volumes of refrigerators and washing machine is less than 20 per cent.
The total size of the AC market is around Rs 20,000 crore. The change in tax structure could support localisation of many models of ACs considered not cost competitive earlier, particularly cassette-type ACs. The tangible impact on higher localisation will reflect in the next season as importing companies start giving orders to Chinese suppliers from November.
The shift to a higher share in local manufacturing could boost AC contract manufacturer Amber Enterprises, and it may be able to gain wallet share among the leading AC brands. Amber has 19 per cent share in the total AC market in India and more than 50 per cent market share in the contract manufacturing segment. The company follows the brand-neutral strategy and caters to eight top AC brands in India.
So, increased domestic manufacturing will lift the capacity utilisation of the company. Amber is targeting a volume of 2.1 million units for the current fiscal year, implying a growth of 10 per cent YoY. But due to change in customs duty, it is targeting 20-25 per cent growth in FY20.
However, in the medium term, Havells and Voltas could be affected. The AC segment under the Lloyds brand contributed nearly 18 per cent of total sales at Havells. According to CLSA, Havells procures from both its erstwhile parent (30 per cent) and through imports (70 per cent). Havells could increase their sourcing from contract manufacturing, such as Amber, or could expedite the commissioning of own manufacturing units, which were likely to start by the end of FY19. The new facility of Havells will have the capacity to manufacture 6 lakh units a year.
The earnings of India’s largest AC brand, Voltas, may be affected due to its consumer durable joint venture with Arcelik, which forayed into white goods space on September 13. Under the JV, the company will be supplying refrigerator, washing machine and microwave by entirely importing from China, Turkey, and Thailand until its new facility in Sanand.
The development was first reported by ET Markets