AC industry sweats on high GST rate

The cooling products (room air-conditioner and refrigerator) market in India witnessed several challenges during fiscal 2018. While implementation of goods and services tax (GST) resulted in a market frenzy to liquidate pre-GST stocks, industry players faced another issue of a change in energy efficiency ratings. The former forced cooling product makers to heavily discount their unsold inventory while the latter resulted in a pricing issue between old and new (energy labelled) stocks in the market.

The overall market has gradually stabilised post the two challenges even as cooling products taxed at the highest bracket still lingered in the minds of Indian and multinational companies. While the recent decision by the GST Council to bring refrigerators in the 18% tax slab brought cheers in the market, players in the room air-conditioner (RAC) industry have been left high and dry as they are still taxed in the 28% bracket.

Adding to the woes of RAC makers was the uncertain weather conditions that lead to major de-growth in this product category during the peak business season.

According to Kamal Nandi, business head and executive vice president, Godrej Appliances, the weather has played truant this year. “April is supposed to be the big month for the industry in terms of AC secondary sales. But, this year, the secondary sales de-grew by almost 19% in April alone (due to unseasonal rains and mild summer), affecting the sentiments of the distribution channel. Besides, due to a switch-over to the new Indian Seasonal Energy Efficiency Ratio (ISEER) table in January 2018, there was huge inventory in the distribution pipeline of the old Energy Efficiency Ratio (EER) table products, till March 2018. This delayed the introduction of the new 2018 ISEER stock keeping units (SKUs) to the end consumer,” said Nandi.

Though the weather improved in North India, starting third week of May and in June, there wasn't much up-stocking from the companies to trade, considering existing stock in the pipeline plus the ‘shortened’ summer. This added to the challenges, in terms of inventory and de-growth in terms of primary billing, for the period January to June, and is expected to be around 15% this year. And ACs, being the most profitable category of home appliances has now put a deterrent to the initial growth plans.

The demand scenario, however, has improved based on channel checks and management interaction, according to Naveen Trivedi and Siddhant Chhabria, research analysts at HDFC Securities. “We noted that March-April were washout (primarily South region) months owing to pre-monsoon showers and storm. However, since mid-May onwards temperatures have been rising in the north/west region on an average by over one degree celsius year on year. This was driven by an extended summer. Our checks confirmed that higher temperatures have resulted in a recovery in consumer offtake primarily for air conditioners since air coolers require consistent heat (impulse purchase),” the analysts said in their report.

What hasn't changed though is the 28% GST rate on RACs which is not helping the industry to grow. As per Bureau of Energy Efficiency (BEE), the RAC industry grew at a modest 7% pace in volume terms during FY18 to 6.9 million units versus 37% growth in FY17. Slower industry growth was attributed to GST disruption, rating change (change in energy efficiency norms) and the high base of last year.

B Thiagarajan, joint managing director, Blue Star Ltd, said while ease of doing business is something that’s happening, we are being over-regulated by things like energy efficiency, refrigerant, the non-tariff barriers, e-waste etc. “Regulations can grow with the market but it should not be one-sided wherein regulations are growing but the market is not in the same proportion. There needs to be a right balance. We are only asking the government to also help us grow the market. We want to be energy efficient, environment-friendly and so on but all that should be compensated for market growth. For example, if inverter five-star AC consumption has to grow in the market, that product category has to come in the 12% goods and services tax (GST) bracket instead of 28%. That’s the only way industry/ market will grow and businesses will become profitable. That’s how other countries have done it in the past so we are not saying anything new,” Thiagarajan had said in an earlier interaction.

Thiagarajan makes a valid point on the aspect of over-regulation by the government while suppressing growth through higher tax levies. While industry players see the valid reason for regulations, they aren't very pleased with the high frequency of new regulations being introduced thus leaving the industry grappling to handle everything at the same time.

“Case in point is the ISEER upgrades for air conditioners - which are being revised every two years since 2010. Although it was a challenge for manufacturers to cope, India has now reached higher ISEER standards levelling the global AC market. There is Quality Control Order (QCO) also in the offing, which has aggravated the need to revamp all standards pertaining to heat exchangers, compressors, indoor/ outdoor units, complete air conditioners, etc. This also warrants huge investments in testing labs, etc,” said Nandi.

That's not all, the refrigerant changeover considering the global warming potential has thrown a lot of challenges for the service sector, by which the service technician needs to handle multiple refrigerants like R22, R410A, R32 & R290 in an air conditioner. Then there is e-waste and plastic waste regulations being implemented, too.

“The industry accepts all the regulations considering the positive impact on the end consumer and working towards a sustainable environment. However, we feel a systematic roll-out including a breather should be given as well since it entails investments in several functions including research and development (R&D), testing labs, manufacturing processes and so on. The new regulations, however imperative, are adding to the cost of operations, thereby causing an increase in the product prices,” said Nandi.

Industry players are of the view that the government needs to look at things taking into consideration all the aspects of changing lifestyle. Take for instance the positive impact of the GST Council's decision to cut tax rates on refrigerators, washing machines, television (up to 27 inches) and other home appliances. The market has already started to see price reduction by LG, Samsung, Godrej, Panasonic, Havells, Bosch Siemens etc., which have taken a 7% to 8% price cut on their washing machines, refrigerators while more players are likely to follow suit thus spelling growth for the sector.

Gunjan Srivastava, managing director and chief executive officer, BSH Household Appliances, said, “Today most consumer durable items like refrigerators, washing machines and ACs have become common household items and are not a luxury anymore.”

Players in the AC segment are not giving away so soon though. And there are hopes that AC tax rates will also witness a review from the GST Council. “There is a high possibility that ACs will also be brought in the lower tax bracket in the next meeting of the GST council members,” said an executive from one of India's leading AC manufacturing companies.