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AC makers see declining trend in sales realisations

06-July-2004
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AC makers see declining trend in sales realisations

In spite of an increased customer tendency to go for greater value-added products, the average sales realisations on air-conditioners (ACs) have shown a declining trend over the past few years. "The realisations have declined because of increased competition from market entrants such as LG and Samsung, which forced the established players such as Carrier and Voltas to reduce their prices in order to protect their market share," industry analysts said.

Commenting on the trend, analysts said, "The fact that the consumer is going for value-added products is visible from the increase in the share of split ACs in the total AC sales." A Consumer Electronics and TV Manufacturers' Association (CETMA) official told Business Line that, "Though it is true that consumers are purchasing premium products, the market of such buyers is still very small. The revenue generation comes from the entry-level or low-end products."

The industry is expecting to close the current year with a sale of 1.2 million units. It closed 2003 with a figure of 9.50 lakh units last year. According to ICRA, price realisations are expected to decline further during financial year (FY) 2004 because of the excise duty reductions announced in the Union Budget for 2003-04. However, according to CETMA, if there is any price dip it would be very marginal since input costs have gone up. Besides, the industry does not see any chance of further deduction in excise duty from the existing 24 per cent.

Because of the significant dip in price realisations and increase in selling expenses, the operating margins for the AC industry as a whole have shown a declining trend over the past five years, the ICRA analysis revealed. In FY 1999, the operating margin dropped again as the employee costs incurred by players increased by more-than-proportionate terms.

Though the operating margin rose again in FY 2000 because of a move towards cost control on the part of most of the players, the overall trend in the operating margins has been declining, mainly because of increased competition, ICRA said.

For the AC industry as a whole, the return on capital employed and return on net worth, has shown a decline over the past five years mainly due to drop in operating margins, ICRA commented. With competition intensifying, AC manufacturers have had to provide longer credit period to the dealers, resulting in receivable days, on the whole, going up over the last five years to 88 days in FY 2003 from 68 days in FY 1998.

"However, manufacturers have tried to compensate for the increasing trend in receivables days with better inventory management. The creditor days have gone up as major companies such as Voltas, Carrier, and Hitachi have managed to raise their credit periods," ICRA said.

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