Air-conditioner stocks are likely to remain in focus as weak demand trends, rising costs, and fuel supply disruptions cloud the near-term outlook. However, industry experts see a potential recovery if weather conditions turn favourable. A report by brokerage house Nuvama flags a “trifecta” of challenges. These include weather volatility, input cost pressures and fuel shortages, at a time when the industry is entering its most critical sales period.
Geopolitical tension hit factory floors
One of the more unusual pressures this season is coming from geopolitics, the report noted. Tensions in West Asia have disrupted supply routes through the Strait of Hormuz, a key chokepoint for a large share of India’s LPG imports. This is beginning to show up not just in energy markets, but also on manufacturing lines, the report added.
LPG is the most commonly used fuel for brazing components in AC production. With supplies tightening and prioritised for household consumption, manufacturers, particularly EMS players, are being forced to switch to alternatives such as oxy-acetylene, as per the report.
There’s a catch, though: oxy-acetylene is more expensive, requires changes in production processes, and comes with higher safety and handling requirements. While acetylene can be produced without crude oil, India depends heavily on limestone imports for this route, and nearly 94% of that supply also comes from the Middle East, creating a parallel supply risk, according to the report.
Higher prices add to demand woes
The second point that the brokerage firm highlights is rising AC prices. Companies have already implemented price hikes of 5–10% at the retail level, with some brands taking increases of up to 9–12% in response to rising input costs.
These increases are being driven by a combination of factors: currency depreciation, higher commodity prices and regulatory changes such as tighter energy efficiency norms, the report noted. The result is what the report describes as a cost-heavy environment for both manufacturers and buyers.
However, companies are not able to fully pass on these costs. Intense competition and the growing presence of private labels are forcing brands to absorb part of the increase, leading to margin pressure even as prices rise, the report acknowledged.
Weather volatility disrupts early demand
The summer season has started unevenly, with demand proving highly sensitive to weather patterns. North India saw a strong pickup in mid-February, but unseasonal rains in March have cooled temperatures and disrupted momentum, the report said.
Across regions, sales trends have remained inconsistent, with channel partners reporting slower-than-expected demand and holding slightly elevated inventory levels. As a result, dealers are cautious about building stock ahead of the peak season, the report noted.
The report further added that while overall temperatures are marginally higher year-on-year, regional variations, particularly cooler conditions in parts of the south and rainfall in the north, have delayed a broad-based demand recovery.
Growth muted in near-term, but recovery possible
Given this backdrop, Nuvama expects modest revenue growth for AC brands in the March quarter, with margins under pressure due to cost inflation and under-utilisation of capacity. The outlook is more challenging for EMS players, which are more exposed to both supply disruptions and input cost volatility.
Still, the brokerage sees room for recovery. It expects weather conditions to improve from April, with El Niño likely to persist through June–July, potentially leading to a stronger and more prolonged summer season that could revive demand and help clear channel inventory, as per the report.
Brokerage sees opportunity in recent weakness
Despite the near-term headwinds, Nuvama remains constructive on the sector’s medium-term prospects. It has recommended using the recent correction to accumulate stocks such as Amber Enterprises, PG Electroplast and Havells, citing long-term drivers such as low AC penetration, rising incomes and growing demand from smaller cities.