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AC industry: Big expectations from Budget

June 29, 2009 18:41 IST
The ongoing economic buoyancy in India despite global economic melt down has offered opportunities for rapid growth of consumer durable industry, and in particularly air conditioners and refrigeration industry.

In general, there are different types of air conditioners, but the broader classification was room air conditioners and commercial range of air conditioners.

The room air conditioners category consists of both the window and split ACs for the use in residential and commercial spaces.

The commercial air conditioning comprises of the ductable split ACs to large sized chillers. This segment comprises of retail chains, MNCs, IT/ITeS sectors, BPOs, call centres, institutes, malls, etc. The market is of around Rs 3,600 crore, and is growing at the rate of approximately 25 per cent annually.

Although the commercial air conditioning segment has been tepid with the slow down in the new infrastructure projects, the room air conditioners category was expected to perform well on the back of extended summer.

Around 35 per cent of the sales generally take place in summer, ie in the months of April and May 09. Blue star which has recorded sales of around 1.5 lakh units of window and split AC's in the fiscal ended March 09 is expecting a growth of around 10-15 per cent in this fiscal.

The subdued spending in metros has taken its toll in the commercial air conditioning segment. However, expectations on the government stimulus for the infrastructure will enhance the growth in this segment. 

Record production of Window type air conditioners for the month of April 09

The production of window type air conditioners has reported 32 per cent increase in no of units to 174391 in the month of April 09 as against 13,2518 units in the corresponding previous period.

After a steep fall in the month of December to 16616 units, production ramped up on sequentially basis and recorded highest ever production in the month of April 09. This is due to the extended summer as well as the increase in the temperature levels of the tropical country.

On the other front, the production of refrigerators has improved by 13 per cent on y-o-y basis to 924.92 thousand units as against 815.79 thousand units in the corresponding previous period. However, on a sequential basis the production has observed a dip by marginal 4 per cent in the month of April 09.

Pre Budget Expectations of the air conditioners industry

The air conditioning and refrigeration industry is now on a high growth trajectory with an overall growth rate of 25 per cent per annum.

Since manufacturing activity of this industry is mostly in the organized sector, the government collects a good amount of excise duty, sales tax and service tax. The market penetration of air conditioners is a very low around 2 per cent.

Even refrigerator, which is a relatively mature product, has achieved a penetration of 15 per cent only. Hence there is a huge potential for growth for all the segments of the AC&R industry.

In order to improve growth of industry rapidly through rationalization of excise structure; to reduce disadvantage to the domestic manufacturing industry on account of anomalies in the FTA agreements and import duty structure; refrigeration and air conditioning manufacturers association - RAMA has submitted pre Budget memorandum to the Government of India. Some of the suggestions were as follows:

Recommends import of R 22 refrigerant gas and refrigeration and air conditioning equipment filled with R 22 gas should be allowed under open general license.

The inverted duty structure of duty on raw materials, while nil in the fully assembled air conditioners should be taken off, by including components or raw material for manufacture of air conditioners in Thailand FTA.

The provision of payment of excise duty on sale to EPCG license holder and the refund from DGFT should be removed. A specific exemption notification under central excise rules can be issued.

The Due date for the payment of service tax should be extended by 10 days to 15th of the next month.

Withdraw restrictions on input credit to the extent of 20 per cent of the output tax.

As against Notification no dated 19/03 dated Aug 2003, which provides for service tax to be paid on 33 per cent on the composite contract, reduce the valuation to 15 per cent in line with VAT legislation.

Service tax should be collected on 70 per cent of the maintenance contract value and the applicable VAT be charged on balance 30 per cent of the contract value.

As part of works contracts, all HVAC Electromechanical and refrigeration contracts are work contracts, provision of acts and rules should be applicable instead of erection, installation and commissioning service.

Clarification is requires to make it clear that all works carried out for airports railways transport terminals bridges tunnels and dams are exempted from payment of service tax.

Outlook

After some weakness, there was improvement in demand for air conditioners in the past couple of months.  With monsoons getting delayed, the premium demand continues.

Meanwhile, the players are straddling across price points to optimally capitalize on demand across the spectrum. Air conditioners are transforming from being luxury goods to the requirement goods category.

Also, with the penetration of air conditioners remaining low, and as greater thrust on infrastructure will also add to demand for centralised ACs etc, on an overall basis, the Union Budget 2009-10 can turn positive for air conditioners. 

But if the government hikes customs duty on steel, aluminium etc, it will lead to rise in costs and can turn negative for the air conditioner producers.

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