Air Conditioning Companies to face the heat as Dealers Destock

Tax rates aside, another serious impact of the new goods and services tax (GST) is slowly sinking into companies and investors, as the countdown to its implementation has begun. Consumer sectors where the dealer is the final point of sale are likely to see a slowdown in sales for the June quarter. This is the fallout of dealers destocking old inventories to clear out products bought under the pre-GST tax structure.

Among the consumer sectors, air conditioner (AC) manufacturers such as Voltas Ltd and Blue Star Ltd will take a hit on revenue as the June quarter, being the peak summer season, rakes in a huge chunk of annual revenue.

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In fact, this time round a severe summer had otherwise started the year with robust sales growth in April. But, as multi-brand outlets started destocking, sales in May for the industry tapered.

Dealers started cutting back inventory through aggressive sales and discounts. A report by Jefferies India Pvt. Ltd highlighting key takeaways from dealer meets says discounts range from 25-50%. The trigger was the GST rule that all inventory purchased before 30 June 2017 will have to seek input cost tax credit separately, which could range between 60% and 100% based on the documentation available for the old stock.

Stocks post-GST, however, will have no issue. So, dealers are hesitant to lift fresh stock until GST comes into force, with some likely to shy away until the tax machinery functions smoothly. All this will temper sales for FY18, too. In its 5 June report on Blue Star, brokerage and research house JM Financial Research says that the firm’s management itself has lowered forecast for AC sales from 25% to 17-18% during FY18. A similar downgrade in revenue is expected for Voltas, too.