house hold appliances outlook 2007'08 to 2012'13

CRISIL RESEARCH HOUSEHOLD APPLIANCES ANNUAL REVIEW A-i

Sections

Executive summary A-1

1.0 Demand outlook A-3

- Demand methodology A-4

2.0 Colour television A-9

3.0 Refrigerators A-15

4.0 Washing machines A-21

5.0 Air conditioners A-27

6.0 Outlook on profitability A-31

7.0 Key success factors A-35 Box

1.0 Demand outlook

01 Methodology for forecasting demand for household appliances A-7

Charts

2.0 Colour television

01 CTV - Volume break up A-9

3.0 Refrigerators

01 Refrigerator - Volume break up A-15

4.0 Washing machines

01 Washing machines - Volume break up A-21

6.0 Outlook on profitability

01 CTV - Profitabili ty outlook for 2008-09 and 2009-10 A-32

02 Refrigerator - Profitabili ty outlook for 2008-09 and 2009-10 A-32

03 Washing machine - Profitability outlook for 2008-09 and 2009-10 A-33

04 AC - Profitability outlook for 2008-09 and 2009-10 A-33 Figures

Executive summary

01 Replacement / fresh demand A-1

02 Urban/rural sales A-2 Continued…

Opinion October 2008

A-ii CRISIL RESEARCH HOUSEHOLD APPLIANCES ANNUAL REVIEW

…continued Figures

1.0 Demand outlook

01 Household appliances - Proportional share of products A-4

02 Household appliances - Penetration curve A-5


01 CTV - Volumes A-9

02 CTV - Replacement proportion A-10

03 CTV - Urban/Rural sales A-10

04 CTV stock in rural market A-11

05 CTV stock in urban market A-11

06 CTV - Value A-12

07 CTV - Segmental mix A-13

08 LCD - Volumes A-13

3.0 Refrigerators

01 Refrigerator - Volumes A-15

02 Refrigerator - Replacement proportion A-16

03 Urban/Rural sales A-16

04 Refrigerator stock in rural market A-17

05 Refrigerator stock in urban market A-17

06 Refrigerator - Value A-18

07 Refrigerator - Segmental mix A-19


01 Washing machines - Volumes A-21

02 Washing machines - Replacement proportion A-22

03 Urban/Rural sales A-22

04 Washing machine stock in rural market A-23

05 Washing machine stock in urban market A-23

06 Washing machines - Value A-24

07 Washing machines - Segmental mix A-25

5.0 Air conditioners

01 AC - Volumes A-27

02 AC - Value A-28

03 AC - Segmental Mix A-29

7.0 Key success factors

01 Selling expenses as a proportion of sales - 2007-08E A-35

continued…

CRISIL RESEARCH HOUSEHOLD APPLIANCES ANNUAL REVIEW A-iii

…continued

Tables

Executive summary

01 Growth rates at a glance A-2

1.0 Demand outlook

01 Household appliances - A snapshot A-3

02 Household appliances - Industry size A-4

03 Sales hierarchy (2007-08) A-5

04 Consumer durables - A snapshot A-6


01 CTV - Value break up A-12

3.0 Refrigerators

01 Refrigerator - Value break up A-18


01 Washing machines - Value break up A-24


01 AC - Value break up A-27

02 Air conditioners - Demand contribution (2007-08) A-28


01 Key financial indicators A-31


01 Business profile A-36

CRISIL RESEARCH HOUSEHOLD APPLIANCES ANNUAL REVIEW A-1

The household appliances industry comprising colour television (CTV), refrigerators, washing machines and room air conditioners (RAC) has been estimated at Rs 208 billion in 2007-08. The sector is projected to grow annually by 9-11 per cent in value terms during the next 5 years to reach a size of around Rs 337 billion by 2012-13. In volume terms, RACs are expected to record the highest growth rate of 12-14 per cent, followed by washing machines at 9-11 per cent, CTVs at 7-9 per cent, and refrigerators at 6-8 per cent. The industry is expected to witness sluggish growth in the short term, mainly due to the overall slowdown in the economy which has led to reduced spending by consumers. Increasing inflation, higher interest rates as well as rising commodity prices have resulted in falling demand for household appliances. In the first quarter of 2008-09, all product categories except CTV registered slower growth as compared with the previous year. Replacement demand is expected to account for more than 50 per cent of total CTV sales by 2012-13. In case of other products, while replacement demand is growing at a faster pace than fresh demand, its contribution to total sales will remain below 50 per cent. Increasing income, rising affordability, shorter replacement cycle, relatively under penetrated rural India, and increase in upper middle class population would continue to drive the overall demand for the household appliance industry. Figure 1: Replacement / fresh demand

Proportion of sales - 2012-13 P

52 4740

48 5360

0

10

20

30

40

50

60

70

80

90

100

CTV Refrigerator Washing machine

(per cent)

Replacement demand Additional sales

Source: CRISIL Research Increasing income in the hands of farmers - on the back of higher prices for commodities, farm loan waivers - as well as increased pay in the hands of the government employees following the sixth pay commission will drive demand from rural markets. Nevertheless, the CTV segment will benefit the most from the rural market, which is likely to contribute to more than half of the total industry demand by 2012-13. For other product categories, demand would remain urban centric.

Executive summary

A-2 CRISIL RESEARCH HOUSEHOLD APPLIANCES ANNUAL REVIEW

Figure 2: Urban/rural sales

CTV Refrigerator Washingmachine

44

56

78

22

71

29

(per cent)

Urban/rural sales - 2012-13 P

Rural sales

Urban sales

Source: CRISIL Research Value growth is expected to exceed volume growth across products, except CTVs, where value growth will be almost in line with volume growth. Price hikes and shifting segmental mix in favour of higher end products in all segments will drive this value growth. Table 1: Growth rates at a glance

Projected CAGR (2007-08 to 2012-13)

CTV REF WM AC

Volume Growth 7 7 9 13

Value Growth 8 9 12 17

Source: CRSIL Research

The household appliances industry’s profitability is mainly driven by realisation changes, raw material costs and the ability of players to increase prices. In 2008-09, CRISIL Research expects industry margins to decline for all products due to higher raw material costs and the inability of players to increase prices to the same extent. The marginal hike in prices and segmental shift towards higher end products will help mitigate the fall in margins to a very limited extent.


Summary This section deals with CRISIL Research’s long-term (5-year) demand outlook for the household appliances industry. The value growth and demand trends for each segment, key trends in sub-segments and important demand drivers have been discussed, which provide an insight into where the industry is headed by the end of 2012-13. This section also explains the methodology used and key assumptions made while projecting industry growth. The household appliances industry is expected to grow by 9-11 per cent annually in value terms between 2007-08 and 2012-13. Value growth in all the product categories, except CTVs, is expected to surpass volume growth, mainly because of improvement in average realisation due to a shift towards higher-end premium products and marginal increase in product prices. The volume growth would be led by air conditioners and washing machines, which are expected to grow at a faster rate than CTVs and refrigerators, given their relatively low penetration levels. The industry growth would be driven mainly by increase in household income as well as demand from the replacement market. Table 1: Household appliances - A snapshot Product 2002-03 to 2007-08 2007-08 to 2012-13 P

Volume Volume Volume Volume

Category Growth Growth Growth Growth

Colour television 12% 3% 7-9% 7-9%

Refrigerators 7% 8% 7-9% 9-11%

Washing machines 12% 12% 9-11% 10-12%

Air conditioners 21% 16% 12-14% 14-16%

Household appliances industry 7% 9-11%

P: Projected

Source: CRISIL Research

Note: The scope of the coverage of household appliances in this report is restricted to major household appliances including Colour television, Refrigerators, Air conditioners and Washing machines. The household appliances industry is expected to witness sluggish growth in the short term, mainly due to the overall slowdown in the economy which has led to reduced spending by consumers. Increasing inflation, higher interest rates as well as rising commodity prices have resulted in falling demand for household appliances. In the first quarter of 2008-09, all product categories except CTV registered slower growth as compared with the previous year.

1.0 Demand outlook


The size of the household appliances industry (for major appliances) is estimated to be Rs 208 billion in value terms in 2007-08. The industry, which has grown at around 7 per cent annually during last 5 years, is expected to grow annually by around 9-11 per cent from 2007-08 to 2012-13. Table 2: Household appliances - Industry size Value (Rs billion) 2002-03 2007-08 2012-13 P

CTV 81.1 96.0 138.4

Refrigerators 32.8 48.1 75.0

Room air conditioners 20.7 44.5 88.9

Washing machines 10.9 19.7 34.8

Household appliances 145.6 208.2 337.0

P: Projected


Figure 1: Household appliances - Proportional share of products

23

21

564147

22

22

1427

8 109

0

10

20

30

40

50

60

70

80

90

100

2002-03 2007-08 2012-13 P

(per cent)

CTV Refrigerators Room air conditioners Washing machines

Source: CRISIL Research Going ahead, air conditioners would continue to be the highest growing segment, mainly driven by the split AC segment, and would account for 27 per cent of the total industry size by 2012-13. The washing machine segment will post the second-highest growth, with an annual growth of 9-11 per cent between 2007-08 and 2012-13. The share of CTVs in the total industry size is expected to decline from 56 per cent in 2002-03 to 41 per cent in 2012-13. Demand methodology Asset preference hierarchy Asset preference hierarchy forms the basis of our estimation methodology. The preference hierarchy principle states that buying behaviour always follows a hierarchical pattern. It is assumed that a consumer will buy durables only after his basic needs for sustenance (like food, clothing, shelter) and essential needs (like transportation, communication and education) are met. Even in durables it is observed that a consumer buys products in a specific hierarchical order. Consumer preference for a product is not only driven by its affordability, but also its perceived utility for the cost of ownership (value for money)


Table 3: Sales hierarchy (2007-08)

2007-08 Sales (million units)

Mobile connections 85.8

CTV 10.3

Two wheelers 7.2

Refrigerators 4.4

Washing machine 2.1

Air conditioners 2.0


Note: The sales volumes above can be considered as indication for the preferential hierarchy. Whereas, the air conditioners are at the bottom of the hierarchical list (depicted in graph), the steady price declines have improved perceived utility/ price ratio resulting in air conditioners slowly closing up with washing machine in terms of its perceived utility.

In consumer’s hierarchy, mobile phones are the most preferred appliance followed by colour televisions, two wheelers, refrigerators, washing machines and air conditioners. Any drastic change in the product’s price would change the ratio (perceived utility/ cost of ownership), thereby altering the consumer’s preference hierarchy (for durables). For example, mobile phones have steadily risen in the consumer’s preference hierarchy with the drastic fall in cost of ownership. Figure 2: Household appliances - Penetration curve

0

8

16

24

32

40

48

2002-03 2007-08 2012-13 P

(ow

ner

ship

per

100

ho

use

ho

lds)

Mobile connections CTV Two wheelers

Refrigerators Washing machines

Note: 1. Mobile connections penetration reached 114 in 2007-08 and is expected to reach around 223 in 2012-13,

and therefore, has not been included in the graph. Source: CRISIL Research


Table 4: Consumer durables - A snapshot Durables Sales CAGR Average Maintainence/ Replacement Rural

(2007-08) (5 year) price Running cost demand sales

Unit (Million nos) (Per cent) (Rs./unit) (Million nos) Per cent

Colour television 10.3 7 9,300 Low 4.3 47

Refrigerator 4.4 7 10,900 High 1.9 21

Washing machine 2.1 11 9,300 Medium 0.7 16

Room air conditioner 2 21 22,000 High 0.2 3

Two wheeler 7.2 8 40,000 Medium 3.3 55

Mobile phones 85.8 62 2,000 Low n.a. 24

Durables Power Perceived Availability Consumer Urban/

consumption utility of segment Rural centric

Unit alternatives

Colour television Low High No Households/ Commercial Urban/ Rural

Refrigerator High High Yes (Limited) Household Urban

Washing machine Medium High Yes Household Urban

(for metro consumers)

Room air conditioner High Medium Yes Households/ Commercial Urban

Two wheeler - Medium Yes Personal Urban/ Rural

Mobile phones Low High Yes Personal Urban/ Rural

n.a. - not available

Note

1. Mobile phones sold during the year are assumed to be equal to the number of new connections in that year.



Box 1: Methodology for forecasting demand for household appliances

In order to forecast domestic demand for household appliances, CRISIL Research has first estimated and forecast stock of each appliance. The annual differences between the stock represent fresh demand (including demand for upgrades), to which estimated units of replacement (life expired) are added to arrive at forecast sales. Upgrade demand is assumed to add to the stock of appliances, since in India used durables are purchased by lower income households. The stock also includes multiple units owned by a small proportion of the households. Stock demand has been projected using income distribution and penetration forecasts, using historical data from NCAER surveys of income and ownership. CRISIL Research has forecast income distribution, based on economic growth assumptions and their impact on urban and rural incomes. In order to project penetrations, it has been assumed that any changes in asset preference hierarchy will primarily depend upon only significant changes in perceived utility to cost of ownership ratio. Since price of an appliance is only one component of cost of ownership (the other being recurring expenses) and perceived utility can change only gradually with product changes and market evaluation, this has implied virtually no change in asset preference hierarchy over the 5 year projection period. It has further been observed that for a given income category, probability of purchase increases with time and the same has been extrapolated into the future. Replacement demand has been estimated based on assumptions on the life of critical components and average usage, based on interactions with industry sources. Upgrade demand has been projected based on current and expected estimates of average year to upgrade in urban and rural markets, though in reality this may be influenced by product changes in the future. Using this method, demand has been separately estimated for urban and rural markets, and then aggregated. The income penetration-based method has been used to arrive at demand forecasts for colour television sets, refrigerators and washing machines for 2012-13. For room air conditioners, growth in demand from household and commercial segments have been separately assumed, based on sales trends, expected price movements, and trends in household incomes and commercial activity. For each appliance, aggregate demand forecasts have been split into extrapolations for each category and size segments. This disaggregation has been based on recent historical trends, expected manufacturer’s action and expected changes in relative prices of segments. Future prices have been assumed based on intensity of competition, cost trends of major components and expected player focus on specific segments. Value growth forecasts for each appliance are derived from volume forecasts, the impact of changes in segmental mix on average realisation, and expected changes in product prices.

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Annual CTV demand expected to touch around 15 million units by 2012-13 Chart 1: CTV - Volume break up

Total volume growth7.3%

Fresh demand growing at a CAGR of 3.3 %

Replacement demand growing at a CAGR of 12.0 %

• Households• Penetration

Source: CRISIL Research CTV industry is expected to grow at 7-9 per cent annually from 2007-08 to 2012-13. Volumes are expected to reach around 14.7–15.5 million units by 2012-13 based on our demand estimation methodology (mentioned earlier in the report). Rising incomes, increasing affordability, shorter replacement cycle, relatively under penetrated rural India and increase in upper middle class population, leading to increase in demand for multiple CTVs per household, are the main factors driving demand. Figure 1: CTV - Volumes

(million units)

0

2

4

6

8

10

12

14

16

2002-03 2007-08 2012-13 P

CAGR - 7%

CAGR - 7%

P: Projected Source: CRISIL Research Replacement demand to contribute around half of the total demand by 2012-13 We expect the share of replacement demand in total demand to increase from 42 per cent in 2007-08 to around 52 per cent by 2012-13. Shorter replacement cycles, due to increasing number of new models and rising incomes, would drive replacement demand, which is expected to arise from highly penetrated urban markets. Replacement



demand is expected to grow at a rate of 12 per cent CAGR by 2012-13. Figure 2: CTV - Replacement proportion

3542

52

6558

48

0

10

20

30

40

50

60

70

80

90

100

2002-03 2007-08 2012-13 P

(per cent)


P: Projected Source: CRISIL Research Primary/fresh demand to come from rural markets Between 2007-08 and 2012-13, under penetrated rural markets are likely to grow by around 10-11 per cent, while urban markets are forecast to grow by 3-4 per cent. Increasing income in the hands of farmers on the back of higher prices for commodities, farm loan waivers as well as increased income in the hands of government employees due to the sixth pay commission will drive demand from rural markets. Figure 3: CTV - Urban/Rural sales

2007-08 2012-13 P

44

56

53

47

(per cent)

Rural sales

Urban sales

The share of rural sales in total CTV sales is expected to rise from 47 per cent in 2007-08 to around 56 per cent by 2012-13.



Figure 4: CTV stock in rural market

12

25

42

128

127

121

0 30 60 90 120 150 180

2002-03

2007-08

2012-13 P

(millions)

In million units Rural - stock Unpenetrated rural household

Source: CRISIL Research, Industry The rural market, with around 153 million households, is highly under penetrated - not more than 17 per cent of the rural households own colour televisions. 127 million households in the rural India still don’t have colour televisions, signifying tremendous potential for players in the rural market. CRISIL Research expects penetration in rural markets to reach 26 per cent by 2012-13; even so, around 121 million households would continue to be potential buyers for colour televisions. Figure 5: CTV stock in urban market

27

41

55

33

27

23

0 10 20 30 40 50 60 70 80

2002-03

2007-08

2012-13 P

(millions)

In million unit Urban - stock Unpenetrated urban household

Source: CRISIL Research, Industry Urban market with around 68 million households is highly penetrated - around 61 per cent of urban households own colour televisions. The potential for players in the urban markets is relatively low as compared with rural markets, as only 27 million households don’t own a CTV in urban India. CRISIL Research expects penetration in urban markets to reach 70 per cent by 2012-13. The demand in urban markets would mainly come from the replacement market as well as upgraders (i.e. people shifting from Conventional Colour television (CCTV) to Flat colour television (FCTV) or high-end TVs).


Value growth to be in line with volume growth Table 1: CTV - Value break up

CTV FY04 FY05 FY06 FY07 FY08 5 yr CAGR Projected CAGR

Volume growth -8 17 7 23 1 7 7.3

Change in realisation -9 -2 -8 1 0 -4 0.3

-Change due to prices -13 -13 -20 -16 -15 -15 -6.2

-Change due to segmental mix 4 11 12 16 15 12 6.5

Value growth -16 15 -1 24 0 3 7.6


CRISIL Research expects the size of the CTV industry to increase from Rs 96 billion in 2007-08 to Rs 135-145 billion by 2012-13. Value growth is expected to be at 7-9 per cent, surpassing volume growth marginally due to improved realisations. In spite of price reductions, the realisations are expected to improve on account of segmental shift in favour of high-end TVs and flat TVs. From 2002-03 to 2007-08, all categories of household appliances witnessed an era of price cuts, out of which CTV has seen the maximum erosion in terms of prices, especially for higher end televisions like Liquid Crystal Display (LCD) and plasma. FCTV too has seen a sharp reduction in price in the last 5 years. Figure 6: CTV - Value

0

20

40

60

80

100

120

140

160

2002-03 2007-08 2012-13 P

CAGR - 8%

CAGR - 3%

(Rs billion)

P: Projected Source: CRISIL Research From 2002-03 to 2007-08, the industry has grown by 7 per cent in volume terms and around 3 per cent in value terms. Prices during the same period declined by 15 per cent annually, but the fall in value was arrested to a great extent by the changing segmental mix in favour of high end high value television. Going forward, CRISIL Research expects the change in segmental mix to lead to marginally higher value growth than volume growth; nevertheless, prices are expected to fall, especially for LCDs.


Segmental shift away from CCTV segment continues

Figure 7: CTV - Segmental mix

87

18

11

13

62

61

92

31

2066

65

8

4

14

20

28

2002-03

2007-08

2012-13 P

(per cent)

CCTV FCTV High-end

(Volume) (Value)

P: Projected Source: CRISIL Research

In the past few years, we have seen a shift in consumer preferences in favour of flat colour televisions. This trend continues and more and more buyers are moving towards FCTV and high-end television sets (high-end includes LCD, plasma and RPTV). We believe that FCTV and high-end television sets together will contribute close to 90 per cent of the total value of the industry by 2012-13. Reduced focus on the CCTV segment, aggressive price reduction in the LCD and FCTV segments, and declining price differential between FCTV and CCTV segments are propelling this shift.

CRISIL Research expects CCTVs to continue on this trend and decline by 2-3 per cent annually over next 5 years. FCTVs are estimated to grow by 7-9 per cent annually during the same period, whereas high-end TVs are expected to grow at an annual rate of 40-42 per cent. Segmental shift is expected to continue in favour of FCTVs and display devices like LCDs and Plasma. Due to the reducing price differential between CCTV and FCTV, not only will replacement demand increase, but first time buyers will also start opting for FCTVs.

LCD sales expected to reach 1.5 million units by 2012-13

Figure 8: LCD - Volumes

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2006-07 2007-08 2012-13 P

('000 units)



Currently, the LCD segment accounts for around 3 per cent of the total CTV sales in volume terms, and around 16 per cent in value terms. LCD prices have been falling drastically over the past few years, leading to a surge in demand. Going forward, CRISIL Research expects the LCD segment to contribute around 11 per cent to the total volume to reach 1.5 million units by 2012-13. Changing consumer preferences, convenience, high perceived utility and reducing price differential between LCDs and CRT TVs are the demand drivers for LCDs.


Refrigerator demand to grow at 7-9 per cent from 2007-08 to 2012-13 Chart 1: Refrigerator - Volume break up

Total volume growth 7.1%




Source: CRISIL Research CRISIL Research expects refrigerator demand to grow at a moderate rate of around 7–9 per cent CAGR to reach 6.2 million units by 2012-13. Rising household income, increasing nuclear families, increasing working women population and upgradation to higher capacity models will act as growth drivers. Figure 1: Refrigerator - Volumes

0

1

2

3

4

5

6

7

2002-03 2007-08 2012-13 P

CAGR - 7%

CAGR - 7%

(million units)

P: Projected Source: CRISIL Research Replacement demand growing at a slower pace in refrigerators The share of replacement demand in total demand is likely to increase from around 44 per cent in 2007-08 to around 47 per cent by 2012-13. Shorter replacement cycles, demand for higher capacity models and increased income will lead to an increase in replacement demand, which will mainly arise from highly penetrated urban markets. Replacement demand is expected to grow at around 8 per cent CAGR by 2012-13.

3.0 Refrigerators


Figure 2: Refrigerator - Replacement proportion

42 44 47

58 56 53

0

10

20

30

40

50

60

70

80

90

100

2002-03 2007-08 2012-13 P

(per cent)


P: Projected Source: CRISIL Research Rural markets to contribute around 30 per cent of total sales by 2012-13 CRISIL Research expects under penetrated rural markets to grow by around 14-15 per cent from 2007-08 to 2012-13, while urban markets are likely to grow by 4-5 per cent. Lower rural penetration, increasing income in the hands of farmers on the back of higher prices for commodities, farm loan waivers as well as sixth pay commission will stimulate demand from the rural markets. Figure 3: Urban/Rural sales

2007-08 2012-13 P

71

29

79

21

(per cent)

Rural sales

Urban sales

The proportion of rural sales in total refrigerator sales is forecast to augment from 21 per cent in 2007-08 to around 29 per cent by 2012-13.



Figure 4: Refrigerator stock in rural market

7

8

13

134

144

151

0 30 60 90 120 150 180

2002-03

2007-08

2012-13 P

(million)

Rural - stock Unpenetrated rural household

Source: CRISIL Research, Industry Figure 5: Refrigerator stock in urban market

25

33

43

35

35

34

0 10 20 30 40 50 60 70 80

2002-03

2007-08

2012-13 P

(million)

Urban - stock Unpenetrated urban household

Source: CRISIL Research, Industry Rural market with around 153 million households is highly under penetrated, with not even 5 per cent of the households owning refrigerators. 144 million households in rural India don’t have refrigerators, indicating tremendous potential for players to expand their footing in the rural market. By 2012-13, CRISIL Research expects penetration in rural markets to increase but remain at very low levels, with close to 8-10 per cent of rural households owning refrigerators. This still leaves around 151 million households as potential buyers for refrigerators. Urban market with around 68 million households in 2007-08 is highly penetrated, with close to 50 per cent of households owning refrigerators. CRISIL Research expects penetration in urban markets to reach 56 per cent by 2012-13, leaving around 34 million households as potential buyers for refrigerators. The demand in urban markets would come from the replacement market as well as upgraders (i.e. people shifting to higher capacity models and frost free refrigerators).


Segmental mix to drive value growth for refrigerators Table 1: Refrigerator - Value break up

REF FY04 FY05 FY06 FY07 FY08 5 yr CAGR Projected CAGR

Volume Growth 5 6 8 10 11 7 7.1

Change in realisation -6 -1 1 5 6 2 2.1

-Change due to Prices -7 -5 -2 4 5 -1 0.6

-Change due to Segmental Mix 1 5 3 1 2 3 2.0

Value Growth -6 5 9 15 18 9 9.3


The size of the refrigerator industry is expected to increase from Rs 48 billion in 2007-08 to Rs 75-80 billion by 2012-13. Value growth is expected to be around 9-11 per cent, surpassing volume growth, mainly driven by segmental mix change and marginal price increase. From 2002-03 to 2007-08, all categories of household appliances have witnessed price cuts. The refrigerator segment also experienced price cuts, though the fall was not very drastic. However, in the past 2 years, they have seen an increase in prices, leading to higher value growth than volume growth. Figure 6: Refrigerator - Value

0

10

20

30

40

50

60

70

80

2002-03 2007-08 2012-13 P

CAGR - 9%

CAGR - 8%

(Rs billion)

P: Projected Source: CRISIL Research Volumes for the industry grew at a CAGR of 7 per cent between 2002-03 and 2007-08, whereas the value growth was around 9 per cent. Prices declined by 1 per cent annually during this period, though changing segmental mix in favour of high end high value refrigerators have lead to an increase in average realisations by around 2 per cent. Going forward, CRISIL Research expects the changing segmental mix as well as marginal price increase will lead to a higher value growth than the volume growth.


Segmental mix change is very gradual in refrigerators as compared to CTVs Figure 7: Refrigerator - Segmental mix

77

55

43

23

45

57

57

69

8614

31

43

2002-03

2007-08

2012-13 P

(per cent)

Direct Cool Frost Free

(Volume) (Value)

Source: CRISIL Research As with all categories of household appliances, refrigerators too are witnessing a segmental shift towards high end segments. In refrigerators, the mix is shifting in favour of the frost free segment. The contribution of frost free in total refrigerator sales has been increasing. But this change has not been as swift as seen in other categories like AC or CTV. We believe that the frost free segment will contribute around 57 per cent to the total value of the industry by 2012-13, propelled by replacement demand as well as demand for higher end models. CRISIL Research expects the direct cool segment to record growth of 2-4 per cent annually over next 5 years, whereas the frost free segment is expected to post higher growth of 14-16 per cent. The segmental shift in favour of the frost free segment is expected to continue.


Washing machine to grow annually by 9-11 per cent from 2007-08 to 2012-13 Chart 1: Washing machines - Volume break up

Total volume growth 9.4%




Source: CRISIL Research CRISIL Research expects demand for washing machines to increase from 2 million units in 2007-08 to 3.2-3.5 million units by 2012-13. Demand is expected to grow by 9-11 per cent from 2007-08 to 2012-13. Improving income levels, increasing urbanisation, low penetration levels and changing life styles of double income families, would act as the key demand drivers. Figure 1: Washing machines - Volumes

0

1

1

2

2

3

3

4

2002-03 2007-08 2012-13 P

CAGR - 9%

CAGR - 11%

(million units)

P: Projected Source: CRISIL Research



Replacement demand lower than other products Figure 2: Washing machines - Replacement proportion

31 34 40

69 66 60

0

10

20

30

40

50

60

70

80

90

100

2002-03 2007-08 2012-13 P

(per cent)


P: Projected Source: CRISIL Research In 2007-08, the replacement demand constituted around 34 per cent of the total demand. We expect the replacement demand to increase to around 40 per cent of the total demand by 2012-13. This replacement demand is expected to come from highly penetrated urban markets. Replacement demand is expected to grow at around 14 per cent CAGR till 2012-13. Figure 3: Urban/Rural sales

2007-08 2012-13 P

78

22

84

16

(per cent)

Rural sales

Urban sales

In 2007-08, rural sales contributed around 16 per cent to the total washing machine sales. By 2012-13, the proportion or rural sales in the total is expected to increase to around 22 per cent. In spite of penetration in rural India being as low as 2 per cent, growth would be low as demand would continue to be hampered by infrastructural bottlenecks like lack of continuous water supply, power cuts and easy availability of domestic help, leading to low perceived utility for the product.



Figure 4: Washing machine stock in rural market

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5 159

150

140

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2002-03

2007-08

2012-13P

(million)

Rural - stock Unpenetrated Rural Household

Source: CRISIL Research, Industry Rural market with around 153 million households is highly under penetrated and not even 2 per cent of households own washing machines. There are still 150 million households in rural India that don’t have washing machines, indicating tremendous growth potential for players. CRISIL Research expects that, by 2012-13, the penetration in rural markets will increase but will remain at very low levels, with close to 3 per cent of rural households owning washing machines. This still leaves around 159 million households as potential buyers for washing machines. Figure 5: Washing machine stock in urban market

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2002-03

2007-08

2012-13P

(million)

Urban - stock Unpenetrated Urban Household

Source: CRISIL Research, Industry The urban market, with around 68 million households in 2007-08, also has low penetration with just 17 per cent of households owning washing machines. The market for washing machine manufacturers is very vast in the urban market, as around 57 million households don’t have washing machines. Rising income, changing lifestyles and increasing working women population are certain factors that will lead to increasing demand for washing machines in the coming years. CRISIL Research expects that, by 2012-13, the penetration in urban markets will reach 23 per cent, still leaving around 60 million households as potential buyers for washing machines. The demand in urban markets would


come mainly from first time buyers; some part of it would also come from the replacement market as well as upgraders (i.e. people shifting to higher capacity models and fully automatic washing machines). Industry value expected to grow by around 12-14 per cent from 2007-08 to 2012-13 Table 1: Washing machines - Value break up

WM FY04 FY05 FY06 FY07 FY08 5 yr CAGR Projected CAGR

Volume Growth 5 17 5 18 13 11 9.4

Change in realisation -5 2 -3 5 6 1 2.6

-Change due to Prices -7 -5 -4 3 2 -2 1.0

-Change due to Segmental Mix 2 7 1 1 3 3 1.5

Value Growth -1 19 2 24 20 12 12.1


The washing machine industry, which has been valued at around Rs 20 billion in 2007-08, is expected to grow by around 12-14 per cent annually during next 5 years to reach a size of around Rs 35 billion by 2012-13. Both segmental mix as well as price hikes will contribute to the high value growth. From 2002-03 to 2007-08, all categories of household appliances have witnessed price cuts, though the drop was not very sharp in the washing machine segment. In the past 2 years, the segment has seen an increase in prices, leading to higher value growth than volume growth. Figure 6: Washing machines - Value

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2002-03 2007-08 2012-13 P

CAGR - 12%

CAGR - 12%

(Rs billion)

P: Projected Source: CRISIL Research Between 2002-03 and 2007-08, the industry grew at 11 per cent CAGR in volume terms, and around 12 per cent CAGR in value terms. Prices during the same period declined by 2 per cent annually; however, changing segmental mix in favour of high end washing machines lead to an increase in average realisations by around 1 per cent. In the next 5 years, due to the changing segmental mix as well as price increase, value growth is likely to surpass volume growth.


Fully automatic machines to contribute around 42 per cent to the industry demand by 2012-13 Figure 7: Washing machines - Segmental mix

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48

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5842

33

17

2002-03

2007-08

2012-13 P

(per cent)

SEMI AUTOMATIC FULLY AUTOMATIC

(Volume) (Value)

Source: CRISIL Research We see the gradual shift in demand continuing in favour of the fully automatic segment. While the fully automatic segment contributed 33 per cent in volume terms in 2007-08, in value terms it contributed to more than half of the industry value. CRISIL Research expects the fully automatic segment to contribute to around 62 per cent of the total value of the industry by 2012-13. CRISIL Research expects the semi automatic segment to record a growth of 5-7 per cent annually over the next 5 years, whereas the fully automatic segment is expected to record a higher growth of 14-16 per cent annually during the same period.


Room air conditioners to grow at 12-14 per cent from 2007-08 to 2012-13 Figure 1: AC - Volumes

(million units)

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2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2012-13 P

CAGR - 13%

CAGR - 21%

P: Projected Source: CRISIL Research Demand for room air conditioners (RACs), which is estimated to be around 2 million units in 2007-08, is expected to reach around 3.5-3.8 million units by 2012-13. The industry would continue to display double-digit growth (around 12-14 per cent CAGR) over the next 5 years. Increasing disposable income and demand from the commercial segment would propel the growth of room air conditioners growth during this period. However, there will be a slowdown in growth as compared with the CAGR of the past 5 years due to slowdown in the commercial as well as housing sectors and the overall deceleration of the economy. Of all the household appliances under purview, RACs penetration is the lowest. RAC is mainly an urban phenomenon. The urban market, with around 68 million households in 2007-08, is to a great extent under penetrated, and hence, offers tremendous potential for players. Industry to grow by 14-16 per cent CAGR (value terms) from 2007-08 to 2012-13 Table 1: AC - Value break up Air conditioners FY04 FY05 FY06 FY07 FY08 5 yr CAGR Projected CAGR

Volume growth 15.0 25.0 19.0 22.1 18.0 21.0 13.0

-Split AC 14.0 45.0 47.3 31.6 50.0 37.0 20.0

-Window AC 15.0 17.8 6.5 16.1 7.0 12.0 4.0

Value growth 12.0 -2.3 11.8 28.0 35.8 17.0 17.0

-Split AC 16.0 16.9 20.4 35.6 54.5 27.0 22.0

-Window AC 14.0 -15.4 3.6 19.6 12.4 6.0 6.0


Industry’s value growth is expected to be to the tune of 14-16 per cent between 2007-08 and 2012-13. The industry size is expected to grow from Rs 43 billion in 2007-08 to around Rs 86-88 billion by around 2012-13.



From 2002-03 to 2007-08, all categories of household appliances have witnessed price cuts. CTVs and ACs have seen maximum erosion in terms of prices, especially for higher end products like split air conditioners. This has led to a sharp increase in the demand for ACs. Figure 2: AC - Value

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2002-03 2007-08 2012-13 P

CAGR - 16%

CAGR - 16%

(Rs billion)

P: Projected Source: CRISIL Research Value growth for ACs has been lower than the volume growth in the past 5 years due to sharp fall in prices. In the next 5 years, CRISIL Research expects the value growth for ACs to exceed volume growth on the back of improving segmental mix as well as price hikes. CRISIL Research expects the realisations to grow annually by around 3 per cent; both price increase as well as segmental mix change in favour of split ACs will lead to a higher value growth rate. Commercial demand for split ACs to drive industry growth in next 5 years Table 2: Air conditioners - Demand contribution (2007-08) (per cent) Household demand Commercial demand Segmental mix

Split AC 20 80 54

Window AC 70 30 46

Overall demand contribution 52 48 100


While window air conditioners would grow at a rate of 2-4 per cent, the split air conditioners would lead the room air conditioners growth, growing by around 19-21 per cent between 2007-08 and 2012-13. This growth would mainly come from the commercial segment, which accounts for around 75 to 80 per cent of the split AC sales. Demand for window ACs is skewed towards household application, which accounts for more than 60 per cent of the total window AC demand.


Shift towards split AC segment continues Figure 3: AC - Segmental Mix

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2002-03

2007-08

2012-13 P

(per cent)

WINDOW AC SPLIT AC

(Volume) (Value)

Source: CRISIL Research There has been a significant shift towards the split air conditioner segment, due to the narrowing price differential between the two segments. This has encouraged not only the upgraders, but also the first-timers to opt for entry level SACs over WACs. The split AC segment is expected to contribute around 80 per cent in value terms by 2012-13, from the current level of around 64 per cent.


Summary Profitability for the household appliances industry is mainly driven by realisation changes, raw material costs and the ability of the players to increase prices. Profitability for all household segments declined considerably in 2007-08 due to rising prices of raw materials. Prices for all segments marginally increased during the second half of 2007-08, which helped the industry to partially cover the steep increase in the input costs rise during the year. In 2007-08, operating margins of CTVs were at 7-9 per cent, while that of refrigerator, washing machine and air conditioner industries were at around 4-5 per cent, 4-5 per cent and 2-4 per cent, respectively. (Note: These are average industry margins and individual player margins would vary). In 2008-09, CRISIL Research expects industry margins to decline across products due to higher raw material prices and the inability of players to pass on the cost increase in full. Marginal price increase and segmental shift towards higher end products will only be able to mitigate the fall to a limited extent. Key financial indicators of major players Table 1: Key financial indicators 2007-08

LG Mirc Whirlpool Sony Philips

Net sales (Rs million) 74,322 15,284 18,084 23,401 28,320

ROCE (Per cent) 17.3 18.2 15.0 49.5 29.5

OPM (Per cent) 4.5 6.0 4.8 3.3 9.3

NPM (Per cent) 2.0 2.3 1.8 2.0 6.7

Debt-equity (Times) 0.7 0.8 4.3 0.1 0.0

Market share (Per cent) 28.0 6.0 6.0 9.0 3.0

Note

1. Financials for LG and Sony are for 2006-07.

2. Market share includes all the products - CTVs, refrigerator, washing machine and ACs.

Sony's market share is only for CTV.




CTV margins to remain under pressure Chart 1: CTV - Profitability outlook for 2008-09 and 2009-10

CTV - Profitability outlook for 2008-09 and 2009-10

Parameters 2008-09 P 2009-10 P

Average realisations Raw material cost Operating margins P: Projected


Average realisations – Average prices are expected to fall by 5-6 per cent in the medium term but change in the product mix in favour of flat TVs and high-end TVs will keep average realisations fairly stable; hence, change in average realisations is expected to have a neutral effect on the margins of the industry. Raw material costs – Increasing prices of CPT due to imposition of anti dumping duty, higher costs of commodities like plastic and metals will have a negative impact on the margins of players in 2008-09. Prices of raw material are expected to stabilise by 2009-10, but this will not improve margins. Operating margins – Owing to increasing inflation and intense competition, players would be unable to hike prices in the same proportion as the increase in the raw materials. As a result, margins will decline by around 80-120 basis points in 2008-09. In 2009-10, stabilising raw material prices and changing product mix in favour of high end TVs will not be able to arrest the fall in CTV margins; consequently, margins will drop by 30-70 basis points. Refrigerator margins to remain under pressure in 2008-09, improve by 2009-10 Chart 2: Refrigerator - Profitability outlook for 2008-09 and 2009-10

Refrigerator - Profitability outlook for 2008-09 and 2009-10




Average realisations – With increasing prices and favourable change in the product mix, average realisations are expected to increase in the medium term. Raw material costs – Increasing prices of inputs like steel and plastics will impact the margins of players negatively in 2008-09. Prices of raw material are expected to stabilise by 2009-10, which will ease the pressure on margins.


Operating margins – the inability of players to pass on the increase in raw material costs in full due to increasing inflation and competition will lead to a fall in margins by around 70-110 basis points in 2008-09. In 2009-10, stabilising raw material prices and changing product mix in favour of frost free refrigerators will improve player margins by 50-90 basis points. Washing machines margins to decline in 2008-09, revive by 2009-10 Chart 3: Washing machine - Profitability outlook for 2008-09 and 2009-10

Washing machine - Profitability outlook for 2008-09 and 2009-10




Average realisations – With prices expected to largely remain stable at the current levels or increase marginally, we expect the average realisations to improve due to increasing contribution from fully automatic washing machines. This will have a positive impact on the margins of players. Raw material costs – Increasing prices of raw material like steel and plastics will impact the margins of players negatively in 2008-09. Prices of these inputs are expected to correct by 2009-10, which will ease the pressure on margins. Operating margins – Players' inability to increase prices in the same proportion as the increase in the raw materials in the current scenario of increasing inflation and competition will lead to a fall in margins by around 80-120 basis points in 2008-09. In 2009-10, stabilising raw material prices and changing product mix in favour of fully automatic washing machines will improve player margins by 40-80 basis points. AC margins to decline in 2008-09, stabilise by 2009-10 Chart 4: AC - Profitability outlook for 2008-09 and 2009-10

AC - Profitability outlook for 2008-09 and 2009-10

Impact on operating margins Parameters

2008-09 P 2009-10 P




Average realisations – Average realisations are expected to increase on the back of rising prices and shifting segmental mix in favour of split ACs. This will have a positive impact on the margins of players. Raw material costs – Increasing prices of raw materials like steel and plastics will adversely impact the margins of players in 2008-09. Although prices of raw materials are expected to stabilise by 2009-10, margins will not benefit. Operating margins – Rising inflation and intensifying competition will restrict the ability of players to hike prices in the same proportion as the increase in raw material costs; this will cause margins to fall by around 80-120 basis points. Stabilising raw material prices, changing product mix in favour of split ACs and marginal price increase will have a neutralising effect on the margins of players in 2009-10.


Summary This section deals with some of the key factors that determine a company’s competitive advantage over its peers. A player’s competitive advantage can be ascertained through parameters such as the advertising and promotional support, distribution network, presence across product segment, access to technology and operational efficiency. Advertising and promotions Players with a portfolio of strong brands have a strong edge over competitors. Continued and sustained advertising and promotional support is the key to creating strong brands. A company’s competitive advantage on this parameter can be evaluated on two fronts: • Advertising support indicated by advertising spend as a proportion to revenue. • Advertising effectiveness indicated by its market share movement. Figure 1: Selling expenses as a proportion of sales - 2007-08E

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(per cent)

Source: Prowess, CRISIL Research Some companies like Samsung and Whirlpool spend around 15-17 per cent of their total revenue on selling costs (including advertising and promotional activities), while others like Onida, Videocon and Voltas spend only around 4-7 per cent. With the highest spend of around 18-20 per cent of revenue on selling costs, LG has been able to sustain its overall market leadership in household appliances sector over last 3-4 years despite increasing competition from new entrants. Establishing and managing a strong distribution network is another important factor for market expansion and servicing existing customers. Household appliances demand is concentrated in urban centres, with only 33 per cent of the sales coming from rural India. Most dealers have dealership in major cities. But with demand from smaller cities on the rise, companies are taking steps to enter relatively under penetrated semi-urban or rural India. Companies are trying to capture market share through increasing their dealer base in under penetrated rural markets.



Market leaders like LG and Samsung not only lead in terms of sheer number of dealerships but are also more efficient, as they generate more revenues per dealer as compared with others. Presence across product segments Table 1: Business profile 2007-08

Business profile LG India Samsung Mirc Whirlpool Sony Philips

CTV 35 25 58 0 39

Refrigerator 16 18 0 64 0

Washing machines 6 7 7 18 0

Air conditioners 16 12 18 6 0

29

Others 27 38 18 13 61 71

Note

Business profiles for LG, Samsung and Sony are for 2006-07.


Diversification helps companies in the following ways: • A diversified company is well placed to take advantage of synergies of scale for expenditures like advertising,

distribution and other marketing costs. • Reduced exposure to a particular product segment makes the company more stable and less vulnerable to the

downtrend in any particular segment. For example, LG and Samsung are more diversified than companies like Onida. Realising its overdependence on the CTV segment, Onida has been increasingly taking efforts to diversify its portfolio by aggressively entering into other segments like air conditioners. Access to new technologies Regular product launches with high quality and innovative technology at competitive prices is one of the key factors that help a company gain an edge over its competitors. With the product life cycle shrinking, players have to introduce new products at frequent intervals to survive in the competitive market environment. Most multinationals such as LG, Samsung and Whirlpool are better placed as compared with domestic companies as they receive technological and financial support from their parent companies. Operational efficiency The company’s operational efficiency can be assessed by looking at its capacity utilisations and supply chain efficiency (lower cost, minimal component inventory or shortages). Capacity utilisation for the household appliance industry has been at sub-optimal levels. Many players had set up capacities in 1990s in anticipation of high demand growth, which did not materialise. Operating rates vary across players; while Korean players like LG and Samsung operate at 70-80 per cent, others like Onida operate at 35-40 per cent.

house hold appliances outlook 2007'08 to 2012'13

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