House Hold Appliances Outlook 2007'08 To 2012'13

Opinion
October 2008
Sections
Executive summary
Demand outlook
- Demand methodology
2.0 Colour television
3.0 Refrigerators
4.0 Washing machines
5.0 Air conditioners
6.0 Outlook on profitability
7.0 Key success factors
1.0
A-1
A-3
A-4
A-9
A-15
A-21
A-27
A-31
A-35
Box
1.0
01
Demand outlook
Methodology for forecasting demand for household appliances
A-7
2.0
01
Colour television
CTV - Volume break up
A-9
3.0
01
Refrigerators
Refrigerator - Volume break up
A-15
4.0
01
Washing machines
Washing machines - Volume break up
A-21
6.0
01
02
03
04
Outlook on profitability
CTV - Profitability outlook for 2008-09 and 2009-10
Refrigerator - Profitability outlook for 2008-09 and 2009-10
Washing machine - Profitability outlook for 2008-09 and 2009-10
AC - Profitability outlook for 2008-09 and 2009-10
A-32
A-32
A-33
A-33
Charts
Figures
01
02
Executive summary
Replacement / fresh demand
Urban/rural sales
A-1
A-2
Continued
CRISIL RESEARCH HOUSEHOLD APPLIANCES ANNUAL REVIEW
A-i
continued
Figures
1.0
01
02
Demand outlook
Household appliances - Proportional share of products
Household appliances - Penetration curve
2.0
01
02
03
04
05
06
07
08
Colour television
CTV - Volumes
CTV - Replacement proportion
CTV - Urban/Rural sales
CTV stock in rural market
CTV stock in urban market
CTV - Value
CTV - Segmental mix
LCD - Volumes
A-9
A-10
A-10
A-11
A-11
A-12
A-13
A-13
3.0
01
02
03
04
05
06
07
Refrigerators
Refrigerator - Volumes
Refrigerator - Replacement proportion
Urban/Rural sales
Refrigerator stock in rural market
Refrigerator stock in urban market
Refrigerator - Value
Refrigerator - Segmental mix
A-15
A-16
A-16
A-17
A-17
A-18
A-19
4.0
01
02
03
04
05
06
07
Washing machines
Washing machines - Volumes
Washing machines - Replacement proportion
Urban/Rural sales
Washing machine stock in rural market
Washing machine stock in urban market
Washing machines - Value
Washing machines - Segmental mix
A-21
A-22
A-22
A-23
A-23
A-24
A-25
5.0
01
02
03
Air
AC
AC
AC
A-27
A-28
A-29
7.0
01
Key success factors

Selling expenses as a proportion of sales - 2007-08E
conditioners
- Volumes
- Value
- Segmental Mix
A-4
A-5
A-35
continued
A-ii
continued
Tables
01
Executive summary
Growth rates at a glance
A-2
1.0
01
02
03
04
Demand outlook
Household appliances - A snapshot
Household appliances - Industry size
Sales hierarchy (2007-08)
Consumer durables - A snapshot
A-3
A-4
A-5
A-6
2.0
01
Colour television
CTV - Value break up
A-12
3.0
01
Refrigerators
Refrigerator - Value break up
A-18
4.0
01
Washing machines
Washing machines - Value break up
A-24
5.0
01
02
Air conditioners
AC - Value break up
Air conditioners - Demand contribution (2007-08)
A-27
A-28
6.0
01
Key financial indicators
A-31
7.0
01
Key success factors

Business profile
A-36
A-iii
Executive summary
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
(per cent)
100
90
80
70
48
53
52
47
CTV
Refrigerator
60
60
50
40
30
20
40
10
0
Replacement demand
Washing machine
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.
A-1
Figure 2: Urban/rural sales

Urban/rural sales - 2012-13 P
(per cent)
22
29
56
Rural sales
Urban sales
71
78
44
CTV
Refrigerator
Washing
machine
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
13
Value Growth
12
17
Source: CRSIL Research
The household appliances industrys 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.
A-2
1.0
Demand outlook
Summary
This section deals with CRISIL Researchs 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
Growth
Growth
Growth
Growth
12%
3%
7-9%
7-9%
7%
8%
7-9%
9-11%
Washing machines
12%
12%
9-11%
10-12%
Air conditioners
21%
16%
12-14%
14-16%
Category
Colour television
Refrigerators
Household appliances industry
7%
9-11%
P: Projected
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.
A-3
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
145.6
208.2
337.0
Household appliances
P: Projected
Figure 1: Household appliances - Proportional share of products

(per cent)
100
90
80
70
60
8
14
10
21
22
27
23
50
22
40
30
20
56
47
41
10
0
2002-03
2007-08
CTV
Refrigerators
Room air conditioners
2012-13 P
Washing machines
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 201213.
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)
A-4
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 consumers 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 products price would
change the ratio (perceived utility/ cost of ownership), thereby altering the consumers preference hierarchy (for
durables). For example, mobile phones have steadily risen in the consumers preference hierarchy with the drastic
fall in cost of ownership.
Figure 2: Household appliances - Penetration curve
(ownership per 100 households)
48
40
32
24
16
8
0
2002-03
2007-08
Mobile connections
CTV
Refrigerators
Washing machines
2012-13 P
Two wheelers
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.
A-5
Table 4: Consumer durables - A snapshot

Durables
Sales
CAGR
Average
Maintainence/
Running cost
(2007-08)
(5 year)
price
(Million nos)
(Per cent)
(Rs./unit)
10.3
9,300
Refrigerator
4.4
Washing machine
2.1
Unit
Colour television
Room air conditioner
Two wheeler
Mobile phones
Durables
Replacement
demand
sales
(Million nos)
Per cent
Low
4.3
47
10,900
High
1.9
21
11
9,300
Medium
0.7
16
21
22,000
High
0.2
7.2
40,000
Medium
3.3
55
85.8
62
2,000
Low
n.a.
24
Power
Perceived
Availability
Consumer
Urban/
consumption
utility
of
segment
Rural centric
No Households/ Commercial
Urban/ Rural
Unit
alternatives
Colour television
Low
High
Refrigerator
High
High Yes (Limited)
Household
Urban
High
Household
Urban
Urban
Washing machine
Rural
Medium
Yes
(for metro consumers)

Room air conditioner
Two wheeler
Mobile phones
High
Medium
Yes Households/ Commercial
Medium
Yes
Personal
Urban/ Rural
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.
A-6
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 manufacturers 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.
A-7
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2.0
Colour television
Annual CTV demand expected to touch around 15 million units by 2012-13

Chart 1: CTV - Volume break up
Replacement demand growing at a CAGR of
12.0 %
Total volume growth

7.3%
Fresh demand growing at a CAGR of

3.3 %
Households
Penetration
CTV industry is expected to grow at 7-9 per cent annually from 2007-08 to 2012-13. Volumes are expected to
reach around 14.715.5 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)
16
14
CAGR - 7%
12
10
CAGR - 7%
8
6
4
2
0
2002-03
2007-08
2012-13 P
P: Projected
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
A-9
demand is expected to grow at a rate of 12 per cent CAGR by 2012-13.

Figure 2: CTV - Replacement proportion
(per cent)
100
90
80
70
60
48
58
65
50
40
30
20
10
52
42
35
0
2002-03
2007-08
Replacement demand
2012-13 P
Additional sales
P: Projected
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
The share of rural sales in total CTV sales is expected
(per cent)
to rise from 47 per cent in 2007-08 to around 56 per

cent by 2012-13.
47
56
Rural sales
Urban sales
53
2007-08
44
2012-13 P
A-10
Figure 4: CTV stock in rural market
2012-13 P
42
2007-08
121
25
2002-03
127
12
128
30
60
90
120
150
180
(millions)
Rural - stock
Unpenetrated rural household

In million units
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 dont 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
2012-13 P
55
2007-08
23
41
2002-03
27
27
10
Urban - stock
33
20
30
40
(millions)
50
60
70
80
Unpenetrated urban household

In million unit
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 dont 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).
A-11
Value growth to be in line with volume growth

Table 1: CTV - Value break up
CTV
Volume growth
Change in realisation
-Change due to prices
-Change due to segmental mix
Value growth
FY04
FY05
FY06
FY07
FY08
5 yr CAGR
Projected CAGR
-8
17
23
7.3
-9
-2
-8
-4
0.3
-13
-13
-20
-16
-15
-15
-6.2
11
12
16
15
12
6.5
-16
15
-1
24
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
(Rs billion)
160
140
CAGR - 8%
120
100
CAGR - 3%
80
60
40
20
0
2002-03
2007-08
2012-13 P
P: Projected
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.
A-12
Segmental shift away from CCTV segment continues

Figure 7: CTV - Segmental mix
(per cent)
(Volume)
14
66
20
2012-13 P
65
11
61
28
31
2007-08
(Value)
18
62
20
92
2002-03
CCTV
87
FCTV
13
High-end
P: Projected
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
('000 units)
1,800
1,600
1,400
1,200
1,000
800
600
400
200
2006-07
2007-08
2012-13 P
A-13
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.
A-14
3.0
Refrigerators
Refrigerator demand to grow at 7-9 per cent from 2007-08 to 2012-13

Chart 1: Refrigerator - Volume break up
8.3 %
Total volume growth

7.1%

6.0 %
Households
Penetration
CRISIL Research expects refrigerator demand to grow at a moderate rate of around 79 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
(million units)
7
6
5
CAGR - 7%
CAGR - 7%
4
3
2
1
0
2002-03
2007-08
2012-13 P
P: Projected
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.
A-15
Figure 2: Refrigerator - Replacement proportion

(per cent)
100
90
80
70
58
56
53
42
44
47
2002-03
2007-08
2012-13 P
60
50
40
30
20
10
0
Replacement demand
Additional sales
P: Projected
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 201213, 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
The proportion of rural sales in total refrigerator sales is

(per cent)
21
forecast to augment from 21 per cent in 2007-08 to

29
around 29 per cent by 2012-13.
Rural sales
Urban sales
79
2007-08
71
2012-13 P
A-16
Figure 4: Refrigerator stock in rural market
2012-13 P
13
2007-08
2002-03
151
144
134
30
60
90
120
150
180
(million)
Rural - stock
Unpenetrated rural household
Figure 5: Refrigerator stock in urban market
2012-13 P
43
2007-08
34
33
2002-03
35
25
10
35
20
30
40
50
60
70
80
(million)
Urban - stock
Unpenetrated urban household
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 dont 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).
A-17
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
10
11
7.1
-6
-1
2.1
-7
-5
-2
-1
0.6
2.0
-6
15
18
9.3
Volume Growth
-Change due to Prices
-Change due to Segmental Mix
Value Growth
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
(Rs billion)
80
70
CAGR - 9%
60
50
CAGR - 8%
40
30
20
10
0
2002-03
2007-08
2012-13 P
P: Projected
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.
A-18
Segmental mix change is very gradual in refrigerators as compared to CTVs

Figure 7: Refrigerator - Segmental mix
(per cent)
(Volume)
43
(Value)
57
43
2012-13 P
31
69
2007-08
14
57
55
45
86
77
2002-03
Direct Cool
23
Frost Free
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.
A-19
4.0
Washing machines
Washing machine to grow annually by 9-11 per cent from 2007-08 to 2012-13
Chart 1: Washing machines - Volume break up
14.5 %
Total volume growth

9.4%

6.6 %
Households
Penetration
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
(million units)
4
3
3
CAGR - 9%
CAGR - 11%
2
2
1
1
0
2002-03
2007-08
2012-13 P
P: Projected
A-21
Replacement demand lower than other products

Figure 2: Washing machines - Replacement proportion
(per cent)
100
90
80
70
60
69
66
31
34
2002-03
2007-08
60
50
40
30
20
10
40
Replacement demand
2012-13 P
Additional sales
P: Projected
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
In 2007-08, rural sales contributed around 16 per cent
(per cent)
16
to the total washing machine sales. By 2012-13, the
22
proportion or rural sales in the total is expected to

increase to around 22 per cent.
Rural sales
84
78
Urban sales
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
2007-08
2012-13 P
easy availability of domestic help, leading to low

perceived utility for the product.
A-22
Figure 4: Washing machine stock in rural market

2012-13P 5
159
2007-08 3
150
2002-03 1
140
20
40
60
80
100
(million)
Rural - stock
120
140
160
180
Unpenetrated Rural Household
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 dont 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
2012-13P
18
2007-08
60
12
57
2002-03
52
10
20
Urban - stock
30
40
(million)
50
60
70
80
Unpenetrated Urban Household
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 dont 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
A-23
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
Volume Growth
-Change due to Prices
-Change due to Segmental Mix
Value Growth
FY04
FY05
FY06
FY07
17
18
FY08 5 yr CAGR
13
11
Projected CAGR
9.4
-5
-3
2.6
-7
-5
-4
-2
1.0
1.5
-1
19
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
(Rs billion)
40
35
CAGR - 12%
30
25
CAGR - 12%
20
15
10
5
0
2002-03
2007-08
2012-13 P
P: Projected
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.
A-24
Fully automatic machines to contribute around 42 per cent to the industry demand by 201213
Figure 7: Washing machines - Segmental mix
(per cent)
(Volume)
42
58
38
2012-13 P
33
62
67
2007-08
17
(Value)
48
52
83
69
2002-03
SEMI AUTOMATIC
31
FULLY AUTOMATIC
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.
A-25
Air conditioners
5.0
Room air conditioners to grow at 12-14 per cent from 2007-08 to 2012-13
Figure 1: AC - Volumes
(million units)
4.5
4.0
3.5
CAGR - 13%
3.0
2.5
2.0
CAGR - 21%
1.5
1.0
0.5
0.0
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2012-13 P
P: Projected
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
12.0
-2.3
11.8
28.0
35.8
17.0
17.0
Value growth
-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
Industrys 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.
A-27
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
(Rs billion)
100
90
80
CAGR - 16%
70
60
50
40
CAGR - 16%
30
20
10
0
2002-03
2007-08
2012-13 P
P: Projected
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.
A-28
Shift towards split AC segment continues

Figure 3: AC - Segmental Mix
(Volume)
(Value)
(per cent)
70
30
2012-13 P
49
79
51
2007-08
27
21
36
64
73
2002-03
WINDOW AC
59
41
SPLIT AC
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.
A-29
6.0
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
28.0
6.0
6.0
9.0
3.0
Market share (Per cent)

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.
A-31
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 80120 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
Parameters
2008-09 P
2009-10 P
Raw material cost
Operating margins
P: Projected
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.
A-32
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
Parameters
2008-09 P
2009-10 P
Raw material cost
Operating margins
P: Projected
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
Parameters
Impact on operating margins

2008-09 P
2009-10 P
Raw material cost
Operating margins
P: Projected
A-33
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 80120 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.
A-34
Key success factors
7.0
Summary
This section deals with some of the key factors that determine a companys competitive advantage over its peers.
A players 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 companys 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

(per cent)
20
18
16
14
12
10
8
6
4
Whirlpool
Hitachi
IFB
Philips
Samsung
LG
Voltas
Videocon
Mirc
2
-
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.
A-35
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
CTV
35
25
58
39
Refrigerator
16
18
64
18
Washing machines
Air conditioners
16
12
18
Others
27
38
18
13
61
Philips
29
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 companys 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.
A-36

House Hold Appliances Outlook 2007'08 To 2012'13

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House Hold Appliances Outlook 2007'08 To 2012'13

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Opinion

CRISIL RESEARCH HOUSEHOLD APPLIANCES ANNUAL REVIEW

Key success factors

CRISIL RESEARCH HOUSEHOLD APPLIANCES ANNUAL REVIEW

Key success factors

CRISIL RESEARCH HOUSEHOLD APPLIANCES ANNUAL REVIEW

Source: CRISIL Research

CRISIL RESEARCH HOUSEHOLD APPLIANCES ANNUAL REVIEW

Figure 2: Urban/rural sales

Source: CRISIL Research

Source: CRSIL Research

CRISIL RESEARCH HOUSEHOLD APPLIANCES ANNUAL REVIEW

Household appliances industry

CRISIL RESEARCH HOUSEHOLD APPLIANCES ANNUAL REVIEW

Room air conditioners

Figure 1: Household appliances - Proportional share of products

Room air conditioners

Source: CRISIL Research

CRISIL RESEARCH HOUSEHOLD APPLIANCES ANNUAL REVIEW

Table 3: Sales hierarchy (2007-08)

Sales (million units)

Source: CRISIL Research

(ownership per 100 households)

CRISIL RESEARCH HOUSEHOLD APPLIANCES ANNUAL REVIEW

Table 4: Consumer durables - A snapshot

Room air conditioner

High Yes (Limited)

(for metro consumers)

Yes Households/ Commercial

n.a. - not available

CRISIL RESEARCH HOUSEHOLD APPLIANCES ANNUAL REVIEW

Box 1: Methodology for forecasting demand for household appliances

CRISIL RESEARCH HOUSEHOLD APPLIANCES ANNUAL REVIEW

This page is intentionally left blank

Annual CTV demand expected to touch around 15 million units by 2012-13

Total volume growth

Fresh demand growing at a CAGR of

Replacement demand to contribute around half of the total demand by 2012-13

CRISIL RESEARCH HOUSEHOLD APPLIANCES ANNUAL REVIEW

demand is expected to grow at a rate of 12 per cent CAGR by 2012-13.

Primary/fresh demand to come from rural markets

The share of rural sales in total CTV sales is expected

to rise from 47 per cent in 2007-08 to around 56 per

Source: CRISIL Research

CRISIL RESEARCH HOUSEHOLD APPLIANCES ANNUAL REVIEW

Figure 4: CTV stock in rural market

Unpenetrated rural household

Source: CRISIL Research, Industry

Unpenetrated urban household

Source: CRISIL Research, Industry

CRISIL RESEARCH HOUSEHOLD APPLIANCES ANNUAL REVIEW

Value growth to be in line with volume growth

Source: CRISIL Research

CRISIL RESEARCH HOUSEHOLD APPLIANCES ANNUAL REVIEW

Segmental shift away from CCTV segment continues

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

Source: CRISIL Research

CRISIL RESEARCH HOUSEHOLD APPLIANCES ANNUAL REVIEW

CRISIL RESEARCH HOUSEHOLD APPLIANCES ANNUAL REVIEW

Refrigerator demand to grow at 7-9 per cent from 2007-08 to 2012-13

Total volume growth

Fresh demand growing at a CAGR of

Replacement demand growing at a slower pace in refrigerators