Whalesbook
The Evolving AC Market Landscape
India's air-conditioner market is poised for a significant transformation as new energy efficiency norms and tax regulations set to take effect from January 2026. The Bureau of Energy Efficiency (BEE) is implementing stricter energy performance standards, which will require manufacturers to incorporate more advanced and costly components into their appliances. This regulatory shift is expected to inherently increase the production costs for air conditioners.
However, the recent reduction in the Goods and Services Tax (GST) on air conditioners from 28% to 18% provides a significant counterbalance. This tax cut is anticipated to largely absorb the price increases stemming from the new BEE ratings. According to Sanjay Chitkara, co-chief sales and marketing officer at LG Electronics India Ltd, the objective is to ensure that the new prices post-regulation remain comparable to those seen before the GST reduction. Commodity prices are expected to remain stable, helping manufacturers manage costs.
Manufacturer Perspectives on Cost Pressures
While LG Electronics India highlights the offsetting effect of the GST cut and stable commodity prices, other industry players foresee more complex cost pressures. Kamal Nandi, business head and executive vice-president at Godrej Enterprises Group’s appliances business, pointed to the cumulative impact of sustained currency depreciation, adverse commodity costs, and the impending energy regime changeover. He anticipates a significant overall cost increase for cooling categories, particularly for air conditioners, potentially leading to price hikes of 5–7% in the near term. Refrigerators might see a 3–5% increase.
Market Analysts and Forecasts
Brokerage firm Jefferies estimated that the GST cut alone has already reduced market prices for air conditioners by approximately 8%. Analysts at Jefferies foresee a strong third quarter for the industry, driven by robust festive sales, a demand revival spurred by the GST reduction, the need to liquidate older inventory before the new BEE norms kick in, and the expectation of hotter weather in western and southern India.
Conversely, rating agency ICRA has flagged a potential near-term moderation in sales volumes. In a September report, ICRA forecasted a year-on-year decline in Indian room air-conditioner (RAC) volumes. They projected volumes to fall by 10-15% in FY2026 to between 11.0 and 11.5 million units, down from a record high of 12.5 to 13.0 million units in FY2025. This anticipated dip follows an extended period of unseasonal rainfall during the crucial April-July demand season in northern and central India, which reduced the number of heatwave days.
Regulatory Transition and Future Outlook
The new Star label, effective from January 2026, aims to enhance efficiency standards and is projected by ICRA to increase room air-conditioner prices by ₹500 to ₹2,500 per unit. This increase, however, is expected to be partly offset by the GST reduction. Kinjal Shah, senior vice-president and co-group head at ICRA, suggested that this might encourage pre-buying in the third quarter of FY2026, helping Original Equipment Manufacturers (OEMs) partially recover sales lost during the 2025 summer season.
Air conditioner OEMs are also preparing for significant changes with the gradual implementation of the Quality Control Order (QCO). This order will increase the indigenization of the manufacturing process and mandate compliance with Indian standards, requiring products to bear the Bureau of Indian Standards (BIS) quality mark. The QCO will be implemented in phases over 12 months for various product categories, including RACs, reshaping market dynamics and manufacturing strategies.
ICRA anticipates a partial recovery in the second half of FY2026, driven by demand in southern and western markets, coupled with forecasts of a warmer summer in 2026. They maintain that the GST reduction will likely more than offset price increases from the new star labelling norms. Despite near-term volatility, the medium-term outlook for the sector remains constructive. ICRA estimates that manufacturing capacity is poised to expand by 40-50% over the next two years from the current 24-26 million units, supported by planned capital expenditures of ₹4,500-5,000 crore.
Impact
This news is significant for investors in the Indian consumer durables sector. Changes in energy norms and GST directly affect pricing, demand, and profitability for AC manufacturers. While regulatory shifts can introduce cost pressures, the offsetting GST cut and anticipated capacity expansion suggest a constructive medium-term outlook. The impact on market returns for AC manufacturers and related component suppliers could be considerable, depending on their ability to navigate these changes and manage costs effectively.
Impact Rating: 8/10
Difficult Terms Explained
- Bureau of Energy Efficiency (BEE): A government agency focused on reducing energy consumption and promoting energy efficiency through standards and labeling programs.
- Goods and Services Tax (GST): A comprehensive indirect tax levied on the supply of goods and services in India.
- Original Equipment Manufacturer (OEM): A company that manufactures products or components that are used in another company's end product.
- Quality Control Order (QCO): A regulation mandating that specific products must conform to certain quality standards and bear a certification mark before being sold.
- Bureau of Indian Standards (BIS): The national standards body of India, responsible for the harmonious development of the activities of standardization, marking, and quality certification of goods.
- Star Label: A rating system used by BEE to indicate the energy efficiency level of appliances, with higher star ratings signifying greater efficiency.
- Volume: In a business context, this refers to the quantity of goods sold over a specific period.
- OEMs: An abbreviation for Original Equipment Manufacturers.