PG Electroplast's Q2 Shock: RAC Inventory Glut Threatens Profits – What Investors Must Know!

PG Electroplast (PGEL) has reported a challenging second quarter for FY26, with revenues declining 2% year-on-year to Rs 655 crore. This downturn is primarily attributed to significant industry headwinds impacting the Room Air Conditioner (RAC) segment, including aggressive channel inventory liquidation, sluggish retail demand, and recent GST rate changes.

Q2 FY26 Performance Hit by Industry Headwinds

• PG Electroplast's overall revenue for Q2 FY26 saw a 2% year-on-year decline, reaching Rs 655 crore.
• The company cited several factors for this performance, including prolonged monsoon affecting demand and a GST rate cut for RACs from 28% to 18%.
• A significant accumulation of RAC inventory by original equipment manufacturers (OEMs) and channel partners exacerbated the situation.
• Revenues from the products division, which includes Room ACs and washing machines, fell by 15% year-on-year to Rs 320 crore.
• Specifically, AC revenues plummeted by 45% year-on-year to Rs 131 crore due to weak volumes and high inventory.
• In contrast, the washing machines business demonstrated robust growth, increasing by 55% to Rs 188 crore.
• The plastic-moulding business also experienced a slowdown.
• Consequently, operating margins were significantly impacted, plunging 380 basis points year-on-year to 4.6%, driven by negative operating leverage and rising input costs.

Deep Dive into Inventory and Cash Flow

• The company's inventory, including RACs and related raw material components, stood at a substantial Rs 1,363 crore at the end of September 2025, virtually unchanged from its peak in March 2025.
• In the first half of FY26, PGEL recorded a negative cash flow from operations of Rs 153 crore, a sharp reversal from the Rs 145 crore inflow seen in H1 FY25.
• Industry-wide channel inventory for RACs is currently estimated at 70-80 days, which is approximately 30-35 days higher than the typical average.

Future Outlook and Company Plans

• Management expressed hope that the elevated RAC inventory problem would be resolved in the second half of FY26.
• An upcoming energy-label change effective January 2026 might add short-term pressure to the RAC market.
• Cost structures are under pressure due to spikes in copper and aluminium prices, alongside adverse currency movements.
• Brands are expected to implement price hikes for the upcoming season, but market competition may limit their ability to do so effectively in the near term.
• The washing machine segment is expected to maintain its strong performance, fuelled by a robust order book and underlying market demand. PGEL targets a 15% revenue share from this business over the next 2-3 years.
• PGEL has retained its revenue guidance for FY26, expecting a turnover of Rs 5,700-5,800 crore.
• Total group revenues are projected to be around Rs 6,500 crore, including an estimated Rs 850 crore contribution from Goodworth Electronics, a 50:50 TV manufacturing JV.
• Net profit is expected to be around Rs 300 crore for FY26.
• The planned Rs 350-crore compressor JV, aimed at meeting half of internal needs and supplying others, has been pushed to FY27, pending approvals from its Chinese partner.
• Capital expenditure for FY26 is estimated at Rs 700-750 crore, including new plants for refrigerators and washing machines, and AC capacity expansion.

Analyst View and Recommendation

• Analysts forecast that FY26 will be a challenging year for the RAC industry due to aggressive channel inventory liquidation, which will likely impair near-term results for all stakeholders.
• Despite the recent stock price decline reflecting some pressure, the company's valuation of 59 times FY27 estimated earnings is considered stretched.
• Investors are advised to refrain from investing in the immediate term, as margin performance across the RAC industry is expected to be significantly squeezed over the next two quarters.
• However, PGEL's long-term outlook is considered fundamentally sound.

Stock Price Movement

• The company's stock has been trading in a rangebound manner for the past three months.

Impact

• Shareholders of PG Electroplast may experience near-term pressure on their investments due to the challenging industry environment and potential stock price volatility. The company's profitability could be affected by margin compression and inventory write-downs. For consumers, the immediate impact might be limited, but prolonged inventory issues or price hikes could influence purchasing decisions. The broader Indian consumer durables market faces headwinds impacting manufacturers, suppliers, and retailers.
• Impact Rating: 6

Difficult Terms Explained

• RAC (Room Air Conditioner): A device used to cool the air in a room.
• YoY (Year-on-Year): A comparison of performance metrics between the current period and the same period in the previous year.
• OEM (Original Equipment Manufacturer): A company that manufactures products or components which are then sold to other companies that rebrand and sell them.
• GST (Goods and Services Tax): A consumption tax imposed on most goods and services in India.
• Basis Points: A unit of measure equal to one-hundredth of one percent (0.01%). Used to denote small changes in percentages.
• Capex (Capital Expenditure): Funds used by a company to acquire, upgrade, and maintain physical assets like property, plants, and equipment.
• JV (Joint Venture): A business arrangement where two or more parties agree to pool their resources for the purpose of accomplishing a specific task or project.