Why are low margins a problem if the asset turns are high?
On a fixed assets base of 100 Cr, a good brand can generate 600 Cr room AC sales at 10% EBIT margin. At a working capital cycle of 70 days that calls for a working capital investment of 120 Cr. ROCE will still be 20%+
All well known room AC players are growing sales at 12-15% range. Blue Star has the highest investment into both adverts and R&D, if not for these their EBIT % in the Unitary products division can easily be 14-15%. As is the case with any consumer brand, advert investments do not scale linearly with revenue and there is good scope for improvement in margins over the medium term. At AC penetration levels of around 6% in India, the growth runway is indeed long. The problem plaguing the industry is the seasonality of AC sales, Q4 and Q1 make up the bulk of sales in any FY.
Category expansion (water purifiers, air purifiers, other white goods) and improvement in margins will be the key parameters to watch out for. Scale does not enhance manufacturing margins but can spread advert and R&D spends across more units and improve unit economics significantly from here.
Disclosure: Tracking, not invested