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spark Capital :Lighting Industry Note - CFL to ensure robust growth, LED the next frontier




Spark Capital Advisors(India) Private Limited


14 Dec 2012





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CFL to ensure robust growth, LED the next frontier The lighting industry has witnessed a robust growth of ~13% over the past 6 years owing to a structural shift from GLS to CFL bulbs and the emergence of new technologies (LEDs) to cater to the increasing demand driven by lower energy consumption of these products, initiatives by the government to promote them and longevity of usage. Similar to other consumer appliance products, the lighting industry has also faced a steady transformation from unorganized to organized markets as large players have been able to improve product quality, optimize pricing and increase reach over the past few years. The following are the key takeaways of our analysis/observations of different segments in the lighting market. CFL, in the limelight – The CFL market has witnessed unbridled growth over the past few years (27% CAGR in past 6 years) on the back of increased consumer preference for energy efficient lighting aided by falling product prices due to better technology and governments' thrust to promote these products. Organized players have been able to capitalize on this and have increased their market share from 50% in CY09 to 72% in CY12 in spite of stiff competition from cheap Chinese imports. They have been able to achieve this through better sourcing, improved quality of products and benign warranty terms. Going forward, we expect this structural shift to continue and expect the CFL market to expand further Rare earth price increase unlikely to affect CFL demand – While growth momentum is expected to continue going forward, sharp increase in prices of rare earth elements due to the ban on export by China has increased input costs of CFL bulbs. While this has been a negative surprise, initiative by the Indian government to increase rare earth production and gradual pass through of price increase to customers are expected to protect margins for domestic companies. GLS, getting phased out – Volume growth of GLS bulbs has been stagnant at ~1% CAGR (CY05-CY11), clearly indicating consumer’s, manufacturer’s and government’s preference towards energy efficient products. Similarly FTL, which is heavily reliant on rare earth elements, has witnessed weak demand due to increase in product prices. LED, the way forward – LED products are emerging as a clear alternative to CFL bulbs with technological advancement improving both energy efficiency and life of the bulb further. While LED bulbs continue to be at a disadvantage in terms of price (~5x costlier than a similar CFL bulb), falling prices of input material, higher local sourcing, improving scale aided by bulk purchases by governments and increasing consumer awareness are expected to expand the LED market. Dealers interaction takeaways – Interaction with a few lighting dealers in Chennai and Mumbai suggest that while demand for lighting products has weakened yoy over the past 2-3 months due to weak real estate and infrastructure demand, sales traction is expected to pick up in a few months time. Working capital position is getting stretched due to payment delays from large customers. On the other hand, decrease in VAT from 12.5% to 5% on CFL bulbs by state governments has not improved demand significantly. We expect the lighting market growth to be lead by further conversion from GLS/FTL to CFL and growth in CFL. Moreover growth in both luminaries and LED is expected to pick up further. Despite near terms concerns, the lighting industry is well...

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