Consumer durables could take a while to charge up

Besides, some segments have their own problems. For instance, change in Bureau of Energy Efficiency (BEE) norms effective 1 January would create volatility in the fans portfolio in Q3. According to checks done by JM Financial Institutional Securities, higher discounts in the range of 8-15% have been given to liquidate non-rated fans inventory by brands. Also, companies have resorted to 5-10% price hikes on BEE star rated products on a like-to-like basis, they added.

View Full Image

Thus, Crompton Greaves Consumer Electricals Ltd and Orient Electric Ltd’s fans volumes are expected to see pressure in Q3. Here, Havells India Ltd is shielded to some extent as its fans portfolio caters to the premium segment where customers are less price-sensitive. Investors seem to have factored in these concerns. Shares of Havells, Crompton, Orient and Bajaj Electricals Ltd are down by 10-30% from their respective 52-week highs.

Nevertheless, softening input costs are a silver lining. “Prices of key commodities declined by 7-44% (PVC seeing the steepest fall) over the previous year. Sequentially, while most commodities saw 3-15% decline, copper and aluminium saw 3-7% increase,” said JM Financial analysts. Margins are expected to improve hereon on a sequential basis. But given the possibility of a rise in advertising and promotion expenses due to increasing competition, how Ebitda margins shape up remains to be seen.

In Q3, analysts at PhillipCapital (India) estimate a year-on-year revenue growth of 10% and earnings drop of 0.1% for consumer durables companies under their coverage universe.

All eyes are now on summer. Companies have started stocking up and the demand for air-conditioners is expected to rise in the coming months. “In FY22, market for room air-conditioners was 7 million units, and the industry expects this to grow by 35-40% to reach 10 million in FY23,” said PhillipCapital’s analysts in a report. Fans are also expected to see higher demand.

Further, companies which primarily cater to the cables and wires segment such as Polycab India Ltd would benefit from the growing demand in the infrastructure industry. But volatility in copper prices necessitates closer tracking.

Overall, an expected recovery in rural demand aided by a good monsoon and healthy minimum support prices bode well. Bajaj Electricals has significant exposure to rural markets, and the management’s commentary on demand here is paramount. Even so, rising electrification in rural areas is a plus.

Given the potential for an improving margin trajectory in the sector and barring the short-term headwinds, analysts believe in the structural growth story of the segment. This is on the back of expected consolidation in the industry and low penetration. Unorganized players have ceded market share to organized ones as they dealt with volatile raw material prices owing to the Russia-Ukraine crisis.

Initially FY23 was expected to be a tale of two halves with brands staging a recovery in H2, said a Nuvama Research report dated 5 January. “There seems to be some respite on margins, and they can be better than H1, but an elongated period of feeble consumer demand may push this recovery to FY24 and that too is subject to how the summer this year pans out,” it added.

All said, volume growth is crucial for consumer durables companies and investors in the shares would follow that.