There is a lot of hope riding on the festive season to rekindle consumption demand in a big way, especially for discretionary purchases. Policymakers want Indians to become the avid consumers they were before the pandemic struck. One sector that is a strong indicator of this is consumer durables.
Consumer durable firms are likely to report an improvement in revenues for the September quarter, and this expectation has gained conviction from recent channel checks by analysts. Sales of durables and white goods have recovered sharply during the quarter as the restrictions to stem the pandemic’s second covid wave were eased. Indeed, Indians are buying air conditioners and appliances to spruce up their homes for festivities.
Voltas Ltd, Blue Star Ltd and Havells India Ltd may see a sequential jump in their revenues. “Our channel checks indicate that July saw strong year-on-year (y-o-y) volume growth,” analysts at Emkay Global Financial Services Ltd wrote in a note. To be sure, a high base has resulted in a more modest y-o-y growth during August, they added. Even so, a 26% growth during the two months is no chump change, and early indicators in September are also encouraging. Within durables, room air conditioners showed a sharper increase versus other appliances, but given the loss of the key summer sales months of the June quarter, the benefit of this growth is limited for overall FY22 earnings.
For the September quarter (Q2FY22), air conditioners may show 20% growth from a year ago, according to Emkay’s estimates. Washing machines and refrigerators sales volume should see growth in the range of 2-5%. Voltas, the market leader in air conditioners, is expected to report an overall volume growth of 17%, according to analysts at PhillipCapital India Pvt Ltd. Rivals such as Blue Star and a few others have been under pressure in the air conditioners market despite the pent-up demand benefit in FY21.
Voltas has beefed up its product offerings and channels for its Beko range of products, which is a joint venture for white goods. Voltas is likely to report 11.5% y-o-y growth in revenues, analysts estimate. There has been some traction in the Lloyd range of air conditioners as well.
Havells offers a wider range of products in the electrical appliance or electrical consumer durables (ECD) space as well as in lighting, switches and wires and cables (C&W). A Jefferies report points out that demand for smaller appliances have witnessed a stronger rebound mainly because consumers are upgrading their homes driven by the work-from-home phenomenon.
Further, consumer electricals showed a strong recovery which is an indication of an upswing in construction activity. While business-to-consumer remains strong, business-to-business too is improving. This augurs well for Havells and also firms such as Crompton Greaves Consumer Electricals Ltd, Bajaj Electricals Ltd and Orient Electric Ltd.
While the demand rebound is helping firms, price hikes by manufacturers would boost realizations. Analysts estimate double-digit growth in value for Q2FY22. “YTD (year-to-date) price hike is at 15-20% in durables/appliances and higher at 30% in cables and wires,” point out analysts at Jefferies India Pvt Ltd in a note. “We expect consumer electrical companies in our coverage to post 25% revenue growth YoY and 12% growth versus Q2FY20,” wrote analysts at Emkay.
The cables and wires segment may grow 34% from a year ago, while on a compounded annual growth rate over two years, the growth maybe 12%. The ECD segment should see 17% growth, they added.
A key downside for firms is the rising cost of raw materials. During the first half of FY22, average copper prices have increased by 22% from the same period a year ago, say analysts. True, firms have hiked the prices of their products, but analysts believe these are not enough to protect margins. Further, discounts offered to lure buyers during festivals may dent margins. Those at PhillipCapital estimate that gross margins could see an erosion of 100- 150 basis points for Q2. One basis point is one-hundredth of a percentage point. Shares of consumer durable firms have gained since August, pricing in most of the upbeat sentiment. Any upside surprise on September quarter earnings may help valuations further.
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