A rise in crude oil prices have also impacted the pricing in the home appliances space, weakening consumer demand
The first quarter of FY19 may prove to be a dampener for consumer durables companies with a rise in raw material prices and a depreciating rupee hurting sales.
It must also be noted that the same quarter last year was exceptionally good as customers flocked to buy products in anticipation of a rise in prices due to Goods and Services Tax (GST) from July 2017.
Increasing oil prices have led to a rise in raw material costs as well as transportation expenses for the companies. This will have an impact on the bottom-line of the firms. Similarly, the GST rate hikes have also not been fully passed on to customers. This too will impact the Q1 numbers.
Among the companies, Havells India will be the first to report its results on July 20. Motilal Oswal in a report said they expect standalone revenue of Havells to grow 32 percent year-on-year (YoY), driven by revenue contribution from recently-acquired Lloyd Electric in Q1FY18.
GST windfall gains
Consumer durables firms were bracketed in the highest tax category of 28 percent under the GST regime. This led to a period of uncertainty since customers were worried about an immediate price hike.
A report by Kotak Institutional Equities said the numbers for Q1FY19 are not strictly comparable YoY due to GST-led de-stocking in the base quarter (Q1FY18).
“With much of the channel now stabilized for most of the companies, we expect the positive underlying trend of the previous quarter to continue,” it added. Overall, while revenue growth could see an upswing in the later quarters, specific segments like air conditioners could see a slump.
Unseasonal rains and air conditioners
Unseasonal rains in the North and parts of East India had led to a decrease in the sale of air-conditioners in the first quarter. An analysis by Motilal Oswal said electrical consumer durables companies like Voltas and Blue Star could post muted revenue growth, with unseasonal rains impacting room air conditioner demand.
Similarly, the implementation of the new energy-efficient air conditioner norms will also impact prices since it requires companies to re-rate their air-conditioners leading to increased costs. This has a direct impact on the final sale price causing a fall in demand.
Rupee depreciation and oil price rise
The rupee depreciated 5.11 percent against the US dollar in Q1FY19. For home appliances companies this leads to a direct impact on costs since a large proportion of the raw materials are imported.
Freight costs are estimated to be around 10-15 percent of the overall costs. Any hike in oil prices leads to a subsequent increase in transport costs, pushing up the overall production costs.While consumer durable firms, impacted by the twin issues of falling rupee and rising input costs have already decided to hike prices from June, they may further increase prices if the oil situation continues. But, the Q1 numbers will see a direct hit due to these twin factors.