Pay revisions may add 10% to industry growth rate: Hitachi

March and April have seen good demand pick-up against the same period last year, although May has been a letdown, says Gurmeet Singh, Executive Director at Hitachi Home and Life Solutions (India).  

Speaking to CNBC-TV18, Singh says events like Seventh Pay Commission implementation which lead to higher disposable income levels tend to add at least 10 percent to the industry’s normal growth rate. He expects the upcoming 7th pay commission to boost sales.

"We witnessed strong tailwind, particularly in the room air conditioning segment, when the last pay commission was implemented. We expect a similar fillip this time around also," he says.

Considering the recovery in demand, he does not expect much pile-up of inventory this year.Below is the transcript of Gurmeet Singh's interview with Ekta Batra, Anuj Singhal & Guest Editor Abhay Laijawala, Head-India Research at Deutsche Equities on CNBC-TV18.Anuj: What is the overall demand scenario right now? Piece of green shoot last quarter, has that continued in this quarter?Singh: In a way yes. The market has been good in the months of, the peak season of March and April. The last quarter went off well. So April and May; May was a bit of a laid down, it was not such great market. June has been going on and I do not think June will be as great as some great months which have crossed by, but as of now I find that the months of April-May-June for the market maybe, will be slightly better than last year.Abhay Laijawala: I have a question on Pay Commission. What is your view happens following the implementation of these recommendations. We also have monsoon related demand tailwind. So what do we see in terms of consumption moving forward and what had happened during previous similar episodes when these Pay Commission recommendations were implemented?Singh: When this was done last, I do remember clearly that we had a strong tailwind due to this and we found the market going up particularly for the room air conditioners. However, when we talk of room air conditioners, this is directly related to the consumer spending and we did find a fillip going ahead on this and I think this time's Pay Commission also should give us some fillip in the markets. The only thing is that we are in the business of air conditioners largely as the market and air conditioners' season is typically from February to June, the peak season. However, talking about peak season, this is almost half the country. The other half is virtually all year around. So we should get some good news in terms of market pull from the west markets like Mumbai, Pune side which are usually hot October onwards and south is always hot. Therefore, it should give us good throughput.Ekta: If we have to put this into numbers, give us a sense in terms of volume growth that you are clocking in right now in terms of your business and how much do you expect it to rise incrementally if in case the seventh Pay Commission tailwind does come about?Singh: The numbers is something which is anybody\\\\\\'s guess. I would rather avoid this question but I can say that in terms of market growth we found that when this kind of Pay Commission or other things do come in which has a serious impact on the consumer free spending. I find that there is normally a plus 10 percent over the regular growth which happens usually, plus 10 percent over usual growth. So I would say that if the market was supposed to grow at 4-5 percent, this would go to 14 or 15. This is how it should be.Ekta: What are you doing in terms of value growth at this point in time? Where are inventory levels for you at this point and is inventory now liquidating for you comfortably?Singh: If you talk of our company Hitachi Home & Life Solutions particularly, we are into a business which is much beyond the business of only room air conditioner which is seasonal. So yes, we do have inventories which are very large, which we build up particularly for the season time - that is the months of March-April-May and they tend to taper off when we go ahead. However, when we look at the other parts of the business which is our B2B or commercial side, the inventories are never an issue; we do not need to build up the inventories for any season or anything. So inventories are getting liquidated but we did have a challenge, not us, the entire market had a challenge last year when June was a very bad month, so there was a big pile up of stocks which happened at the end of the companies as well as at the end of retail dealers. So, we will see how the market goes in the month of June, how it shapes up. It\\\\\\'s still three-four days to go and then reports will come up. Also July to September last year were not very great months in terms of air conditioning. So with bad last year, the inventory should not be becoming an issue coming in this year. I think July-August-September, if they tend to be better than last year also; the inventory also seems to be lower than last year in the entire market.Anuj: We have seen some of these companies do well but stocks have run up and a lot of them are trading at new lifetime high. Is there valuation comfort still in some of these durable goods companies?Laijawala: The market will be looking out for the tailwinds and what happens and as we have highlighted in our note, one of the key trends that we think investors should watch at is scarcity premia for safe haven names or sectors where the catalysts are positive will widen, so cement is an example. Over the last two years we have seen that cement stocks have traded at valuation premiums, the PE for some of the cement stocks is almost 40 percent above what the average PE has been for many years. So our call therefore is in a market like this where investors are looking for earnings visibility, positive catalysts and additional tailwinds such as rural demand. We do think that the scarcity premium will widen. Ekta: We have a couple of triggers for rural demand which are coming up now; we have the Seventh Pay Commission which is likely implementation. We have a normal monsoon or a less of a deficit as compared to the last two years. Your sense in terms of whether consumer staples would be the sector to invest in, in FY17?Laijawala: We remain positive on consumer staples because all these variables, all these tailwinds will impact the sector and the sector will also be impacted positively by the end of deflation. So that is also an important development that is creating a strong tailwind for that sector and even in terms of valuation support, if we look at the PE relative, what I as a strategist do, I look at PE relatives of sectors very closely and at this point in time the PE relative of the consumer staple sector is not looking as expensive as it was about two years ago. So we think that on a PE relative basis there is scope for additional value.