Indian Consumer Durables Industry – Is the momentum durable?

Indian companies selling appliances and electronic goods may have to adopt a cautious approach while planning price increases to cover higher input costs and help sustain demand as the pandemic abates.

“Most OEMs are adopting a wait-and-watch strategy for taking further price hikes given the potential impact on volumes and thus overall demand. Going forward, companies will take calibrated/gradual price hikes to sustain demand momentum,” said Suvarna Joshi, a senior research analyst at Axis Securities.

The consumer durables industry, like other sectors, was hit by the pandemic-induced slowdown in the past more than one year. Not only did demand get impacted, but gross margins also came under pressure of rising raw material prices.

Signs of a turnaround in the sector became visible when companies declared their results for the second quarter (July-September) of FY22 and the trends witnessed during the festive season were encouraging. The strong festive demand was a good indicator that the sector would be able to match its pre-pandemic performance.

The appliances and consumer electronics industry will double to Rs 1.48 lakh crore ($21.18 billion) by 2025, according to a report by India Brand Equity Foundation, a government export promotion agency.

In May, consumer durables output increased 98.2 percent compared with a 70.3 percent decline in May 2020, IBEF said. Electronics hardware production in the country increased to Rs. 5.47 trillion in FY20 from Rs 4.43 trillion in FY19.

As of FY20, the markets for electronics, domestic appliances and air-conditioners in India were estimated to be Rs 5,976 crore, Rs 17,873 crore and Rs 12,568 crore, respectively.

First-half performance

The second quarter and first half of FY22 were characterised by steady top line growth, driven by demand.

However, “operating profitability in terms of margins and bottom line came under pressure owing to raw material inflation that was notable in Q2FY22 and lockdown in Q1FY22 impacted the overall profitability,” said Joshi of Axis Securities.

Although raw material cost pressures were notable, they were partially offset by price increases implemented by companies. The impact of supply chain issues was not severe because companies had enough inventory for Q3 and Q4 of FY22.

“Despite Q2 being a lean quarter, RAC (room air-conditioner) volume growth – on a 2-yr CAGR basis – stood at 14-15 percent vs. -2 percent and 3 percent for refrigerators and washing machines, respectively,” brokerage firm Emkay said in a report.

Additionally, RAC segment realisations remained flat compared to a 4-7 percent improvement in the case of refrigerators and washing machines. Across categories, industry volumes in the first half contracted by 2-14 percent (on a two-year CAGR basis), pointing to a slow recovery.

The lighting segment witnessed healthy growth and is expected to grow in the second half, aided by a revival in residential sales. The wires & cables segment saw pricing-led growth, although volumes were moderate due to a higher increase in the prices of raw materials passed on to the consumer.

So far, consumers have absorbed the price increases.

“Moderation of competitive intensity in coming months is key as it is critical for potential price hikes, and thus better profitability for the entire industry,” said Emkay.

Demand trends

The festive season brought cheer to the sector with robust demand for premium products. The recovery for mass products, however, remained subdued but is expected to pick up during the upcoming wedding season.

“Sustained offtake in premium products after the festive season and volume recovery in entry-level products are critical for revenue growth in Q3 as the industry had seen robust 30-50 percent volume growth across categories in Q3FY21,” added Emkay.

The price increases effected in the past nine months and the mix improvement would contribute 8-10 percent to revenue growth in the third quarter.

“With the festive season fading and price hikes coming into the system, volumes could see some pressure,” said Joshi.

In the immediate future, heating products such as geysers and water heaters are expected to do well. Demand for cables and wires for housing will likely remain robust due to the uptick in residential housing demand. As the economy gains momentum, institutional demand for cables will improve.

“RACs growth is expected to sustain aided by low penetration, despite a competitive industry and the volumes are expected to grow to 6.5-7 mn units for FY22,” as per Axis Securities. RAC volumes in H2FY22 are expected to be at FY20 levels, while demand for refrigerators could pick up further ahead of the summer season.

Commentaries on expected demand trends by the management of consumer durables companies were quite positive and exude confidence for the rest of the year.