Valuations, growth hopes to limit downsides for white goods firms

Margins expected to bottom out; brokerages prefer category leaders

Sluggish demand, higher costs, and insufficient price hikes are expected to weigh on the October-December quarter (third quarter, or Q3) performance of consumer durables companies. Except for the wire and cable industry, most segments are expected to see volume growth challenges due to regulatory transition (fan segment) and competitive pressures (air conditioners, or ACs). 

Analysts, led by Vinod Chari, of BOB Capital Markets, expect a dull Q3 for stocks they track, given the lower volume offtake in the aftermath of the festival season. While premium products saw buoyant sales, the entry-level segment (where volumes are higher) remains distressed. 

Taking cognisance of competition, industry players refrained from price hikes and chased market share over margin gains. With uncertainty in China amid a surge in Covid cases, companies are operating at higher inventory levels of 75-90 days, compared with the usual 40-45 days. 

The December quarter is off-season for ACs, and companies withheld price hikes amid heightened competition, resulting in flat volumes.

The fan segment witnessed a volume decline as trade adjusted to the regulatory transition. The wire and cable segment, however, bucked the trend yet again as demand remained robust, led by the housing sector, as well as higher infrastructure activity, in the business-to-business segment.

Weak demand and customer incentives are expected to weigh on demand and profitability in the near term.

Deepak Agarwal of PhillipCapital India Research says that to push demand due to weak rural sentiment and higher inflation, companies started offering higher discounts/incentives. Since there was volatility in commodity prices and discounts, gross margins could take a hit.

Currently, companies are focusing on volumes (operating leverage) to offset pressure on gross margins, he adds. 

While near-term concerns could weigh on sentiment, some brokerages are turning positive on the sector, given the decline in stock prices in the past year, bottoming out of margins, market-share gains, and expectations of a demand revival.

BOB Capital Markets believes that margins have likely bottomed out in Q3 of 2022-23 (FY23). While operating profit margins are expected to remain under pressure over year-ago levels, they are expected to post a sequential pick-up, led by lower commodity prices.

Most brokerages expect margins to witness an upward trend from the January-March quarter of FY23 onwards.

What works in favour of listed consumer durables players are valuations that are at undemanding levels.

Say Ashish Poddar and Pranay Shah of Systematix Shares and Stocks (India), “After a year-long underperformance, we are now comfortable with their valuations, led by Crompton Greaves Consumer Electricals and Bajaj Electricals, and anticipate decent upsides at the prevailing price levels. Notwithstanding their sharp outperformance, we expect the wire and cable companies to do well, given their robust business outlook.”

Excluding a few, the brokerage expects most players to give double-digit returns from the current market price.

Voltas, Orient Electric, Whirlpool of India, and Crompton Greaves Consumer Electricals have been among the top losers in this space, shedding 20-36 per cent over the past year. 

The other positive for listed consumer durables/electrical majors is market-share gains, especially for market leaders.

Axis Securities highlights that higher penetration and a large dealer network have helped leaders in their respective categories to gain market share. Unorganised players are under pressure due to volatility in raw material prices. 

While the near-term risk to earnings persists, given subdued volume growth on a three-year annualised basis, Nuvama Research expects the long-term growth outlook for the electrical/consumer durables sector to remain healthy.

The brokerage prefers cyclical segments (such as wire and cable) to pure consumer players and advises investors to stick to strong category leaders and earnings champions, while remaining relatively cautious on large appliances and white goods players, with the only exception being Whirlpool of India. Its top picks are Havells India, KEI Industries, Dixon Technologies (India), and Whirlpool of India.

BOB Capital Markets, too, maintains its preference for category leaders. These include Havells India, which is better placed for energy rating transition in fans with higher premium segment contribution; Polycab India, which is insulated from recent reversal in commodity prices; and Dixon Technologies (India), a proxy to robust growth prospects in electronics manufacturing services.