Budget measures key trigger for consumer durable firms battling high prices

Any proposal to boost manufacturing, demand would help sector and listed companies

The results of consumer durable/fast moving electrical goods makers point to a weak demand environment. This coupled with intense competitive pressures could weigh on growth and margins in the near term. While business-to-business (B2B) demand remains firm, the business-to-consumer (B2C) segment is yet to pick up given higher retail inflation.

The muted demand is reflected in the Q3 FY23 results of the consumer durable goods/electronic manufacturing service companies and brokerage commentary on the same. Havells, the largest player, indicated that consumer demand was impacted by inflation and there is lack of clarity on when demand would recover. While analysts at ICICI Securities are positive on the growth opportunity in the sector and for Havells, they have cut their earnings estimates of the company given muted consumer sentiment and subdued performance in the first nine months of FY23. For Havells, barring cable and wires, most segments are witnessing a slowdown compounded by increasing competitive pressures especially in the air-conditioner segment.

Analysts led by Abhineet Anand of Emkay Research said that the room air-conditioner segment is witnessing intense competition with negligible price hikes despite raw material prices rising in the past few quarters. High-cost inventory continues to hurt margins.

Polycab’s results too were mixed with cables and wires exhibiting double-digit growth while fast moving electrical goods posted flat performance over the year ago period due to weak consumer demand. Margins too were impacted given higher spends on advertising and promotions.

The weakest December quarter results print came from Dixon Technologies, India’s largest electronic manufacturing services (EMS) player. The company reported a revenue fall of 22 per cent year-on-year (YoY) and it was way below street estimates due to lower volumes in mobile phones, consumer electronics and lighting. Realisation hit in consumer electronics (LED televisions) also led to the drop in the topline.

In this backdrop, brokerages believe any measure to boost manufacturing and demand in the Budget would act as a trigger for the sector and the listed companies.

Among key measures expected is the increase in customs duty on certain inputs which is expected to benefit EMS companies. Analysts led by Aniruddha Joshi of ICICI Securities say that an additional levy on imports of raw materials may lead to increase in domestic production and would be beneficial for companies such as Dixon Technologies, Amber Enterprises and Syrma SGS.

Steps taken to enhance growth of the real estate sector in the Budget could help business-to-business segments such as wires, cables, switches and switchgear and lighting.  

Other initiatives which could lower pricing of final goods and boost demand are lower indirect taxes on white goods and tax cuts leading to higher disposable income in the hands of consumers. In this regard, initiatives to step up rural consumption which account for a fifth of consumer durable consumption could be beneficial, believes the brokerage.

Among the listed stocks, analysts have cut their target prices and valuation multiples for Havells. Says Nomura Research, “Given slowing consumer demand and rising capital allocation towards Lloyd, we expect the company to trade at the lower end of its historical trading band of 36-54 times its price to earnings estimates.”

Most brokerages have a buy rating on Polycab given its fortified position in cable and wires. This coupled with increasing strength in the B2C segment bodes well for margin and cash-flow profile going ahead, believe analysts at Emkay Research.

Brokerages have a mixed view on Dixon Technologies. Elara Securities, which has an accumulate rating, has lowered its earnings per share estimates for FY23 by 35 per cent and 25 per cent for FY24 given significant underperformance in mobile phone, consumer electronics and lighting business.