Breezy summer ahead for consumer durables financiers, say analysts

Strong product demand is expected to drive loan book of lenders

Above-normal temperatures in the north and other parts of India are expected to push sales for consumer durable makers, especially cooler, air conditioner, and refrigeration system manufacturers. The rub-off, analysts say, will be seen on banks and non-banking financial companies (NBFCs) engaged in financing these products.

“Festive demand and work-from-home culture led to healthy buying in the second and third quarters of the current financial year (Q2/Q3FY21). The demand for white goods, such as air conditioners, washing machines, and refrigerators, is expected to remain strong due to the summer season, continuation of work-from-home culture, and pick-up in the housing and real estate sectors,” says Ajit Mishra, vice-president for research at Religare Broking.

According to a March 19 note by Jefferies, inventory levels have also rationalised over the past two-three quarters and are now at near optimal levels. That apart, some companies have already undertaken cumulative price hikes of about 5-9 per cent in the durables (mainly ACs) segment, which may see further calibrated hikes in peak season (April), depending on the input cost scenario.

Against this backdrop, analysts at Antique Stock Broking say consumer financing has picked up meaningfully over the past six months and has now reached at pre-Covid levels.

Currently, NBFCs like Bajaj Finance and Tata Capital, and private banks, such as HDFC Bank, ICICI Bank and IDFC First Bank, together contribute to a large part of consumer durables financing.

On the back of double-digit volume growth in consumer durable products, analysts expect financiers to report an expansion in loan book over the next two quarters, along with stable asset quality and a gain in market share.

Premium valuations

While analysts do warn against their premium valuation, they believe these stocks can continue to do well over the long term on the back of the recovery in overall demand and low interest rates.

“Both, Bajaj twins and HDFC Bank, have seen strong growth momentum and have gained market share over the years. Currently, these stocks do trade at a premium due to their strong growth and healthy asset quality, but can continue to do well on the back of the recovery in overall demand and low-interest rates,” says Mishra of Religare Broking.

For ICICI Bank, a strong focus on increasing retail presence bodes well for the bank. Mishra says: “We would recommend holding all four stocks for the long term.”

Over the past six months, all stocks in this space have outperformed the benchmark S&P BSE Sensex. While IDFC First Bank jumped 97 per cent, Bajaj twins, ICICI Bank, and HDFC Bank leaped between 42 per cent and 60 per cent. In comparison, the Sensex advanced 29 per cent during the same period, ACE Equity’s data show.

However, there's a word of caution, too. G Chokkalingam, founder and chief investment officer at Equinomics Research, too, opines that valuation of these stocks has risen multifold, giving investors a window to book profit at higher levels. Corrections may be used to re-enter these stocks.