Consumer durable demand outlook likely to remain weak in Q3FY23

While input costs have eased, lower volumes could impact margins

Demand trends for the consumer durables sector are expected to remain weak for the second consecutive quarter, impacting the performance of companies in the third quarter for the 2022-23 financial year (Q3FY23). After a strong Q1FY23, the performance of consumer durable majors -- barring wires/cables companies -- have been sluggish.

Analysts, led by Aniruddha Joshi of ICICI Securities, expect the white goods and durables sector to report weak revenues in Q3FY23 on account of post-Diwali slowdown in consumer offtake, led by steep price hikes, inflationary pressures and higher interest rates. What would impact the sector further is reduction in trade inventory of fans due to the shift to Bureau of Energy Efficiency or BEE norms which kick in from January 1, 2023.

In addition to weak demand despite the festive season, what is impacting companies, according to Elara Capital, is an inability to pass on price hikes amid increased competition. Competitive pressures are highest in the room air conditioner sector with companies looking at expanding market share. While the rural segment is experiencing higher impact than urban, a gradual recovery is expected by the March quarter next year.

This is the second consecutive quarter of weakness after the aggregate revenue of the listed players in the sector in Q2FY23 rose only 7 per cent year-on-year (YoY), according to BNP Paribas Research.

Cables companies outperformed white goods firms as business-to-business segments outperformed firms catering directly to the consumer. Further, the slated BEE rating introduction in fans and changes in ACs, led to channel destocking, thereby hampering the growth of the electrical consumer durables segment and white goods brands, says Nilesh Bhaiya of the brokerage.

While demand has been weak, the Street will also track the margin movement of the various segments in the sector. Operating profit margins were down over 200 basis points (bps) YoY, given higher input costs, employee expenses and advertising spends.

While raw material costs have come off sequentially, some brokerages expect margin pressures to stay in the current quarter as well. ICICI Securities points out that while input prices have corrected from their peak in the first half of the 2022 calendar year, commodity prices are still trading higher YoY. They believe that negative operating leverage and higher input prices will likely hurt margins by 50-150 bps in Q3FY23.

Of the various segments in the sector, consumer electrical companies have done better than their durable peers in protecting margins. Data for the past 12 quarters, when commodity prices started increasing, show that consumer electrical companies have been able to limit the impact on gross margins and manage their financials much better than durables companies.

This indicates better discipline, relatively lesser discretionary nature of portfolio, lower competitive intensity and benefits of recovery in business-to-business demand for the electrical companies, says Aakash Fadia of YES Securities.

In addition to Polycab. which has been an outlier on the growth front, most brokerages prefer Havells India, Crompton Greaves Consumer and Blue Star among the picks in the sector.