Margin pressure for consumer electrical companies to continue in Q4

Volumes key as costs rise and firms refrain from hiking prices of products

With raw material prices rising sequentially in Q4 FY23, margins of fast moving electrical goods (FMEG) companies could witness pressure as they refrain from hiking prices and demand remains soft. Transition to a new regulatory regime—fans moved to new BEE standards from January 1—poses additional risk for firms. Business depends on volume trends in summer for key sub-segments, which account for a significant chunk of the sector’s overall sales pie.

“Post strong pent-up demand over April-May 2022, fast-moving electrical goods space excluding cable and wires remains soft to date due to an inflationary environment, lower spend on discretionary goods, and consumer spending in travel & healthcare. Currently, FMEG companies (excluding cable and wire) are cautiously optimistic on demand recovery. The only variable which can drive demand is a good summer while price hikes are largely ruled out. It implies continued margin pressure in Q4 FY23,” said analysts led by Harshit Kapadia of Elara Securities.

While raw material prices in Q3 FY23 saw a 12-25 per cent decline compared to the year-ago quarter, overall prices continue to trend above pre-Covid levels. Barring exceptions, FMEG players posted a 90-450 basis points fall in margins on a sequential basis in the December quarter. For a three-year period, margins are down 140 basis points.

Gross margin improved due to a stable raw material environment, but operating margin remained under pressure. This was on the back of low-operating leverage on weak demand, competition in the form of schemes to stimulate volume and sustained investments in brand building and go-to-market initiatives, say Achal Lohade and Paarth Gala of JM Financial.

Prices of key commodities have inched up 5 per cent-13 per cent on a sequential basis the March quarter to date. With most of the high-cost inventory now liquidated, recovery in volume remains a key monitorable if margins are to recover to pre-Covid levels by 1QFY24, says the brokerage.

Within sub-segments of the consumer durable space, fans and kitchen appliances could see headwinds. In the fans segment, star rating and excess inventory could delay sales to dealers. Further, there is a 5-8 per cent hike in prices of fans given the transition to the new norms. YES Securities says that persistent price increase and high inflationary environment has impacted kitchen appliances the most. Demand continues to be muted with branded players losing a bit of share to the regional and local players, as there has been down-trading with absence of urban demand and rural customers opting for cheaper products.

Most brokerages are positive on the cable and wires business on the back of infrastructure and industrial capital expenditure. While rise in household electrification, improved availability of electricity and higher disposable income bode well in the long term, Elara Securities is cautiously optimistic on FMEG goods, such as fans, lighting, and switchgears in the short term. While top picks for JM Financial are Bajaj Electricals and Havells, those for Elara Securities are KEI Industries and Eureka Forbes.