Robust demand may sustain growth momentum for consumer durable makers

Margins could come under pressure given sharp rise in raw material costs

Stocks of consumer durable makers have been hitting their 52-week highs, given the pick-up in demand and expectations of healthy growth. Led by gains in recent months, they have given returns of 39-54 per cent over the past six months, as compared to a 32 per cent uptick for the benchmark Nifty50 index during the same period. Revenues of consumer durable companies grew 7 per cent YoY in the July-to-September quarter, led by strong demand from tier-II and tier-III cities/towns and market share gains from unorganised players. This has continued over into the third quarter on the back of a healthy festive season.

“Amid the Covid-19 uncertainty, the festive season brought cheer for the consumer durables industry as it reported healthy double-digit sales growth in value terms. Value growth was higher than volume growth due to premiumisation and up-trading by consumers,” said Chirag Muchhala, research analyst at Nirmal Bang Equities. He attributed this to a surge in sales from e-commerce, continued growth in small towns, and the revival in footfall in metro cities.

Even as demand continues to remain healthy, analysts believe caution is warranted on the margin front, given rising input costs. Commodity prices, which had remained benign until the June quarter, have seen a sharp increase in recent months on hopes that further economic stimulus and global post-pandemic recovery will fuel demand.

“In our view, commodity prices need to be closely monitored as higher commodity prices will have a negative impact on gross margins if it is not fully passed on to consumers with price hikes,” according to brokerage firm Emkay Research in a recent report. 

Companies have already started to pass on these costs. Companies, such as Blue Star, have increased prices by 5-10 per cent depending on the product category. The price hikes are expected to reflect in two to three weeks as dealers will be holding some inventory. Voltas, too, anticipates the need to hike prices to cover the cost increases but is confident of sustaining margins ahead of the seasonally strong March quarter.

The other worry for the Street is an expected reversal in market share gains achieved in the last six months. “While demand revival and market share gains augur well for companies, as unorganised players inch back to normalcy, there may be a partial reversal of market share gains,” said Achal Lohade, research analyst at JM Financial. Other key concerns include demand/supply disruptions on account of intermittent lockdowns and a fresh wave of infections.