Cool consumer durables stocks to buy to beat the summer heat this season

After a sluggish demand due to Covid-19 induced lockdown, commodity inflation stares before consumer durables sector. However, analysts see a new ray of hope with expectation of a blockbuster summer.

After a sluggish demand due to Covid-19 induced lockdown, the consumer durables sector is facing another formidable challenge amid price rise of key raw materials. The prices of key metals such as copper, steel, and aluminum have increased drastically between 18 and 66 per cent in FY22, forcing companies to take price hikes of 3-5 per cent this month. READ HERE

Earlier in fiscal year 2021-22 (FY22), several consumer durable companies had taken price hikes between 5 to 10 per cent range, to be in-line with the rising prices of raw materials. READ HERE

In a recent report, BofA Securities mentions that the inflated commodity costs will hurt the margin of Havells, Crompton, and Voltas. However, the extent of margin hit will be lower for Crompton versus Havells due to the non-discretionary nature of the products and lower ticket sizes. 

Meanwhile, analysts also see a new ray of hope emerging with the expectation of a blockbuster summer. According to Centrum Institutional Research, the pent-up demand of past two summers and weaning Covid-19 intensity can blossom the industry.

"The summer season is a critical period for the growth of appliances like AC and Refrigerator, as 50-60 per cent of the annual demand is met during the four-month period from mid-February to mid-June," adds the brokerage firm.

The weather patterns signaling a harsh summer is expected to drive demand for cooling products. As part of Seasonal Outlook for March to May 2022, the India Meteorological Department forecasted a higher probability of a heat wave over west central and some parts of north-west India. 

However, analysts believe companies having higher scale and lean cost structure will be able to manage cost inflation better versus peers. Though some companies will be able to pass on the price hikes in the upcoming summer, analysts believe that it will be difficult for most to return back to pre-Covid levels given the continuous price rise and high competition.

"India is a consumption driven country. Consumption may slow down but it will not stop. Volumes have been impacted due to slowdown in rural demand. We expect the fourth quarter of FY22 to reflect the margin pain point for consumer durables. The earnings recovery in the first and second quarter of FY23 depends on how much price hike is passed on to the consumers," says Gaurang Shah, senior vice-president at Geojit Financial Services.

Meanwhile, analysts at Nirmal Bang see rebound in demand for air conditioners from March and expect strong Q1FY23 amongst channel partners barring supply disruptions. Given this, the brokerage reiterated 'accumulate' rating on Bluestar, expecting an upside of 5 per cent with a target price set at Rs 1,045 per share.

Ajit Mishra, VP – Research at Religare Broking, too, believes that pent up demand for cooling products amid heat wave and muted sales last year will drive the growth for the sector. "We remain optimistic on the long term growth prospects and bullish on stocks like Voltas, Blue Star and Whirlpool," he adds.

On the other hand, analysts at BofA Securities believes in a secular growth for consumer durables but remains cautious over Havells due to high valuation premium. "We reiterate a 'buy' on Crompton, 'neutral' on Voltas, and 'underperform' stance on Havells," adds the brokerage firm.  

Shares of consumer durable companies have been under selling pressure so far this year with the S&P BSE Consumer Durable index nosediving 6.05 per cent year-to-date. Among individual stocks, shares of Blue Star slumped 2.79 per cent, Voltas 0.02 per cent, Havells 19.71 per cent, Whirlpool India 11.67 per cent, and Orient Electric 14.34 per cent.