Robust demand may sustain growth momentum for consumer durables makers

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

Stocks of consumer durables makers have been hitting their 52-week highs, given a pick-up in demand and expectations of healthy growth going ahead. Led by gains in the recent months, they have given returns of 39-54 per cent in the past six months when compared with the 32 per cent rise seen in the benchmark Nifty50 index in the same period.

Revenues for the consumer durables companies grew by 7 per cent year-on-year in the July-September quarter, led by a strong demand from Tier-II and -III cities and market share gains from unorganised players. This has continued into the December 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 uptrading by consumers,” says Chirag Muchhala, research analyst at Nirmal Bang Equities. He attributes this to a surge in sales from e-commerce, continued growth in small towns and revival in footfalls in metro cities. Brokerages believes this momentum will sustain going ahead.

What could boost revenues in addition to traditional segments are opportunities arising from storage and cooling of Covid-19 vaccines. Blue Star estimates the cold chain market for vaccines requiring a temperature of -30 degrees Celcius to be in the range of Rs 300-500 crore. “We have been regularly getting orders since July from various state governments and expect to achieve sales of Rs 150-250 crore, but we need to wait for more information from the government,” says Blue Star Managing Director B Thiagarajan.

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

On an average, copper prices have increased 20 per cent from the previous year so far this quarter and aluminium prices have inched up 12 per cent during the same period. This is seen having a negative impact on margins for these companies. “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,” brokerage firm Emkay Research said in a recent report.

Companies have already started to pass on costs to absorb these costs. Companies like 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 would already be holding some inventory. Voltas too anticipates the need to hike prices to cover the eventual cost increases but is confident of sustaining margins ahead of the seasonally strong March quarter. 

The other worry for the Street is a reversal in market share gains achieved in the past 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,” says Achal Lohade, research analyst at JM Financial. Other key concerns include demand/supply disruptions on account of intermittent lockdowns and a fresh wave of Covid-19 infections.