Will summer cheer hydrate consumer durable stocks?

Advertisement



An undisruptive summer coupled with above-normal temperature is expected to bring some respite for consumer durable companies after facing weak demand for the past two years.

According to a report by Reserve Bank of India (RBI), confidence among consumers saw a sharp uptick as retail credit surged to 14% in first half of FY22.



Despite fears of Covid’s third wave, the demand for consumer durables, too, saw a significant growth at over 69% to Rs 28,409 crore, hitting an all-time high.

The air-conditi oner business grew by approximately 27% in volume terms and around 38% in value terms in March this year, reports suggest. While metros and urban

Advertisement
continued to show strong demand, rural and semi-urban areas witnessed moderation. Dealers expect this healthy demand momentum to continue going forward.

But there is a catch.

Analysts expect rising raw material prices, especially that of aluminum, copper and PVC to weigh on margin of white goods and wire and cable companies in FY23. Rising interest rates are also an overall sentiment dampener, as companies try to pass on the rise in input cost to the consumers.

To offset commodity inflation, consumer durable companies took price hike of 5-10% in FY22. But earnings recovery in first half of FY23 depends on how much price hike is passed on to the consumers.

According to Pranjul Bhandari, Chief India Economist, HSBC Securities and Capital (India), dividing wholesale price index, or WPI, inflation into input and output prices, only 50 per cent of the input costs over the past six months have been passed on — generally, it’s about 80-90 per cent.

Advertisement

In this backdrop, VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services believes margins of consumer durable firms to remain muted in FY23 as the industry cannot fully pass elevated costs to consumers.

Except Bluestar, shares of consumer durable companies like Crompton Greaves, Voltas, Havells, Orient Electric, Whirpool and V-Guard have been under pressure as they bled from eight per cent up to 21 per cent this year.

In comparison, S&P BSE Consumer Durable index and S&P BSE Sensex tanked over 16 per cent and 10 per cent, respectively, during the same period.

Moreover, the sector is sensitive to rising interest rates. With a surprise rate hike of 40 basis points by RBI, consumers are likely to spend less on discretionary items in a cash-strapped economy.

Analysts believe that only companies having higher scale and lean cost structure will be able to manage cost inflation better than peers.

Advertisement

According to Yesha Shah, Head of Equity Research, Samco Securities, unabated inflation a pain-point and price hikes can eat up demand. She adds, companies are turning to increasing sales to protect margin pressure and in a dilemma to protect growth versus margin.

Overall, analysts expect 2022 to remain mixed for the industry depending on revival of economic indicators, improvement in supply chain dynamics, and consumer confidence.

Lastly, benchmark indices closed lower for fifth straight day yesterday. Both Nifty50 and Sensex tumbled over 2 per cent each. Delhivery IPO was subscribed over 23% on day-2.

As regards today, investors’ will watch out Q4 results of Tech Mahindra, Escorts and Bandhan Bank.

Dear Reader,

Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practice the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard,

Digital Editor





Source link

Leave a Comment

Your email address will not be published.