Rush for consumer durables stocks needs to be tempered with caution
Over the last two years, numerous Indian companies have made plans to enter the consumer durables sector in a big way. Some such as Havells India Ltd even refocused on India, exiting an overseas investment and acquiring local consumer durables brand Lloyd.
According to Motilal Oswal Securities Ltd, Havells India now aims to double the sales of Lloyd in the next three years by introducing new products and expanding reach.
Blue Star Ltd entered the water and air purifiers, and air coolers businesses. Voltas Ltd formed a venture to launch refrigerators, washing machines, microwaves and other white goods. The venture is said to be aiming for an initial product launch in 2018.
An Edelweiss Securities Ltd report released last July noted that several other consumer goods and electrical products sellers including V-Guard Industries Ltd, Symphony Ltd, Bajaj Electricals Ltd and Finolex Cables Ltd have either tied up or acquired brands to enter new product lines. For some of them these are logical extensions, such as Symphony expanding into industrial coolers in an overseas market or Finolex Cables acquiring expertise in optical fibres.
But for several others, expansion into new products can be challenging, involving prolonged investments. This is so especially for white goods which are dominated by entrenched companies and by a few large brands. Gaining market share from them can be an arduous process. IFB Industries Ltd, for instance, is yet to gain notable market share in air conditioners despite launching them several years ago.
Pinakiranjan Mishra, partner and national leader (business and risk advisory services) at consultancy firm EY, agrees that it is difficult to compete with entrenched competitors, especially in home appliances. But Mishra qualifies the statement by saying that firms already present in the “house” (through one product or another) just need to build a parallel service line, get the product strategy right and execute it well. Further, given the expanding market, there is room for a few large firms, he adds.
“Despite several players well entrenched in the market, the penetration levels of white goods is significantly low. For instance, 31% have a refrigerator in their household, only 13% own a washing machine and 8% own an air-conditioner, indicating a market gap for white goods,” says Manish Sharma, president and chief executive of Panasonic India and South Asia. “Companies will continue to invest, as the opportunity needs to be capitalized.”
There is no denying that the opportunity is big. Investors are also pencilling in robust prospects for these companies, reflected in premium valuations of these stocks—most are trading at around 30 times their price-to- earnings multiples. Many gained substantially over the last year as the companies firmed up plans for diversification. And the market opportunities could well accommodate all these companies.
But for investors to see outsized returns as the current premium valuations suggest, the companies will have to acquire critical scale and market share. That will give them pricing power and competitive advantage. But all of them may not be able to achieve this. In fact, past trends show earnings upsides are captured more by the leaders.
Edelweiss’s analysis of valuation rerating in fiscal years 2013 and 2016, when free cash flows of consumer durables companies covered by it rose sharply, shows that the top four firms accounted for around 60% of the free cash flows. “This suggests that a few players get disproportionate advantage and hence provide substantial re-rating potential,” Edelweiss said in a note. That message highlights the importance of discretion for investors.
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