FIIs fancy consumer durables; buy stocks worth over $1 bn in Feb

Consumer durables stocks seem to be the flavour of the season. Surpassing all other sectors, foreign institutional investors (FIIs) poured a staggering net $1.042 billion into consumer durables stocks in February 2024.

This figure also marks the highest influx of FII buying in this sector since January 2020. FIIs had net sold $27 million worth of consumer durables stocks in January 2020. Despite the lacklustre corporate commentary following the December quarter earnings (Q3FY24), FIIs have lapped up stocks of consumer durables companies. 

Other sectors that witnessed FII buying in February included automobiles and auto components, amounting to $668 million, and healthcare services, totalling $626 million.

FII interest was also evident from their acquisition of stakes in Whirlpool of India Ltd and Eureka Forbes Ltd through block deals that took place in February. 

Nirransh Jain, India analyst for consumer durables at BNP Paribas, explained that the consumer durables sector had been grappling with several challenges in the past couple of years. 

These included an inflationary led slowdown in discretionary demand, increased costs of commodities, energy rating implementation and heightened competition. These factors have contributed to companies experiencing multi-year low margins and subsequent de-rating of stock valuations, he said. 

“We see a renewed interest in this sector now,” Jain added. The fact that the consumer durables sector has the potential to generate multi-year double digit revenue growth is comforting, he believes. 

In fact, it is not just FIIs but even domestic institutional investors (DIIs) are fond of consumer durables.  

The data compiled by Fisdom Research shows that there is a 7.5% month-on-month increase in mutual fund ownership in the consumer durable sector, said Nirav Karkera, head of research, Fisdom. 

The data suggests that even DIIs are willing to increase stakes in select pockets of consumer durables as a sector, he added. 

Looking at Q3, overall demand in the sector continued to remain weak as consumer spending remained low. The festive season fell short of expectations, resulting in subdued sales. 

However, room air conditioner (AC) sales were healthy, driven by channel filling in anticipation of the upcoming summer season. Product categories experiencing healthy growth included cable and wires, as well as ACs.  

To give a perspective, in FY24, the AC industry is projected to grow by 10-15% while Blue Star Ltd aims for even stronger growth, targeting a 20% rise, contingent upon robust demand during the peak summer months, the Mumbai-based home appliances company said in its recent earnings call.

Categories such as fans, consumer lighting, kitchen appliances, small domestic appliances, refrigerators, and washing machines either showed flat growth or experienced a decline. 

Some investors are also banking on a resurgence in demand to act as a catalyst for growth in the consumer durables sector. 

In its recent earnings call, V-Guard Industries Ltd said that even as consumer demand remained subdued in Q3, there are indications of demand revival along with anticipation of a better summer. 

Even Bajaj Electricals highlighted that the sales trend in January 2024 mirrored that of Q3, but it anticipates an uptick in demand during February and March. 

So, hopes for demand recovery are now pinned on the upcoming summer season. As demand increases, the expectation is that earnings before interest, tax, depreciation and amortization (Ebitda) margin will also improve due to operating leverage. 

Meanwhile, Crompton Greaves Consumer Electricals Ltd said that premium segments are doing better than the others. 

“I believe that besides premiumization and penetration, a key trend in consumer durables is the growing preference for organized national brands over local and generic ones,” said U.R. Bhat, co-founder and director at Alphaniti Fintech. 

That said, pricing pressure also intensified as brands resorted to aggressive discounting and trade schemes to garner more market share. 

Moreover, there has been a time correction in consumer durables stocks and the expectation is that the summer season will be good this year with extended hot temperatures which might not only boost AC sales volumes but will also help outpace the growth in the last three years which were lull, said Jaykrishna Gandhi, head business development and sales, institutional equities, Emkay Global Financial Services. 

Gandhi sees Voltas and Havells as a play on growth in the AC industry. Havells believes summer season should augur well and anticipates strong performance in both fans and ACs in Q4 and Q1FY25. 

Another reason why there is an interest in consumer durables is that these stocks are still quite away from their 52-week highs, which means there is scope for upside now. 

The BSE Consumer Durables index was up 32% in the past one year but is still 5% away from registering a fresh 52-week high.

Looking forward, it is believed that a rebound in consumer demand, particularly during the summer months, coupled with an increased real estate activity, will drive healthy sales for the sector, along with some normalization in margins.