Markets
Premium trumps regular in demand for consumer durables
Summary
- The early start to the festive season this year saw improving demand trends but investors need to track the momentum.
Overall demand conditions for consumer durables companies remain muted. However, there are some divergent trends. For instance, the demand recovery in the premium category is at a relatively faster pace when compared to entry-level products. Elevated inflation levels continue to weigh on the mass consumption demand and weak rural markets offer no respite.
“We are seeing a shift in demand from single to double door refrigerators and from semi-automatic to automatic washing machines. This indicates rising traction in the premium segment," said Harshit Kapadia, analyst at Elara Securities (India).
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Given this, it remains to be seen if the ongoing festive season brightens the demand scenario, especially in the entry-level segment. The September quarter (Q2FY23) is expected to be a subdued one, continuing on the weakness seen in the later part of Q1. Plus, Q2 is seasonally weak for air-conditioners and fans.
In the case of cables and wires (C&W), falling prices of copper is a key headwind for revenue growth as the decrease in price is passed on without much delay. Moreover, in anticipation of a further drop in prices, dealers and distributors tend to reduce inventory.
“We note reduction in copper prices is likely to expose risk of earnings downgrades for companies with higher C&W exposure as it would lead to reduction in sales value for C&W companies and could have modest impact on margins in the immediate 1-2 quarters," said analysts at JM Financial Institutional Securities in a report on 11 October. Havells India Ltd and Polycab India Ltd have C&W in their portfolio.
On the other hand, fall in price of copper along with softening prices of other key commodities such as steel and aluminium, would aid sequential rise in margins. This would reflect in Q2 to some extent though a large portion of benefit is likely to accrue from Q3 onwards.
However, here too, there is a risk as the benefit to margin could be curbed as a result of discounts or incentives that companies offer to boost volumes in a subdued demand environment.
Therefore, a pick-up in demand is paramount. This would act as a key trigger for shares of companies such as Havells, Voltas Ltd, and Polycab, which are as much as 9%-36% below their respective 52-week highs. The early start to the festive season this year saw improving demand trends but investors should closely track if the momentum sustains.
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