The nationwide COVID-19 lock-down negatively impacted all sectors. The consumer durables sector had been grappling with a low consumption even before the lock-down and brands had been resorting to deep discounting, offering attractive equated monthly instalment (EMI) schemes to entice consumers. Nevertheless, the phased reopening of the economy after the lock-down, is bringing back the recovery trend. Industry hawks had very little expectations and have been taken by surprise.
According to a recent report by Edelweiss, demand seems to have recovered well in June after a lacklustre, insipid May and a near wipeout in April.
Demand revival across categories can be seen in Tier 2-3 towns (See Table 1) even as inventories are normalising. Edelweiss Research indicated that brands are prioritising profitability and not resorting to heavy discounts. The report underscores these as key positives for the consumer durables sector.
The brokerage has also highlighted the headwinds that lie ahead for the sector, such as decline in consumer financing by NBFCs (non banking financial companies), down-trading by consumers, margin pressure and tepid demand environment.
The brokerage firm, however, remains cautious on this sector as near-term headwinds are likely to limit earnings recovery across the board in FY20-21.
Reasons for Sudden Surge in Demand:
After the lock-down, the sales of small kitchen appliances (OTG, dishwashers, mixer, grinders, blenders, ovens, electric cookers, coffee makers, juicers, electric irons, air fryers), LED panels, laptops/computers saw a pent-up demand as people rushed out to buy in June as they attempted to adjust to work-from-home for themselves.
Inventory for computers and laptops is very low indicating that WFH (work from home) and online classes for children has led to a spike in demand.
Since house helps were unable to come to work and because of WFH (people are now spending more time at home with lot of additional chores), people realised the need to ease household chores and bought small kitchen appliances; hence, inventory for small kitchen appliances is also low.
Some were upgrading to large screen TVs as they were stuck at home and needed indoor entertainment. As a result, secondary sales picked up in June.
Meanwhile, air-conditioners lost out this year during its peak season (summer) due to closure of shops amid India's lock-down that has, at places, lasted longer than three months. However, the report noted that the heat wave in north India helped to clear some excess inventory in June, but an early monsoon in South India again capped the overall demand revival to 60%-70%.
Refrigerator sales were impacted too since they lost out the wedding season—appliance gifting is prevalent in Tier-2 / Tier-3 towns.
The report sounded out that primary sales will take some time to recover but secondary sales will see a demand recovery. Primary sales might take place only in select pockets given the reluctance among channel partners and dealers to stock up to capacity.
Industry Speak: What They Said in Recent Interviews and Edelweiss’s Views:
1. Consumer Durable Financing:
“Our current focus fundamentally is to ensure we restart our branches. Number one. We augment our collections infrastructure, number two. In the interest of balance sheet protection and capital preservation, focus on managing risk and managing growth. And as we navigate through this, we will worry about investment growth”.
- Rajeev Jain MD Bajaj Finance
The brokerage report says that, over the next few coming quarters, the key factor would be how much are larger banks keen to fill up for NBFCs in the consumer financing space since large NBFCs appear to be focusing more on asset quality.
2. Rural Focus:
“In the coming years, we will continue to focus on brand building, growing our portfolio through research and development and expanding our distribution network with key focus on semi-urban and rural markets”.
- Anil Rai Gupta, CMD, Havells
The brokerage says that as large urban cities continue to be partially shut, it is the smaller towns which will more likely drive growth with tailwinds from a good monsoon. Apart from distribution, brands will have to work around the product positioning across price points for Rural / Tier-2 and Tier-3 markets for better results vis a vis their competitors.
3. Import Substitution:
“This is an inflection point for the industry. It’s some kind of a Y2K moment. India will emerge as an electronic manufacturing hub, servicing not only in the domestic market but also in certain categories globally”.
-Atul Lall, MD Dixon Technologies
“We import around 40 per cent parts, of which 50 per cent are China-sourced. My idea is to focus on cutting down imports by half over the next one year and at the same time also to double my exports to 50,000 units or thereabout from the present 25,000-odd units to the middle East and Africa--both of which are under the India”.
- Gurmeet Singh, CMD Johnson Controls - Hitachi
“We have decided not to source anything from China after our current orders are executed”.
- TT Jagannathan, chairman, TTK Prestige
The report states that as India starts to look inwards, due to the pandemic led supply chain disruption as well as the border skirmishes with China, domestic ODM/OEM industry is all set to get a boost. Across categories, it is possible to see prices increase by 5%-8% for end consumers across appliances/white goods initially as supply-chain consolidates.
“Consumers now prefer large TVs as in-house entertainment consumption has increased. However, there is a marked shift towards lower priced brands which has led to brands like TCL gaining significant market share(>5%) in LED panels”.
-Promoter of a large central India MBO (multi brand outlet) chain
Edelweiss Research concedes that while down-trading is happening in some categories (such as panels), the brokerage does not foresee any marked shift in premiumisation (which they expect to continue). However, in the near term, growth might be better for value-focused brands.
Headwinds Ahead but Brands Are Not Too Worried Now
Consumer financing by large NBFCs dwindled as the financial firms are now stressing on credit quality and liquidity rather than growth. The report says that this would impact the near-term demand for consumer durables products but a pick-up in credit card sales (indicating the ‘load transfer’ from NBFCs to banks) would ease the situation and the eventual impact on demand would be minimal. Many brands are discontinuing longer dealer credits. There are select schemes to lure customers but there is no visible broad-based competitive aggression amongst brands. Pent up demand was strong in June across most segments except AC.
Amid multiple demand headwinds (See Table 2) and margin pressure, brands are focused in protecting margins through limited discounts for now, despite a tepid demand environment and a marked decline in advertising and promotional spends apart from a higher focus to ‘liquidate inventory’. The report states that the festive season would be crucial for this sector for FY20-21E.
Near-Term Earnings at Risk
The report says that there was only a month (June) of normal sale in Q1FY20-21. Most consumer durables companies have a large exposure to urban markets (top-15 - top-20 cities), which widens the risk. Despite this pent-up demand, earnings will remain under pressure, given weaker growth outlook in large urban markets.