The ongoing Russia-Ukraine war has shot up the prices of crude oil and other commodities, raising the input costs of white goods and consumer durables companies which may dent their earnings in the coming quarters.
The Ukraine war and economic sanctions against Russia have triggered a sharp rise in the prices of several commodities. Prices of key raw materials such as aluminum, steel, copper and high-density polyethylene (HDPE) are up sharply, making consumer durable companies worried over their manufacturing costs.
As the consumer durables sector is a play on discretionary spending of households, inflation is a serious worry for the sector as higher inflation shrinks the disposable income of consumers. This sector has already been struggling in the wake of Covid-19 which saw a fall in demand and earnings cut due to disruption in economic activities.
"Inflation continues to remain unabated and has worsened with Russia-Ukraine conflict. Taking full extent of price hike to protect margin will continue to be challenging amid high competition," brokerage firm Centrum Broking observed.
Clearly, managing inflation will be the key for the consumer durable and white goods sector.
Healthy discretionary spending, upgradation of lifestyle, easy consumer financing and other macro drivers helped the consumer durable industry witness healthy and consistent growth over FY10-20. Household appliances are now a matter of comfort and upgraded lifestyle and no more luxury.
The AC, refrigerator, washing machine industry grew at a CAGR of 12.9 percent, 13.6 percent, 11.7 percent, respectively, over FY10-20. However, the industry declined sharply in FY21 and saw modest growth in the nine months of FY22 due to back-to-back lockdowns in the peak summer season on account of the Covid-19 outbreak, brokerage Centrum Broking pointed out.
Analysts at Centrum Broking believe that the upcoming summer season could see a blockbuster growth for the sector due to pent-up demand, waning intensity of Covid-19, upstocking by trade channels prior to the implementation of BEE norms from July 1, 2022, and weather patterns indicating a harsh summer, which will drive demand for cooling products. Bureau of Energy Efficiency (BEE) is a government body that implements energy rating norms.
Inflation is a key risk
The consumer durables industry will have to find a way to strike a balance between demand and inflation. There has been a sharp rise in the prices of key industry inputs such as aluminium, copper, steel and plastics coupled with higher shipping and logistics costs over the past six quarters.
"The consumer durables industry has been unable to take requisite price hikes considering the demand slowdown and the loss of peak summer season sales. With Russia-Ukraine conflict, prices of certain commodities like aluminium as well as crude oil have escalated sharply," Centrum Broking pointed out.
Centrum expects the companies to pass on some extent of price hikes in the upcoming summer. However, it will be insufficient to return back to the pre-COVID margin levels considering the continuous rise in costs and the high competitive intensity.
"We believe companies having higher scale and leaner cost structure will be able to manage the cost inflation better against peers," Centrum said.
Brokerage firm ICICI Securities sees limited scope for consumer durables companies for cost-saving initiatives.
"As the durable companies have initiated multiple cost-saving initiatives in FY20-FY22, there is limited scope to cut costs further. We do not expect ad-spend to cut further. Freight cost, power and fuel and travelling expenses will inch up due to higher petrol and diesel prices," said ICICI Securities.
ICICI said inflation in raw materials and rising crude oil prices will likely result in a lower EBITDA margin for all companies in its coverage.
"Our PAT estimates will reduce in the range of 7.7 percent-32.1 percent. We expect the decline in PAT to be the least for Havells India," said ICICI Securities.
What to buy?
Havells India and Crompton Consumer are the buy calls from the sector for ICICI Securities.
Centrum Broking has initiated coverage on the five top consumer durable players.
"Based on the current valuations and growth outlook over FY21-24E, we have assigned 'buy' ratings to Blue Star (target price: ₹1,255) and Whirlpool of India (target price: ₹1,925) and 'add' ratings to Voltas (target price: ₹1,280), IFB Industries (target price: ₹935) and Johnson Controls-Hitachi Air Conditioning India (target price: ₹1,935)," said Centrum Broking.