Published on 19/04/2021 11:16:42 AM | Source: Motilal Oswal Financial Services Ltd

Consumer Durables Sector Update - Demand robust, but sentiment turning cautious By Motilal Oswal

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With the onset of the summer season, we performed channel checks across various product categories.

The following are the key takeaways:

* Ongoing summer season augurs well for demand for cooling products: The summer season has set in strongly across the country, leading to the robust offtake of secondary sales for most summer products – such as fans, air coolers, and air conditioners – for Mar’21. However, rising COVID cases in certain states such as Maharashtra, Gujarat, Delhi, and Rajasthan have led to some softening in secondary sales at the start of April’21.


* Stable demand for refrigerators, LED lights, and pumps: Secondary sales of refrigerators, LED lights, and pumps have been stable sequentially, with each of these categories growing in the double digits (10–20%) YoY. Small appliances such as mixer grinders and juicers have seen robust sales on a month-on-month basis. On the other hand, demand for washing machines and dishwashers has now moderated (after growing strongly during Apr–Dec’20) and could grow in the higher single digits hereafter.


* Pre-buying toward end-Mar’21, although not as strong v/s end-Dec’20: Our channel checks suggest there was some amount of pre-buying for summerlinked products – such as air conditioners, fans, and air coolers – towards the end of Mar’21. This was due to the expectation of another round of price hikes in these products on account of rising commodity prices. However, the quantum of pre-buying was not similar to that observed at end-Dec’20. This was largely attributable to (a) higher-than-normal inventory in the channel and (b) rising COVID cases leading to apprehension among dealers. As per the channel feedback, 8- to 15-day lockdown does not pose a high risk for summer products (fans, air coolers, and ACs) – as sales can be recouped in May’21 based on the ongoing strong summer demand.


* Inventory levels marginally higher for summer-linked products: Pre-buying toward the end of 4QFY21 has led to higher-than-normal inventory levels for summer products such as fans and air conditioners. While secondary sales were uniform across Consumer Electricals categories (such as Fans and other appliances) in 4QFY21, they have yet to match the primary sales in the Consumer Durables category (barring Refrigerators).


* Key commodities remain elevated, but price hikes taken: The uptrend in commodity prices has continued, with various commodities such as copper/aluminum/steel seeing a 16%/7%/10% QoQ rise in 4QFY21 (up 61%/30%/45% YoY in 4QFY21). As indicated in our previous note on commodity price inflation (link), the latter is not necessarily a negative catalyst as many companies have the capability to take price hikes. Most companies took price hikes (4–8%) across various products in the first week of Jan’21, with the likelihood of another round of price hikes in Apr’21.


* Near-term headwinds may escalate, but medium- to long-term story intact: In light of the rising COVID-19 cases in India, near-term demand / supply / competition trends may change rapidly across regions in India. We recall the key learnings of last year to simplify the investment decision – a) pent-up demand


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