Published on 24/04/2019 9:30:43 AM | Source: Emkay Global Financial Services Ltd

Consumer Goods Sector - Channel checks: signs of initial demand pick-up in RAC By Emkay Global

Posted in Broking Firm Views - Sector Report| #Consumer Goods Sector #Emkay Global Financial Services Ltd. #Sector Report

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Channel checks: signs of initial demand pick-up in RAC, price hikes yet to kick in

* Although summer demand offtake for RACs is clearly visible, the sustenance of this will depend on weather conditions. Brands are targeting 15-20% volume growth in FY20, driven by favorable base and hotter summer.

* The demand uptick had started from South, then was seen in West and now should be visible in North and Central regions as well. Despite the initial pick-up in demand, price increases were rare. Daikin, which increased prices by ~8% MoM, was an outlier.

* In the refrigerator space, a few players increased prices, while the fully automatic washing machine category saw price cuts on subdued demand. Competitive intensity remains high in the mass category and is being witnessed in the premium categories as well.

* Demand for fans also saw a rebound from Mar’19 after weak Jan and Feb. Havells and Orient continue to lead the premium category, while Crompton remains a value-for-money brand. Some price rationality is seen across the LED segment


Demand scenario improves toward March-end and continues in April

* Feedback from various interactions with dealers/distributors confirmed an initial pick-up in RAC demand with the arrival of summers, after 12 months of subdued demand. South India recorded robust growth in Mar’19 over Mar’18. In the period starting from March last week until now, demand has picked up in the West region as well. However, in North, unexpected rainfall caused a delay in demand pick-up. Store-level footfalls have improved with the shift of festivals to April from March last year (e.g., Gudi Padwa/New year across various regions in the country) and festive discounts. Demand for washing machines continues to remain sluggish, forcing players to cut prices to stimulate demand. Refrigerator demand was better than washing machines though still not so encouraging.

* Pricing trends: Although the demand scenario has marginally improved, competitive intensity is restricting price increases. With the previous year’s AC inventory in the system now cleared, discounts have disappeared and new SKUs are already on shelves with encouraging demand for RAC seen at the start of the summers in FY20. Other categories such as Washing Machines, Refrigerators, and Television (>43”) continue to see cash backs and financing schemes aimed at reducing inventory. Pricing rationality should emerge once demand pick-up is sustainable.

* Commodity trend: Copper prices have rallied 8% in 4Q19 with a spike in February and some cooling-off in March. So far in April, copper prices have been higher by 3% over the last quarter’s average. Aluminum prices increased 16% in 4Q, while it remained flat in April. The INR, which had depreciated by 11% in Q4FY18 to Q3FY19, was flat in 4Q over the 3Q average; therefore, forex-led impact will not dent margins in 4Q on sequential basis (an exception would be hefty discounting to offload the inventory). 


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