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Volume growth subdued; price hikes delayed

Sales growth largely inflation led; volume growth subdued:

Our channel checks suggest subdued volume growth across various categories due to a) the higher base of last year; b) continued price hikes impacting demand; and c) slower channel filling on concerns of a third COVID wave. Brands have been unable to take total price hikes amid a weaker demand environment. Further price hikes are likely to be implemented from January; however, distributors and dealers remain concerned about the demand impact of such price hikes.

Competitive intensity remains strong:

While demand has weakened from the high rates seen over the past few quarters (also a sign that pent-up demand is now over for the sector), brands are focused on market share gains. This has resulted in heightened competitive intensity, especially in the White Goods space. In particular, Samsung has been fairly aggressive with new product offerings as well as pricing. In fact, our interaction suggests Samsung has been aggressive across White Goods categories such as Refrigerators (Refs), Washing Machines (WMs), and Air Conditioners (ACs). In the process, it has likely gained market share as well as limited other companies’ scope to take price hikes. For Refs and WMs, Whirlpool is priced at a 5–10% discount to Samsung and LG across key categories. In ACs, Voltas continues to be the bestselling brand. In fact, Lloyd being priced below Voltas for similar offerings was a surprising development. Blue Star is as expensive as Daikin, while even Hitachi has been aggressive with its pricings strategy. Clearly, companies are currently focused on liquidating inventory. Weaker brands have found it challenging to manage the supply chain and thus have an inadequate presence in the channel.

Brands need to balance market share aspirations and margins:

Amid a weak demand environment and the aggressive stance adopted by a leading brand, it is difficult to focus on margins without suffering market share losses. Thus, brands are forced to take a call to prioritize either market share or margins. We believe the focus should be more on gaining market share over margins as regaining lost market share is a challenging exercise. Thus, leading brands such as Voltas, Whirlpool, Samsung, and LG are focused on acquiring market share at present.

Commodity price key for margins:

An analysis of gross margin trends and margins across white goods companies suggests periods of commodity price deflation are marked by gross margin expansion and vice versa. In contrast, periods of commodity price inflation have been positives for the Cables and Wires business. Thus, unless copper prices correct sharply, we expect near-term gross margins for white goods to be under pressure, which is well-factored into our estimates.

Third wave concerns impact channel filling:

Ideally, we would have expected strong channel filling during the December quarter owing to pending price hikes across various categories in Jan/Feb. However, on account of concerns around a potential third COVID wave, channel filling has been missing thus far. Some dealers further indicated it may prove difficult for brands to take price hikes if demand weakens. Hence, inventory building is currently not a priority. We are moderately positive about this as normal/lower channel inventory levels would eventually aid primary sales once we enter the peak summer season.

Orient and Whirlpool are our top picks:

Our earnings estimates across the Coverage Universe adequately account for the delayed price hikes seen in the sector. We maintain Orient Electric as our top pick in the Consumer Electricals space and Whirlpool as a value pick in the White Goods space. While demand for ACs has been the weakest, along with minimum price hikes, the current stock prices of Voltas and Blue Star suggest the expectation of strong pent-up demand in the upcoming summer season. While the validity of such assumptions could only be tested during the summer season, we find this fairly risky as ACs as a product are ideally cheaper by 10–15% at present (v/s the upcoming summer season) and are still seeing volume de-growth. Thus, we maintain our Neutral rating on Voltas and Blue Star. Havells is also rated Neutral on account of expensive valuations

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