Long road ahead for consumer durable firms

Analysts expect firms to shift focus to online platforms to boost sales in these Covid-19-impacted times.

Even as consumer durables firms prepare for the festive season in the hope of Dussehra and Diwali triggering a sales uptick, analysts caution that recovery in this segment will be a long-drawn-out affair.

Investors, they suggest, should put in money from a 12–18 month perspective - that too on a decline.

A note by Nomura suggests demand and penetration levels should also improve as India’s per capita gross domestic product growth trajectory picks up.

“Our analysis indicates that the air conditioner market can record around 8-10 per cent compound annual growth rate over FY20-FY25F, despite the Covid-impact, touching penetration levels of 18 per 100 households, which is nearly half of what China had in FY06.

"The growth in refrigerators/washing machines is likely to be lower at 6-8 per cent and in the fan segment, given its high penetration levels,” wrote Siddhartha Bera and Kapil Singh of Nomura in a co-authored September 14 report.

That said, analysts expect firms to shift focus to online platforms to boost sales in these Covid-19-impacted times.

According to Goldman Sachs, e-commerce growth in India is expected to rise up to 33 per cent in 2021, up from 18 per cent growth in 2020.

“As demand deepens and widens across the smaller markets within the hinterlands, companies need to re-evaluate market strategy to identify and prioritise new growth centres.

"Success within micro-markets will, however, depend on the ability of players to develop robust sales channels and operating models to reach customers in an efficient and cost-effective manner,” says an August note by PwC.

Long road ahead

Given that Covid has reached the hinterland and urban India is grappling with job losses, analysts expect recovery in the consumer durables segment to be slow and a long-drawn-out affair.

“Lockdowns resulted in wage cuts and layoffs in the April–June 2020 quarter and many firms also deferred pay hikes and variable pay.

"If the wage scenario improves in the second half of FY21, consumption demand should benefit,” says the Nomura note.

The uptick in consumer durables stocks at the bourses over the past few months, say analysts, has mostly been on account of an upmove in the mid- and small-cap segments, where most of these counters get classified.

Moreover, the hope of demand recovery, led by higher consumption in the rural belt, has aided sentiment, they say.

“Rural economy is not a sufficient enough driver to pull us back into a positive growth rate - we need a broader urban recovery for that.

"Rural, which is largely dependent on agricultural income, will only serve as a downside protection - and in general, perhaps support around 40-50 per cent of the mix of demand for various categories in consumption for front-line companies,” cautions Venugopal Garre, India strategist at Bernstein.

G Chokkalingam, founder and CIO at Equinomics Research & Advisory, suggests investing in these counters from a 12–18 month perspective - that too on a decline.

“I think the next two quarters will be bad for consumer durables firms as Covid cases surge.

"People will only spend on essentials and defer purchase of discretionary items.

"A full-blown recovery in sales of firms and stocks are still some time away,” he says.

Photograph: PTI Photo