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As consumer durables firms struggle with profits, focus may shift to market share gains

Consumer durables have ended another bad quarter as the sector saw sales shrink and operating profit plummet from a year ago.

Sales fell 6.1% to Rs 17,991 crore in March quarter and operating profit dropped 32.5% to Rs 1,447 crore. Quarter on quarter, sales shrank 4.3% and operating profit rose 10% but on a low base.

The poor performance can be blamed on a rise in input prices and the companies’ inability to pass on the rise because of increased competition and fragile demand recovery.

Among market leaders, Bajaj Electricals’ EBITDA margin fell to 4.7% from 6.9% in Q3FY22; Honeywell Automation’s number dropped to 13% from 14.2%; and TTK Prestige’s margin fell to 15.7% from 16.9%. Their profit margins fell year-on-year as well – Bajaj Electricals’ by 110 basis points from 5.8% in Q4FY21; Honeywell Automation’s by 620 bps from 19.2%; and TTK Prestige’s number by 210 bps from 17.8%.

Whirlpool India may look to have bucked the trend by improving its operating margin to 8.6% from 5.4% quarter on quarter, but operating margin fell 210 bps from 10.7% a year ago. In fact, operating margin for FY22 was 6.7%, which is its lowest in a decade.

Sudden sequential rise in margin could be from Elica acquisition in September 2021. ICICI Securities said, “Growth in high EBITDA margin Elica business will also be margin accretive for the company.”

Crompton Greaves and Dixon Technologies too posted rise in operating profit margins but they were modest, of around half a percentage each.

“Primary raw materials of consumer durables, which are copper, aluminium or plastic, have seen a significant jump in prices. Earlier the price rise was Covid-induced and, just when the industry was expecting the prices to cool off, the Russia-Ukraine conflict came in and prices went up even further. When the recovery of a segment is fragile, the ability of the players to pass on prices to consumers is also limited, which impacts margins. Though firms have undertaken some price hikes, the strength of the demand isn’t such that they can pass it on entirely,” said Anand Kulkarni, director at Crisil Ratings.

Margins have also taken a hit because of the rupee’s weakness. “Typically almost 45-50% of the raw materials are imported,” said Kulkarni. Crisil Ratings is expecting a “modest, low-single-digit revenue growth” in the current quarter, driven by home improvement products and early onset of summer.

Summer purchases, including those of air-conditioners and refrigerators, contribute nearly 30-35% of the sector’s annual sales and usually start in March and continue through May. This year, summer started nearly two weeks early and brought with it an unprecedented heat wave.

Arun Malhotra, founding partner and portfolio manager at CapGrow Capital Advisors, too said that companies are passing on price hikes in a “gradual manner so as not to impact the aggregate demand”.

He believes competitive intensity is a reason for this. “A couple of players like IFB, Whirlpool and a few MNCs are expanding their product range and entering new spaces. This has led to higher competitive intensity, and since there isn’t too much of a difference between product specifications, pricing plays a critical role,” said Malhotra. “Even local players such as Vijay Sales and Croma are launching their own brands at a lower price point. This aggression is leading to lower profitability while the market continues to expand (on rising home sales),” he added.

Profitability will remain a concern
Experts Moneycontrol spoke to agreed that sales will improve in Q1FY23 and FY23, but profitability will remain a concern in the immediate term.

“In Q1FY23, intense summer is expected to drive demand but profitability is likely to remain suppressed on raw material prices,” said Crisil Ratings’ Kulkarni. Over the next fiscal, he expects revenue growth of 10-15% because disposable incomes are increasing and home improvement is still playing out for select product categories, despite a hybrid work environment. He estimates operating margins may see up to 200 bp decline. Consequently growth in absolute net profits will be lower than revenue growth. “The primary trend to watch out for will be the expectation that industry players may choose market share over profitability,” he said.

CapGrow’s Malhotra said that commodity prices may see a moderation in FY23. “Our view is that commodities cannot sustain levels without hurting demand. Supply disruptions should also ease leading to lower prices for commodities. This should play out more in the second half of FY23,” he said.

According to him, the sector will continue to struggle with profitability on increased competitive intensity and elevated commodity prices; and it will post good revenue numbers riding the home improvement trend and increased home sales, reflected in higher number of property registrations and a record number of new project launches. Moneycontrol

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