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Consumer durable companies: Margin pressure, sales recovery key concerns

Consumer durables manufacturers saw a soft June quarter, with sales taking a hit amid the second wave of the pandemic that led to regional lockdowns.

The impact, however, was less severe compared to the year-ago period, which saw a stringent nationwide lockdown.

As a result, the companies may still be able to report good year-on-year (y-o-y) growth in sales, even as the numbers are lower sequentially, and stay below the levels seen in the June 2019 quarter.

Analysts at Motilal Oswal Financial Services Ltd (MOFSL) said they expect Q1FY22 revenue to increase 49% y-o-y for consumer durables companies under their coverage. On a sequential basis, the same is pegged to decline by 32%.

Demand recovery across the sector had been faster than expected during FY21, but the second covid wave disrupted the recovery process and led to lower offtake during April-May, said analysts.

May was the worst hit in terms of sales of consumer durables such as air-conditioners, said Harshit Kapadia, vice-president, consumer durables & electrical and capital goods, Elara Capital.

This is likely to have a significant bearing on sales growth of room air-conditioners in FY22.

Rising commodity prices will also continue to exert pressure on margins. MOFSL pegs Ebitda margins at 8.6% for companies under its coverage versus 12.4% in the previous quarter. Not surprisingly, net profits are estimated to decline 55.8% sequentially, even though they may more than double on year.

The Street will continue to monitor trends post the easing of lockdown curbs.

Cooling products such as room air-conditioners, fans and air coolers were the most impacted, said analysts at Emkay Global Financial Services Ltd. Although, there was recovery in June, with the last 15 days seeing a healthy rebound for cooling products as a heatwave battered northern India, the pace has been slower than last year.

Pent-up demand that boosted sales last year may also not be as strong. Dealer stocking has been hit by expectation of a third wave. Kapadia said eyes will be on the kickstart provided by the beginning of the festive season in August. If the same is encouraging, the pace may pick up thereafter.

However, with softer sales in the June quarter and lack of a smart recovery, price hikes in consumer durables remain uncertain, leading to concerns on margins. While sustainability of cost-reduction initiatives undertaken by the companies may support, certain costs such as advertising and promotional expenses are expected to return. Any reduction in the fixed costs, if sustainable, could emerge as a key future catalyst, said analysts.

Market leaders such as Havells India Ltd, Voltas Ltd and Blue Star Ltd have seen corrections of up to 17 % since their recent highs in February-April. Live Mint

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