The consumer durables sector1 in India will see revenue grow 15-18% to Rs 1 lakh crore this fiscal, led by a 10-13% increase in volume.
Demand will be driven by both urban and rural segments, though rural demand will come into play in the second half of the fiscal. For the record, the industry had crossed the pre-pandemic mark in value terms last fiscal; this fiscal it will scale past the pre-pandemic volume mark by ~3%.
Profitability will decline marginally due to higher raw material prices and adverse foreign exchange movements. However, the credit risk profiles of players will remain comfortable due to their strong balance sheets, as reflected in low leverage and healthy liquidity.
A CRISIL analysis of eight companies that account for half of the sector revenue indicates as much.
Says Pushan Sharma, Director, CRISIL Research, “In the last two fiscals, pandemic-led disruptions had impacted consumer sentiment and peak season demand. This fiscal, healthy growth in urban income and higher crop prices, which are expected to sustain farmer incomes, will push demand for consumer durables. Shorter replacement cycles, uptrading, increasing finance penetration, and changing weather patterns will support a volume growth of 10-13%. The drought situation in eastern India and monsoon progress, though, remain key aspects to monitor.”
The under-penetrated air conditioners (AC) segment will be the key growth driver for the industry. Demand for ACs and refrigerators is being driven by changing weather patterns. While consumers are opting for higher-capacity refrigerators and washing machines (mainly fully automatic), compact ACs are preferred keeping in mind smaller apartments in urban areas.
Demand for television would be driven by shorter replacement cycles, multiple ownerships, and preference for larger screens. Technological advancement, high competition and consequent significant reduction in prices have also aided demand in this segment.
After a significant contraction of 180-200 bps last fiscal, operating margin is likely to decline marginally this fiscal because of high prices of key commodities such as copper, aluminium, steel and polypropylene; which could not be fully passed on to the end consumer. Despite declining from the peak in the last two months, input prices remain higher than historical levels. Rupee depreciation also impacts profitability as 45-50% of the raw materials are imported.
Says Anand Kulkarni, Director, CRISIL Ratings, “The players’ ability to increase prices was constrained due to fragile demand during the pandemic. This has impacted profitability, which is expected to return to normalcy next fiscal. Nonetheless, low leverage, healthy cash accruals, and strong liquidity will ensure credit profiles remain stable. Over the near-to-medium term, capital expenditure may increase because of the government’s Production-Linked Incentive (PLI) scheme for ACs, though this is likely to be done in a phased manner, without impacting credit profiles.”
PLI scheme on ACs is aimed to gradually reduce India’s import dependency on some of the key raw material components of ACs such as compressors, heat exchangers and control assemblies over the next five years.
That said, the volume and dispersal of rainfall will remain critical determinants of industry demand this fiscal. Additionally, input price trends and foreign exchange movement will continue to be key monitorables for profitability.