The nationwide lockdown will snatch away two good quarters from white goods manufactures. For companies, such as Voltas, Blue Star, Havells, Whirlpool, and Crompton Greaves Consumer Electricals, the March and June quarters are the most critical and active periods, accounting for 50–55 percent of annual revenues. Air conditioner makers, in particular, draw 42–45 percent of their revenues during March-June, according to brokerage Nirmal Bang.
Given the criticality of summer season sales, any effort to bump up operating margins through a price hike or a reduction in distribution commission turns out to be most successful during these quarters.
While these stocks have corrected by 10-36 percent year-to-date, a potential disruption in FY21 earnings may not be fully priced-in.
Consumer durable companies had defied the slowdown until December 2019. But with revenues projected to dip 5–9 percent in Q4, it could pull down FY20 earnings. FY21 is expected to be worse. “We foresee a bleak outlook for cooling products for the summer of 2020,” say analysts at HDFC Securities.
As initial hopes of online sales channel opening up for products, such as ACs, refrigerators, fans and washing machines, not materialising, this opportunity (estimated at 5 – 7 percent of revenues) for players such as Havells, Blue Star, and Voltas will be absent in the June quarter. In other words, durable makers may completely lose out on April sales, which, according to ICICI Securities, could lead to business totally lost in the June quarter. According to the brokerage, Q1 accounts for 20–32 percent of their annual revenues.
A revival from May also hinges on the lifting of the lockdown and ability of durable makers to extend working capital support to distributors.
Analysts at Nirmal Bang say the focus of dealers and distributors would be to clear their stocks as and when stores open post lockdown, which could put tremendous pressure on the operating margin of manufacturers. Until September 2019, these companies were in a favourable spot to implement price hikes.
As stress builds up, analysts say the market price of white goods may fall to a two-year low as the focus will shift from profitability to volumes.
Also, with income disruption across the salaried class, replacement and up-gradation demand may be disrupted. “In the near term, people may prefer to repair their appliances instead of buying something new,” says an analyst from a foreign brokerage.
With multiple headwinds, investors shouldn’t be tempted by the correction in stock prices. Business Standard