Omicron big worry for consumer durable cos

Last year’s base is high owing to pent-up demand sales, which poses a challenge this time around. Additionally, price hikes by manufacturers may have hurt demand to some extent. The rising threat from the Omicron coronavirus variant has further dashed hopes of improved volume trajectory in the near future.

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Channel offtakes and stocking remain impacted in anticipation of a fresh covid wave, which may eventually impact volume growth, according to analysts. Recent channel checks by Motilal Oswal Financial Services Ltd indicate that sales growth is largely inflation-led, while volume growth remains subdued.

“Ideally, we would have expected strong channel filling during the December quarter because of pending price hikes across various categories in January/February. However, on account of concerns around a potential third covid wave, channel filling has been missing thus far,” said Motilal Oswal’s analysts in a report on 3 January.

This is discouraging for investors in consumer durable stocks.

As such, consumer durable sales were hit from the beginning of this fiscal. In Q1, the lockdown imposed to contain the spread of coronavirus had hit demand severely.

Manufacturers of cooling products such as air conditioners (ACs), refrigerators, fans, and coolers suffered the most as they lost their peak summer season sales during the quarter.

Channel stocking, price hikes, and demand revival in Q4 were expected to lead to normalization of volumes and earnings growth for consumer durables manufacturers.

However, recovery is now likely to be delayed. As such, investors would do well to remain cautious on the impact of the pandemic’s spread.

Among manufacturers, white goods manufacturers remain more vulnerable to the impact of any disruption caused by the pandemic.

Larger appliances such as refrigerators, ACs, and washing machines are already seeing weak demand, said analysts. Manufacturers of smaller electrical and kitchen appliances are better placed as the products have lower ticket size.

Meanwhile, margin concerns also prevail, with rising commodity prices affecting earnings growth. Here, the companies looking to maintain market share have not adequately hiked prices.

Margins are likely to remain weak for consumer durable manufacturers for the December quarter, said Himanshu Nayyar, lead analyst-institutional equities at Yes Securities Ltd. Revenues in Q3 may increase, but the growth will be led by pricing and not volume growth, he said. The next few quarters are likely to be challenging on the volume growth front, he added.

There is no comfort on the valuations front, either. According to Bloomberg data, shares of Blue Star Ltd, Voltas Ltd and Havells India Ltd are trading at around 37 times, 48 times and 59.1 times FY23 consensus earnings estimates, respectively. Comparatively, among white goods manufacturers, Whirlpool Of India Ltd stock is trading at 33.5 times FY23 earnings estimates.

Whirlpool remains a pure valuation play, but it is also facing uncertainties on near-term volume growth, Nayyar said. Overall, near-term challenges on volume growth may well keep significant upsides in these stocks at bay.