The overall demand situation for consumer durables companies is muted. However, there are different trends. For example, demand recovery occurs at a faster pace in the premium segment than in entry-level products. High inflation levels are weighing heavily on consumption demand and weak rural markets offer no respite.
“We are seeing a shift in demand from single to double door refrigerators and from semi-automatic to automatic washing machines. This indicates increasing traction in the premium segment, said Harshit Kapadia, analyst, Elara Securities (India).
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Given this, it remains to be seen whether the demand scenario improves in the ongoing festive season, especially in the entry-level segment. The September quarter (Q2FY23) is expected to be weak, continuing on the weakness seen in the later part of Q1. Also, the second quarter is seasonally weak for air-conditioners and fans.
In the case of cable and wires (C&W), falling copper prices are a major headwind for revenue growth as the price reduction is passed on without delay. Furthermore, in anticipation of a further fall in prices, dealers and distributors tend to reduce inventory.
“We note that the reduction in copper prices is likely to expose the risk of declining earnings for companies with high C&W exposures as it will lead to a reduction in selling prices for C&W companies in the immediate 1-2 quarters. Margins may be marginally impacted. In a report dated October 11, analysts at JM Financial Institutional Securities held C&W in the portfolio of Havells India Ltd and Polycab India Ltd.
On the other hand, a fall in copper prices as well as moderation in other key commodities like steel and aluminium will help in a gradual increase in margins. This will be reflected to some extent in the second quarter as well, though a substantial portion of the gains are likely to come from the third quarter onwards.
However, here too, there is a risk as the margin gains could be curtailed as a result of discounts or incentives offered by companies to increase volumes in a weak demand environment.
Therefore, accelerating demand is paramount. This will act as a major trigger for stocks of companies like Havells, Voltas Ltd, and Polycab to trade 9%-36% lower from their respective 52-week highs. This year the festive season started with a recovery in demand, but investors should keep a close watch on whether the momentum sustains.
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