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CONSUMER DURABLES INDUSTRY
q The consumer durables industry has slowed down considerably in recent
months as reflected by the Q1 FY12 numbers. Fan industry that constitutes
a major part of Indian consumer appliances market, grew by 3%
YoY in Q1FY12 due to lighter summer season in north Indian region
q The room AC industry is witnessing higher competition through entry of
new players and excess inventory levels. Margins could continue to be
under pressure.
q We prefer Voltas, Bajaj Electricals and Havells within our consumer
durables coverage. We maintain reduce on Blue Star.
Consumer durables index has slowed down sharply in recent
months
The index for consumer durables has slowed down significantly in the past few
months. While for FY11, the sector recorded a growth of 14%, the same in the Q1
FY12 has slowed down to 3.3% yoy. Apart from the impact of higher base of FY11,
the slowdown in the index reflects moderation in demand trends most likely due to
higher interest rates. Some of the consumer durable companies under our universe
of coverage posted lower than expected revenue growth in the quarter. The situation
has been aggravated by volatility in the commodity prices, which has eroded
sector profitability.
Fans & luminaries also hit by lower demand
Fan industry that constitutes to a major part of Indian consumer appliances market,
grew by 3% YoY in Q1FY12 due to lighter summer season in north Indian region.
This is reflected in weaker set of nos reported by key players like Havells India, Bajaj
electrical and Crompton Greaves. Weaker summer has also resulted in the piling up
of inventory (mainly coolers and fans) resulting in higher working capital interest
charges for almost all the companies in the quarter.
We interacted with the managements of various companies post Q1FY12 results.
Crompton Greaves has outlined a cautious outlook for next few quarters. However
management of Havells and Bajaj electricals are confident of maintaining margins
going ahead on account of 1) steady cost management across the board 2) increase
in contribution from new product launches going ahead.
Room Airconditioning industry logged lower volumes in Q1 FY12
The room Airconditioning industry reported strong volume growth of 35% in 2010
driven by severe summer season coupled with rising disposable incomes. However,
due to a compressed summer season during 2011, volumes in Q1 FY12 have seen a
drop of 15% yoy. The general slowdown in economic growth also aided to the
downturn in industry volumes.
Companywise, Voltas managed to contain the drop in volumes at 11% and in the
process consolidated its market share and position at number 2 in the industry. Despite
the drop in industry volumes, Blue Star clocked strong volumes in the quarter
due to company's foray into retail channels and widening of the range of models.
The company also extended its coverage through dealer network.
In recent months, there has been some changes in market shares with the Korean
companies LG and Samsung losing market share to Japanese companies like
Hitachi, Daikin and Panasonic. These Japanese companies have traditionally positioned
their product in the premium range but have now reduced the price gap. The
market is also getting increasingly fragmented with the entry of new players - the
top 3 players now account for roughly 60% of the total opportunity as compared to
greater than 65% some months ago.
As indicated earlier, the demand for room ACs was robust in 2010 but fell from cliff
since March 2011. As a result, manufacturers were taken for a surprise in this seasonally
strong quarter. Consequently, the industry is now grappling with excess inventory.
Given the competitive nature of the industry, pricing could remain constrained
as manufacturers seek to liquidate the inventory.
Business Outlook - Corporate profits to continue to be under pressure
in near term
In the shorter term, continuing inflationary pressures and high interest rates is expected
to have an impact on the consumer durables business. Higher inventory levels
in the AC segment remains a concern. However, the longer-term drivers remain
in place.
With just 3% households having an AC, there is huge scope for growth in the segment
in the country. The domestic Room AC industry is expected to continue to
grow at the rate of 20-25% in the years ahead, though there exists a distinct possibility
of slightly tempered growth this year, on account of factors discussed earlier.
Higher disposable incomes and rising wages, coupled with low penetration of ACs,
will continue to drive demand.
We opine that the Indian consumer space has been undergoing a major change in
terms of consumer preference toward the branded products, manufactured by the
organized players over the unorganized sector. We therefore believe that strengthening
of dealer network and introduction of new products on constant basis are
likely to be the two fold strategy employed by any player to succeed in the highly
competitive and challenging business environment.
Recommendation
In the universe of consumer durable companies under our coverage, we prefer Bajaj
Electricals, Havells India and Voltas.
n Voltas - Well entrenched position in domestic and Middle East markets.
Unleveraged balance sheet and attractive valuations at 12.2x FY12 earnings.
Target price of Rs 171.
n Bajaj Electricals - We recommend Bajaj Electricals for being the direct play on
the domestic market. Company has a pan India presence and enjoys dominating
position in its key geographies. PEx at current price11.4, TP: Rs.285.
n Havells - We also prefer Havells India for being geographically diversified player
in the consumer appliances space. Company enjoys strong brand positioning in
north and east India and is constantly gaining ground in the western region as
well. Havells has successfully aligned the operations of its key subsidiary Sylvania
in last two years. PEx at current price13, TP: Rs.410.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
CONSUMER DURABLES INDUSTRY
q The consumer durables industry has slowed down considerably in recent
months as reflected by the Q1 FY12 numbers. Fan industry that constitutes
a major part of Indian consumer appliances market, grew by 3%
YoY in Q1FY12 due to lighter summer season in north Indian region
q The room AC industry is witnessing higher competition through entry of
new players and excess inventory levels. Margins could continue to be
under pressure.
q We prefer Voltas, Bajaj Electricals and Havells within our consumer
durables coverage. We maintain reduce on Blue Star.
Consumer durables index has slowed down sharply in recent
months
The index for consumer durables has slowed down significantly in the past few
months. While for FY11, the sector recorded a growth of 14%, the same in the Q1
FY12 has slowed down to 3.3% yoy. Apart from the impact of higher base of FY11,
the slowdown in the index reflects moderation in demand trends most likely due to
higher interest rates. Some of the consumer durable companies under our universe
of coverage posted lower than expected revenue growth in the quarter. The situation
has been aggravated by volatility in the commodity prices, which has eroded
sector profitability.
Fans & luminaries also hit by lower demand
Fan industry that constitutes to a major part of Indian consumer appliances market,
grew by 3% YoY in Q1FY12 due to lighter summer season in north Indian region.
This is reflected in weaker set of nos reported by key players like Havells India, Bajaj
electrical and Crompton Greaves. Weaker summer has also resulted in the piling up
of inventory (mainly coolers and fans) resulting in higher working capital interest
charges for almost all the companies in the quarter.
We interacted with the managements of various companies post Q1FY12 results.
Crompton Greaves has outlined a cautious outlook for next few quarters. However
management of Havells and Bajaj electricals are confident of maintaining margins
going ahead on account of 1) steady cost management across the board 2) increase
in contribution from new product launches going ahead.
Room Airconditioning industry logged lower volumes in Q1 FY12
The room Airconditioning industry reported strong volume growth of 35% in 2010
driven by severe summer season coupled with rising disposable incomes. However,
due to a compressed summer season during 2011, volumes in Q1 FY12 have seen a
drop of 15% yoy. The general slowdown in economic growth also aided to the
downturn in industry volumes.
Companywise, Voltas managed to contain the drop in volumes at 11% and in the
process consolidated its market share and position at number 2 in the industry. Despite
the drop in industry volumes, Blue Star clocked strong volumes in the quarter
due to company's foray into retail channels and widening of the range of models.
The company also extended its coverage through dealer network.
In recent months, there has been some changes in market shares with the Korean
companies LG and Samsung losing market share to Japanese companies like
Hitachi, Daikin and Panasonic. These Japanese companies have traditionally positioned
their product in the premium range but have now reduced the price gap. The
market is also getting increasingly fragmented with the entry of new players - the
top 3 players now account for roughly 60% of the total opportunity as compared to
greater than 65% some months ago.
As indicated earlier, the demand for room ACs was robust in 2010 but fell from cliff
since March 2011. As a result, manufacturers were taken for a surprise in this seasonally
strong quarter. Consequently, the industry is now grappling with excess inventory.
Given the competitive nature of the industry, pricing could remain constrained
as manufacturers seek to liquidate the inventory.
Business Outlook - Corporate profits to continue to be under pressure
in near term
In the shorter term, continuing inflationary pressures and high interest rates is expected
to have an impact on the consumer durables business. Higher inventory levels
in the AC segment remains a concern. However, the longer-term drivers remain
in place.
With just 3% households having an AC, there is huge scope for growth in the segment
in the country. The domestic Room AC industry is expected to continue to
grow at the rate of 20-25% in the years ahead, though there exists a distinct possibility
of slightly tempered growth this year, on account of factors discussed earlier.
Higher disposable incomes and rising wages, coupled with low penetration of ACs,
will continue to drive demand.
We opine that the Indian consumer space has been undergoing a major change in
terms of consumer preference toward the branded products, manufactured by the
organized players over the unorganized sector. We therefore believe that strengthening
of dealer network and introduction of new products on constant basis are
likely to be the two fold strategy employed by any player to succeed in the highly
competitive and challenging business environment.
Recommendation
In the universe of consumer durable companies under our coverage, we prefer Bajaj
Electricals, Havells India and Voltas.
n Voltas - Well entrenched position in domestic and Middle East markets.
Unleveraged balance sheet and attractive valuations at 12.2x FY12 earnings.
Target price of Rs 171.
n Bajaj Electricals - We recommend Bajaj Electricals for being the direct play on
the domestic market. Company has a pan India presence and enjoys dominating
position in its key geographies. PEx at current price11.4, TP: Rs.285.
n Havells - We also prefer Havells India for being geographically diversified player
in the consumer appliances space. Company enjoys strong brand positioning in
north and east India and is constantly gaining ground in the western region as
well. Havells has successfully aligned the operations of its key subsidiary Sylvania
in last two years. PEx at current price13, TP: Rs.410.
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