Analyst Corner: Consumer durables – margin recovery is key

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Published: June 13, 2019 12:36:29 AM

We expect leaders in the mass- premium space to benefit from higher demand. However, extent of margin recovery remains key as brands resort to aggressive sales schemes.

Demand spurt in April led to inventory stock-out for most dealers and is back to normal levels (40 days) currently. (Representative image)Demand spurt in April led to inventory stock-out for most dealers and is back to normal levels (40 days) currently. (Representative image)

We conducted channel checks across north, central and western regions on cooling products in Q1FY20 with rising concern on the Street triggered by weak demand, aggravated by industry leaders’ poor Q4FY19. Key takeaways: a) strong 20-25% YoY AC growth in April and May has helped dealers make up for weak Q4FY19.

However, with monsoon showers in South/West regions in June, Q1FY20 revenue growth is likely to be 15-18% YoY as per dealers inputs; b) while volume growth is comforting, margin pressure is likely to sustain, especially with AC brands resorting to aggressive schemes (given increasing competition); and c) robust sales in April had led to inventory stock out for most dealers. However, it is currently back to normal level (40 days).

We expect leaders in the mass- premium space to benefit from higher demand. However, extent of margin recovery remains key as brands resort to aggressive sales schemes.

Given rising competition with the entry of new brands, existing AC brands have resorted to aggressive schemes and higher ad spends to create demand pull, prioritising market share ramp up. While volume ramp up will help, margin recovery is likely to be challenging this time.

Demand spurt in April led to inventory stock-out for most dealers and is back to normal levels (40 days) currently. That said, dealers overall remained more calibrated in terms of inventory stocking. While consumers have shifted to higher value inverter ACs (>60% of AC industry), the preference is for mass-premium brands providing quality products. As a result, leaders in the mass-premium space—Voltas, Blue Star, Daikin—continue to fare better.

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