Covid-19 Outbreak: Summer Appliance Makers Stare At A Lost Season
Demand for summer appliances such as room coolers, refrigerators and air-conditioners is expected to decline as the nationwide lockdown to curb the novel coronavirus pandemic has been extended to May 3.
Brokerages expect the disruption—as all businesses barring essential services were ordered shut since March 24—in the first quarter of 2020-21 and muted demand for the products to persist for next six months.
Analysts cut the target prices for most consumer durables makers since March, with Whirlpool of India Ltd. and V-Guard Industries Ltd. seeing the biggest downgrade among peers. The BSE Consumer Durables Index has fallen by almost 23 percent during the period.
The virus has stalled business when consumption was already slowing - for everything from biscuits to appliances - dragging growth down to its lowest in more than a decade. Consumer durables output contracted for the second straight month in February. The industry, especially air-conditioner makers, faced a huge pile-up of inventory last year on account of unseasonal rains and energy rating changes.
Here’s a look at the factors affecting demand for white goods this summer:
Demand Will Take Time To Recover
The main growth driver for the consumer durables industry in tier-I and tier-II cities is replacement demand, while first-time buyers drive growth in tier-III and tier-IV cities, according to Chirag Muchhala, analyst at Nirmal Bang. In the current scenario, consumers are only focused on purchasing groceries, impacting demand as consumer durables are discretionary in nature, he said. Revival in demand when the situation eases, especially replacement buying, could take time, he said.
Not Stocking Up
Dealers have delayed stocking up after the new coronavirus outbreak, according to a BloombergQuint survey of eight dealers in Kolkata, Mumbai, Bengaluru, New Delhi, Kochi and Chennai.
Dealers from southern India said room air-conditioners sales were impacted in February-end and March despite pre-buying in anticipation of supply-chain related issues in China, according to the survey.
Amit Mahawar, analyst at Edelweiss Securities, said in a report there was a strong dealer off-take till mid-March for larger appliances such as room air-conditioners and refrigerators. That came on a low base and could still drive mid-single-digit growth, he said. However, with a likely sharp drop in April (30-40 percent across products) and given that 15-20 percent of annual sales happen this month, the impact is likely to be sharp in the first quarter of 2020-21, the report said.
Sales fell since mid-March following the closure of delivery partners and logistics providers, Achal Bakheri, chairman and managing director of Symphony Ltd., said on a recent conference call. The company, however, expects to grow faster than its peers if the situation normalises as a majority of the dealers had paid for the stock would be keen to liquidate it first.
If the lockdown extends beyond April, then the industry’s sales could be impacted as April and May are peak months of demand.
Amber Enterprises-Contract AC Manufacturing
Naval Seth, analyst at Emkay Global, said in a report that sales volumes of air conditioners in the quarter ended March are expected to decline by 11 percent for the company.
Amber Enterprises faced a significant business loss in March—a month that usually contributes the highest revenue for the fourth quarter. The contract manufacturer said in a conference call in January that it imports a lot of critical components from China and has supply till the end of March.
The supply chain disruption may have a silver lining for the company. The company said it has started substituting certain categories of imported components with locally made parts to reduce dependence on China.
Orient Electric, CG Consumer Electricals-Fans
Shantanu Khosla, managing director of CG Consumer Electricals, said in a conference call that the loss of sales in March, the biggest month of demand in summer, will be material and April could witness no sales at all.
The company said while it pays vendors in 45 days, it has asked them to collect payments before the bill date. To support dealers, the company extended credit periods by 15 days without charging interest.
Sales of fans extend till the monsoon and companies will have more time to recoup sales, Achal Lohade, analyst at JM Financial, said in a report. Still, appliance makers are expected to cut discretionary spending like advertising and promotion.
Refrigerators contribute nearly 60 percent of the company’s sales in summer months. Yet, it can recoup sales in the next two quarters—including the Diwali festive season—once the Covid-19 settles down, Nirmal Bang said in a note. The brokerage said Whirlpool has healthy margins, negative working capital cycles and high net-cash position which will help it tide over the current crisis.
Mithun Chittilappilly, managing director of V-Guard Industries, said in a conference call that the inventory of finished goods is high across the industry as a majority of the offtake happens after March 15. The company hasn’t chalked out any plans for its channel partners while it awaits a relief package from state and central governments.
The company said most of its distributors are financially strong and wouldn’t require much support. “We’re already seeing merger and acquisition opportunities as players with weak balance sheets wouldn’t be able to sustain these tough times,” Chittilappilly said.
Havells, Blue Star, Voltas-Room AC
Brokerages have negative short-term view on Voltas and Blue Star as they have higher inventory levels in their channels and the margins could be impacted. The order inflow in the non-AC segments is also weak, according to multiple brokerages.
Voltas’ project execution in the Middle East, according to reports, is likely to be impacted.
B Thiagarajan, managing director of Blue Star Ltd., told BloombergQuint in a phone interview that the room-AC industry isn’t facing a shortage of raw materials as they’re available in most of the warehouses. As summer extends till July across northern India and till the first week of June in the south, the next target for companies would be the festival season, he said. The industry, however, is more concerned about the opening of retail outlets than manufacturing facilities, he said.