We know what ‘consumer durables’ are. We probably can’t do without consumer durables. They make life easy. They are important members of any home makeover and vendor favourites during any festival offer. Up until the lockdown, investing in stock options for consumer durables were considered safe bets. Not anymore. Times have changed. Buying stock in falling consumer durables is something that needs to be avoided.
But, all this was different towards the end of 2019, when the advent of 2020 looked promising.
Consumer durables were once a safe bet
The appliances that fall under the ‘consumer durable’ category are refrigerators, televisions, air conditioners, washing machines, along with kitchen appliances such as grinders, juicers, chimneys, and microwave ovens.
The life expectancy of these appliances is approximately 3 years. They are generally classified into two segments – Consumer Appliances and Consumer Electronics. Consumer Appliances are further categorized into White Goods (heavier appliances such as stoves, air conditioners, and refrigerators) and Brown Goods (lighter appliances such as digital media players, computers, radio and TV).
The reason why it was a safe bet as a stock option was due to the following factors,
By 2019, the rise in disposable income (the amount left after reducing taxes and rent) among consumers led to massive demand in consumer durables. The middle-class segment started purchasing more appliances thanks to the reduction in goods prices.
The reason for this was the easy import of components and advancement in technology. There was suddenly heightened consumption for durable goods.
The increase in consumers income was one factor. The easy financing options available to purchase appliances on EMIs saw the number in purchases spike. Plus, retailers started adopting smart targeting strategies to entice the general public. For commodities such as LED televisions, washing machines, refrigerators, and personal computers, banks were willing to offer hassle-free financing options.
This makes the lower and mid-income group happy, with the cost of capital and flexibility both favouring them.
The rural market has demonstrated potential growth. Smaller towns were expected to present the next opportunity for growth. As per a study, close to 35% of the total sales in consumer durables came from the rural market. This number was expected to grow to nearly 45% by the end of 2020. This hike was attributed to the growing affordability in products and buoyancy in the economy. COVID-19, however, had plans of its own.
The key products that contributed to an increase in consumer durables purchase were music systems, televisions, and phones. Advertising in local languages might have also supplemented this increase.
Media and retail
According to a report by KPMG, the television industry saw a CAGR growth of nearly 16% by 2015. This growth was attributed to the increase in sales of high-end flat-panel TVs, plasma TVs, LCD TVs, and current favourite, LED TVs. This means both the television industry and consumer durables market are inter-related. There was an expected growth of 100% predicted by the start of 2020, in the television industry itself.
Organized retail (branded products) took a leaf out of the consumer durable market boom and made shopping an ‘experience’. Thanks to the rise in income, increase in purchasing power, and the preference of the younger generation towards branded products, organized retail is getting the much-needed fillip.
Consumers prefer upgrades in technology and are attracted to innovative products. Manufacturers are always trying to update their products with the latest technology. For higher-income groups, the combination of technology, branding, and features always move towards a sale.
For the middle and lower-income groups, pricing is the deciding factor for purchasing price-sensitive consumer durables. The sales go up during festivals. This is because consumers find it auspicious to purchase consumer durables during Diwali, Gudi-Padwa or Dhanteras.
The consumer durable loopholes
Everything hasn’t been green grassy for consumer durables. There have been loopholes which have continued to hamper its potential peak market potential.
Cheap importing of consumer durable products from Singapore and China.
Increased competition among major players. The unorganized consumer durables market is still not very strong.
Increase in input costs of raw materials such as plastic, aluminium, steel, and copper puts pressure on the margins.
The import duty structure is still not sustainable for major consumer durable players.
Staying with the point of India’s consumer durable players, one brand that prides itself in becoming a leader in this domain is Blue Star. It is India’s largest central air-conditioning company. Its top competitors are Carrier, Lloyd Electric, and Voltas.
Bursting the investment bubble
If someone has been consistently investing in e.g. Blue Star, then all must have seemed fine until the end of 2019.
Things looked bright for consumer durables as an investment. One would invest in a stable company whose past performance x-ray would be positive. The investment would happen at the right price when the market offered good value. Happily, ever after…
Towards the end of 2019, consumer durables stocks were trading in the negative zone. S&P BSE Consumer Durables index fell to 39.34 points or approximately 0.16% at 25004.05. The biggest losers were Whirlpool India, Orient Electric Ltd, Voltas Ltd and Crompton Greaves Consumer Electrical Ltd. Blue Star Ltd went up 1.55%, VIP Industries Ltd grew by 1.49% and TTK Prestige Ltd rose by 0.25%.
The nationwide lockdown snatched away two probably strong quarters for white goods manufacturers. The lockdown also coincided with their most active or critical periods (Indian summer). For example, according to Nirmal Bang, air conditioner manufacturers garner close to 45% of their revenues during the March-June period.
Online sales were expected to be a knight in shining armour. But, with revenues being projected to dip by Q4, it could pull down the entire FY20 earnings for consumer durables.
Don’t think of buying consumer durable stocks in 2021, as FY21 is expected to be worse until the Indian summer arrives again. On a final note, analysts have predicted that market price for white goods will fall to a two-year low as the focus for consumer durables manufacturers will shift from profitability to volume.
Add to that, with the disruption in income across the salaried class due to COVID-19, demand will continue to stay low. Repairing appliances instead of purchasing new is set to become the new norm.
An AC technician somewhere is smiling reading this.