By Avinash Pathak
The initial prediction was of a strong summer with above-normal temperatures, which has been prevalent in many parts of India. And it has raised expectations among consumer durable makers of a pickup in sales of fans, A/Cs, refrigerators and air coolers. However, February and March have been slightly encouraging, with dealers starting to build AC inventory levels and the channel partners turning optimistic about a demand revival, for all the seasonal products like A/Cs and refrigerators. However, the recent unseasonal rainfall has played some spoilsport and added to uncertainties. Leading to the overall demand seeming a bit muted during the quarter. So we expect it to inch up, as there have been predictions that the summers will be strong.
BEE Star Labelling
There has been an implementation of the new BEE star labelling regulations for ceiling fans. Generally, BEE Star labelling regulations are mandatory guidelines given by the Bureau of Energy Efficiency Government of India, which was implemented from 1st January 2023. Mainly the objective of these regulations and Star rating is to lower the overall consumption of energy. For example, a normal fan without a Star rating consumes around 75 watts. However, for these Star rated fans, power consumption cannot be more than 52 watts for a one-star rated fan, which results in a 30% power saving in electricity consumption. Similarly, for the five Star rated fans, this saving can go up to more than 50%. So we can see that there is an energy saving as we move up the Star ratings. This change in regulations has impacted the demand in Q3, and in Q4 mainly because of higher channel inventory at the end of Q3FY23 due to the implementation of these new BEE norms. The overall cost increase because of the racing change is around 7% to 8% but because of the weak volumes, brands started offering around 4% to 6% discounts and incentives to push out this new Star rating fans. Despite incentives and discounts, the industry saw a decline to flattish primary billing, mainly because of the high inventory and weak demand. So lower volumes and price cuts can result in margin pressure for fan companies during the quarter.
Long-term demand for the Consumer Durables industry
The long-term demand and consumption will stay steady because of the structural demand drivers like increasing power availability, improving construction activity and increase in the housing sector which we expect to continue; this shrinking presence of this unorganised sector also acts as a stimulus for the consumer durable industry. So companies, in thisindustry with an excellent cash conversion cycle, balance sheets with a strong brand recall and expanding product basket will perform well in the consumer durables industry. Under our coverage, we like Crompton Consumer in the consumer durable space.
(Avinash Pathak, Research analyst at LKP Securities. Views expressed are author’s own.)