Consumer durables: Grim outlook - Views on News from Equitymaster

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Consumer durables: Grim outlook

Mar 19, 2002

Over the last few days, consumer durable majors like BPL and Videocon have been gaining ground. After two years of lacklustre demand scenario, the current year was expected to benefit durable majors, more notably in the second half of the current fiscal in light of higher agricultural output. However, if one were to compare YoY, things are not that heartening. Based on the twelve month trend, production has remained volatile on account of uncertainties. Starting from Gujarat earthquake to the September attacks on the US coupled with a sluggish domestic economy, operating environment has remained challenging. But a good monsoon, which resulted in drought affected states like Gujarat, Rajasthan and Madhya Pradesh receiving normal rainfall, brought some cheer for the industry. Though industry watcher opine that rural demand has shown some signs of improvement, we still have a long way to go. As Dr. Bimal Jalan, Governor of the Reserve Bank of India, puts it "the after-effects of a good monsoon would be visible in the next three months".

Since agricultural production, over the last three years has been sluggish, the country needs another good monsoon for rural demand to actually gain pace. Meanwhile, the colour television manufacturers expect CTV sales to touch 20 m in the next three years as compared with 5 m currently. However, this seems to be very optimistic. Just to put things in perspective, annual demand for televisions is estimated to be around 6 m, of which CTV's accounted for as high as 66%. Black and White (B&W) TVs have been losing out because of various reasons like exchange sets substituting B&W demand in rural region and rise in unit manufacturing cost for manufacturers. With budget raising excise duty on B&W TV sets, demand is expected to shrink further in the coming fiscal. Manufacturers cannot pass on the rise in costs to consumers, as this would dent demand further.

Having said that, higher agricultural production will benefit this sector and consequently demand is expected to be on the higher side. Besides, with peak customs duty reduced from 35% to 30%, raw material costs (after adjusting for rupee depreciation) is expected to fall and thus would result in higher profitability. While domestic majors like BPL, MIRC and Videocon are expected to benefit from higher CTV sales, they have a weaker presence in other fast growing segments like refrigerators and washing machines. Refrigerator is the only segment, which has managed to buck the trend. Production has increased by 26% to 1.8 m units for the period ended April-December 2001 as compared with the corresponding period last year. The fastest growing segments within the refrigerator segment are the frost-free and direct cool categories and this trend is expected to continue in the coming fiscal as well. The income tax surcharge and other steps taken in the budget are likely to affect consumer sentiment. Overall, the outlook is not rosy for this sector.

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