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Durables: Has demand plateaued? - Views on News from Equitymaster
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  • Mar 28, 2001

    Durables: Has demand plateaued?

    The valuations of consumer durable companies have fallen sharply over the last six months. Majority of these companies are trading at their 52-week low levels. BPL Limited, one of the market leaders in the colour television (CTV) segment, is trading at a P/E of 2 times its FY00 earnings. Where is the industry heading?

    The slow down is apparent now. CTV sales have dropped significantly from 7 m sets in September 2000 to 0.4 m sets December 2000. CTV sales for January 2001 have further dropped by more than 50% compared to the corresponding period of the previous year. The cut in interest rates on consumer durable loans have failed to enthuse consumers. Besides, there were no major sporting events in the current year, which has also added to the woes of these companies.

    Grossly undervalued…
    (Rs m) BPL Philips Carrier
    Whirlpool MIRC
    Price (Rs) 69 59 65 18 490
    Number of shares (m) 28 46 23 127 7
    Market Capitalisation 1,911 2,686 1,523 2,284 3,443
    EPS (Rs) 38.8 5.4 4.1 6.1 65.6
    P/E (x) 1.8 10.9 15.9 3.0 7.5
    Sales 20,417 17,446 3,853 9,824 7,972
    PAT 1,075 246 96 774 461
    GPM (%) 9.6% 5.5% 4.5% 6.6% 8.3%
    Market cap/sales (x) 0.09 0.15 0.40 0.23 0.43

    Since demand has plateaued in the urban areas, durable companies rely largely on rural penetration and demand, which unfortunately did not take off. Given the current state of agricultural production and natural calamities in both Eastern and Western regions of India, prospects are not promising for the first half of the current year also.

    Having said that, Korean companies like LG and Samsung have recorded reasonable volume growth. These companies have managed to gain market share from the domestic majors like BPL, Videocon and Godrej, which were lagging behind in both technology as well as in marketing capabilities. As a result, majority of urban consumer have shifted from either BPL or Videocon to these multinational companies.

    Post Budget, durable companies have plans to increase prices of CTVs and refrigerators, which again could subdue growth. However, given the current penetration levels of durables (one of the lowest in the world), long-term prospects are promising for these companies. So, all it needs to boost demand are good monsoons, which will result in higher agricultural output and the fortunes might change overnight.



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