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Consumerism in full swing… - Views on News from Equitymaster
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  • Nov 17, 2001

    Consumerism in full swing…

    The bet is on. With festive season in full swing, consumer electronics majors have introduced a range of exchange and finance schemes in an effort push volume growth, which has been languishing over the last two years. Will this festive season be any different for these companies, which are hoping for an upturn in consumer demand?

    The Indian consumer durable industry has been in the doldrums in recent years. After an eventful 1999 thanks to the cricket world cup, demand for CTVs has remained subdued. Slowdown in the economy due to poor growth in agriculture and industrial sector has clearly affected demand. Unfavorable monsoons and natural calamities in FY01 also worsened prospects for consumer durable majors. The television segment is one of the key categories, which witnessed substantial decline in total sales. B&W TV sales declined by more than 23% to around 2.4 m sets in FY01 as against the average of 3.2 m sets per annum. CTV sales also dropped by more than 10% to 2.8 m sets as rural demand fell on account of lower agricultural production.

    Not much has changed since then. While speaking to one of the key executive with a multinational electronics major, the view was that demand scenario would remain subdued in the current year. While B&W TV sales, which averages around 3 m to 3.3 m units per annum, is expected to fall by 15%, CTV sales is expected to register a 10% contraction in volumes in the current year. While a good monsoon is expected to improve agricultural output in the current year, growth in the industrial sector has almost halved. The feel-good factor is also clearly missing amongst the consuming class.

    Net profits nosedive…
    (Rs m) 1QFY01 1QFY02 Change
    BPL 190 102 -46.3%
    Titan 1 (146) -
    Kodak 103 25 -75.7%
    Carrier 102 26 -74.5%
    Voltas 2,355 2,312 -1.8%
    Total 2,751 2,319 -15.7%

    Reflecting the subdued demand scenario, almost all the consumer electronics majors have cut back production in the current year. While there was a brief upturn in production in the first quarter, production has continuously slumped in the following months. Though CTV and refrigerator volumes increased in July, it was very much a short-term phenomena. The performance of the consumer electronics major in 1QFY02 throws some light on the state of the economy. While BPL reported a 19% fall in sales in 1QFY02, other companies like MIRC Electronics, Videocon, Kodak, Whirlpool and Philips have reported atleast a 40% drop in profits. Barring BPL, margins for all other companies have more than halved. Reportedly, even Korean majors like LG and Samsung have cut back production of CTVs citing slowdown in the economy.

    The prospects for rest of the year remain challenging. Though there could be a marginal upturn in demand towards the end of the fiscal, the industry is expected a 6%-8% drop in volumes. Further, average realisation per CTV is expected to fall by 4%-5% in the current financial year.

    But if one were to take a long-term view, our low penetration levels offer promising growth potential. While CTV penetration level is 26% in India, it is 98% in China and 333% in the US. The same is the case with washing machines, refrigerators, microwaves and audio systems.

    The big bet…
    (m) FY95 FY07E
    Category Rural Urban Rural Urban
    Very rich 0.3 0.7 1.6 4.5
    Consuming class 14.3 14.3 47.3 43.6
    Climbers 32.7 15.3 63.3 10.7
    Aspirants 32.7 8.3 14.7 0.7
    Destitutes 39.7 6.1 12.2 0.5
    Total 120 45 139 60

    Structural changes in the household sector are likely to push growth to a higher trajectory in the coming years. To put things in perspective, while the number of households in India are expected to go up to 199 m by FY07 from 164 m in FY95, the rising double income families would lead to a higher growth in household incomes. Besides, the Indian economy is likely to grow at a faster rate considering rolling out of second generation reforms.

    As a result, per capita income (currently at around US$ 350 levels) is likely to go up increasing the purchasing power of the Indian consuming class. Also, as India moves to a softer interest rate regime, credit penetration at an estimated 8% currently would also increase. Thus the average Indian consumer, who was averse to taking loans, would have a whole range of financing options available to him. If loan disbursements of private and public sector banks are any indication, in recent years, consumer loan approvals have gone up markedly.

    But the scenario is not so rosy for the domestic majors. One has to keep in mind that multinationals dominate the Indian consumer durable sector. Barring a few formidable players like BPL, MIRC and Videocon others have clearly been outpaced. Multinationals have cornered almost 69% share in the CTV market. And can one remember an Indian brand in the washing machine and audio system segments?



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