The 6% YoY dip in consumer durables IIP in FY20 (April-October) prompted us to delve deeper into the impact of the all-pervasive economic slowdown. Key highlights of our channel checks are:
a) the vagaries of the weather were the sector’s saving grace—cooling segment grew 33% in H1FY20 & heating products too are estimated to post strong double-digit growth;
b) overall retail sentiment remains weak;
c) inventory, ex-cooling/heating products, remains high with companies continuing channel stocking amidst sluggish retail sales; and
d) intensifying competition could lead to a cap on/marginal decline in prices.
We expect summer inventory build-up from January 2020. With last season’s stock-out scenarios, Q4FY20 is likely to post robust growth in cooling products, especially room air conditioners (RACs).
Heating products soothe an otherwise dull quarter
Festive demand failed to match high recovery expectations in Q3FY20. Weakness in the broader economy continued to hammer demand in electricals and most appliances. Heating appliances (geyser and heaters), however, proved to be the silver lining with double-digit growth in Q3FY20 amidst two-decade low winter temperatures in North India. Though we envisage Crompton, V-Guard and Havells to gain from their presence in the segment, lacklustre electrical sales (fans, switches, etc.)—mirroring the overall sluggish economy—could curtail the benefits.
Inventory appetite high for cooling products
In cooling products, inventory remains stable and dealers expect the build up to start from early Q4FY20 for the ensuing summer season (to avoid encore of last year’s stock-out situation). Barring cooling/heating products, inventory levels across consumer durables and electrical space remain high as companies continued with their channel push amidst slower retail sales. Demand recovery in Q4FY20 remains a key monitorable; lack of it could hit sales as inventory levels start to peak.
Competition heats up; Whirlpool sharpening focus
Competitive intensity is heating up across segments, particularly in RACs—re-entry of Samsung in the mass premium segment, premium players looking to launch cheaper variants (Daikin) and entry of new Chinese players (MI). We will keep an eye on Voltas’ strategy in the face of increased competition in its dominion (mass premium segment in RACs). In the refrigerator space, our channel checks suggest Whirlpool to surpass industry growth in Q3FY20 via increased penetration and market share gains.
Top pick: Voltas
Voltas: With over 40% growth in RACs in H1FY20, we expect Voltas to deliver strong double-digit growth in the UCP segment. As we keenly watch the launch strategy of DC refrigerators (refs) from its new plant in Gujarat (part of Volt-Bek JV), we remain upbeat on its proven track record of deep consumer insights and scalability.