Despite increasing margin pressure, the consumer durables sector is likely to witness a double-digit volume growth, pushing its revenue up by 15-18 percent to Rs 1 lakh crore this fiscal.
According to a report by Crisil, a 10-13 percent spike in demand/volume, which will be driven by both urban and rural segments -- led mostly by the AC and refrigerator segments, though rural demand will come into play in the second half of the fiscal.
The Crisil report said, the industry had crossed the pre-pandemic mark in value terms last fiscal, and this fiscal, it will scale past the pre-pandemic volume mark by 3 percent.
The Crisil report said a 10-13 percent spike in volume will boost the top-line of the sector by 15 to 18 percent this fiscal, taking past the size of the durables industry to over Rs 1 lakh crore, which will be 3 percent above the pre-pandemic size.
However, margins are under pressure given the run-away commodity prices of inputs like copper, aluminum, steel, and polypropylene, but not to the extent of last fiscal when it fell by 180-200 bps. The report, however, didn't quantify how much the margins will be hit.
Another reason for margin compression is the rupee depreciation, which also will shave off profitability as 45-50 percent of the raw materials are imported.
The report said that industry profitability will decline marginally due to higher raw material prices and adverse foreign exchange movements. However, the credit profiles of the key players remain comfortable due to their strong balance sheets, as reflected in low leverage and healthy liquidity.
According to Pushan Sharma, a director at the agency, in the past two fiscals, pandemic-led disruptions had impacted consumer sentiment and peak seasonal demand. This fiscal, healthy growth in urban income and higher crop prices will push demand.
Another enabler is the shorter replacement cycles, up-trading, increasing finance penetration, and changing weather patterns, which will boost volume by 10-13 percent. But, much depends on the drought situation in the eastern markets and the progress of the monsoons in the final weeks of the season.
The under-penetrated air conditioners (AC) segment will be the key growth driver. Demand for ACs and refrigerators is being driven by changing weather patterns. Consumers are increasingly opting for higher-capacity refrigerators and fully automatic washing machines. When it comes to ACs, compact models are preferred keeping in mind smaller apartments in urban areas, the report said.
Demand for television is being driven by shorter replacement cycles, multiple ownerships, and a preference for larger screens.
After a significant contraction of 180-200 bps last fiscal, the operating margin is likely to decline marginally this fiscal because of the high prices of key commodities such as copper, aluminum, steel, and polypropylene; which could not be fully passed on to the end consumer.
Despite declining from the peak in the last two months, input prices remain higher than historical levels. The rupee depreciation also impacts profitability as 45-50 percent of the raw materials are imported.