Revenue of the organised electrical and kitchen appliances¹ industry is expected to grow 8-10% this fiscal, driven by greater consumer preference for branded products. This will also be supported by increasing usage of smart technologies, and similar buying behaviour among rural and urban consumers towards such products.

The implementation of the Goods and Services Tax in July 2017 helped manufacturers in the organised sector to streamline their supply chains, operations, and distribution networks to benefit from input-tax credits, cost-efficient logistics, and uniform taxation of final products across states.

These companies have also deleveraged consistently over the past four fiscals and improved their balance sheets, which will bolster their credit profiles over the medium term.

A Crisil Ratings analysis of eight companies², which account for around half of the ~Rs 62,000 crore industry, indicates as much.

Says Mohit Makhija, Senior Director, Crisil Ratings, “The perception that purchase of electrical appliances is a low-involvement decision is fast changing. Kitchen equipment, lighting solutions for home, electric fans and coolers are now increasingly bought after careful evaluation of brands on functionality, technology, ease of use, and strong after-sales service. We believe increased demand for smart appliances will push manufacturers to invest in technology research and development. The industry’s revenue growth this fiscal will be driven by steady demand from rural and urban segments.”

The industry did not face material disruption during the second Covid-19 wave, in contrast to the first. The resilience is underlined by limited cyclicality in demand and relatively smaller ticket sizes of purchases compared with consumer durables. Even as prices of key raw materials — copper, aluminium, steel, and polypropylene — surged last fiscal, stable demand enabled companies to pass on increases in raw material prices to a large extent.

Says Anand Kulkarni, Director, Crisil Ratings, “Electrical appliances makers increased product prices by 12-14% last fiscal, limiting the impact on operating profitability. This fiscal, too, operating margin is expected to see a marginal decline of ~50 bps despite elevated input prices, highlighting stable demand and ability of players to pass on increased input costs. Furthermore, deleveraged balance sheets and improved liquidity position will support credit profile of players.”

To be sure, operating margin declined ~130 basis points (bps) to ~11.5% last fiscal, albeit on a higher base of fiscal 2021 that had seen a significant increase aided by pent-up demand. This fiscal, the margin is expected to moderate further to ~11%, but will still be higher than the historical level of 10-10.5%.

Meanwhile, focus on deleveraging has improved the capital structure and coverage ratios of organised players, as reflected in the expected debt-to-Ebitda ratio of ~0.6 time this fiscal against ~1.5 times four years ago, and interest coverage ratio of ~13 times versus ~10 times. Liquidity (cash and cash equivalents) of the players is estimated to be above Rs 4,000 crore this fiscal vis-à-vis ~Rs 3,000 crore four years ago.

Going forward, any material impact on profitability due to a rise in input prices will bear watching.

¹ Includes small electrical appliances, i.e., fans, lighting, kitchen appliances, water geysers and coolers, etc.
² Revenue of the sample set includes some revenue from non-consumer durable segments as well