India’s consumer durables sector is set to clock a robust revenue growth of ~20% this fiscal, after a flattish run last fiscal. This will be driven by electrical appliances makers (~35% of sector revenues), which are expected to grow twice as fast as white goods makers (~65% of sector revenues).

Operating profitability will be a wee lower due to costlier inputs and despite price hikes. Credit profiles will be stable on healthy accrual and low leverage, an analysis of 15 companies accounting for ~45% of the sector’s revenue shows.

The sector, which clocked ~Rs 2 lakh crore revenue last fiscal, includes consumer electricals (excluding mobile phones) and white goods. White goods include washing machines, televisions, refrigerator and air conditioners while consumer electricals include fans, small kitchen and cooking appliances, and lighting products among others.

Consumer durables makers have recovered faster than other consumer discretionary sectors such as apparel and jewellery retail, driven by higher demand for home-improvement products during the prolonged stay-at-home period. An analysis of nine listed players (contributing to 25% of sector’s revenue) shows consumer electricals (growth of 4.3%) had rebounded better than the white goods segment (de-growth of 7%) last fiscal.

Says Gautam Shahi, Director, CRISIL Ratings, “The growth momentum is expected to accelerate this fiscal on positive consumer sentiment, uptrading and higher realisations. Consumer electricals will continue to outshine with 23-24% revenue growth expected this fiscal, compared with 14-15% for white goods, riding on factors such as shorter replacement cycle, necessity, and smaller ticket size.”

Despite higher revenues, the sector’s margins are expected to moderate by 100-150 basis points (bps) this fiscal. That’s because, although the prices of key commodities such as copper, aluminium, and polypropylene (~70% of the raw material requirement of the consumer durables sector) have stabilised, they are 30% higher than the average of the past two fiscals (see chart in annexure).

The impact on profitability will vary due to lower price hikes. Consumer electrical makers have hiked prices by 8-10% this fiscal, much more than the average 3-4% by white goods makers. Operating profitability of white goods makers is seen moderating at 6-7%, marking an impact of up to 200 basis points (bps), compared with 10-11% for consumer electrical makers, which would be an impact of 50-100 bps.

Says Sushant Sarode, Associate Director, CRISIL Ratings, “Despite the dent in profitability, traditional strengths of low leverage (gearing of ~0. 2 times), asset-light business models, and healthy cash accrual will ensure credit profiles remain stable this fiscal. Over the medium term, capital spending may increase given the government’s Production-Linked Incentive (PLI) scheme for white goods components (Rs 6,238 crore spread over fiscals 2022-2029), aimed at increasing indigenisation of imported components. We believe the capital spend is likely to be done in a phased manner, which would ensure credit profiles remain stable.”

Material impact on profitability, due to further input price rise, and any large debt funded capital spending by players will remain key monitorables in the road ahead.