In focus Consumer Durables Sector
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Enthused over the implementation of the 7th Pay Commission recommendations, adequate monsoon till mid-July, higher probability for smooth passage of the much-controversial GST Bill in the Upper House of Parliament, consistent impressive return on investments even for the individual investors, we foresee brighter time ahead for the consumer durables sector in India. And we are not even talking about the opportunities hidden in the under-exploited rural pockets of India where a simple television set is still a luxury for some. It will be interesting to note here, only 211 Indians out of 1000 own a television set according to a 2015 data while out of 1000, as many as 878 Chinese citizens own a television. While this indicates a huge opportunity for the players in consumer durables sector, things may not happen at a fast pace as being touted or canvassed. But then, this sector needs a lot of government help to give higher returns to the individual investors, a large amount of whom has their weakness on this sector. Players in this sector have been also pinning their hopes on much-hyped ideas launched by Narendra Modi government including ‘Make In India’ and ‘Digital India.’ So what does this sector hold for the investors in future as the consumer durables sector is expected to grow at a CAGR of 10.51 per cent. The market size for consumer durable is USD 12.5 billion and expected to reach to USD 20.6 billion by 2020. In fact, research by several agencies expect the consumer durable market to be the fifth largest market in the world by 2025. Within consumer durable sector the Indian electronics market is expected to be the largest growing electronics market in the world.
Prime Minister Narendra Modi famously said on August 15, 2014, “I tell the world, ‘Make in India’ (and) sell anywhere but manufacture here. We have the skill and talent for it.” How much the global and local giants have responded to his urges, that can be checked some other time, may be. But yes, the current government's 'Make in India' initiative has created a positive buzz amongst the global investors and players in this segment too. Given macroeconomic factors and thrust on manufacturing by the current government with initiatives like 'Make in India,’ the manufacturing base for consumer durables is likely to expand in India. Apart from 'Make in India’ initiative, various other government initiatives and renewed liberalisation stance undertaken by the current government are also expected to benefit the sector as a whole. The liberalisation policy favours incremental foreign direct investment (FDI) and that augurs well for the sector.
A considerable size of consumer demand for consumer durables comes from urban areas. Almost 2/3 revenue in consumer durable sector is generated from urban population and rest 1/3 is generated from rural population. Urbanisation is the key trigger for the sector and more and more people migrate to large cities for employment opportunities.
Chitij Jain of Rudra Shares says, “Implementation of the 7th Pay Commission recommendations would boost demand in the consumer durables sector, which has witnessed sluggish sales in the last couple of years. With this consumer spending will be on the rise owing to an increase in income levels by 23.55 %. With rise in disposable income and scaling of e-commerce, consumer durable industry is expected to grow by 15 % in this fiscal. This is great positive for the consumer durables industry since this will definitely spur demand for discretionary products.”
Experts also believe the government's rural electrification emphasis will also help the sector tremendously, especially sales volume for refrigerators and washing machines will go up steadily due to power supply reaching further corners of rural India.
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Indian Consumer Electronics Market
Consumer electronics segment in this sector includes TVs, DVD players, home theatre systems, MP3 players, audio equipment, digital cameras and other household appliances.
Fast growing and large Indian consumer electronics market is import driven with strong local demand being the major growth driver for the industry. The Indian electronics manufacturers will also benefit from the increase in cost of manufacturing of alternate markets.
The consumer electronics market which stood at USD 121.48 billion in FY 2014 is expected to reach USD 400 billion by 2020 thus expected to grow at 21.97 per cent CAGR.
National Electronics Mission set up by GOI to implement various initiatives and various programmes of the National Policy of Electronics (NPE) will also be a boost for the sector.
NPE will focus on domestic electronics hardware manufacturing segment while aiming at making the industry a USD 400 billion industry by 2020. NPE has a set objective to create an ecosystem for a globally competitive Electronic System and Design and Manufacturing (ESDM) sector in India with an aim of achieving a turnover of about USD 400 billion by 2020. To achieve such a lofty goal, the industry will need an investment of about USD 100 billion. With such investments the sector will be able to employ around 28 million people at various levels. Special facilities like Electronics Hardware Technology Parks will help industry grow its exports. Units of companies that are set up to export its entire production can set up their facilities in the Electronics Hardware Technology Parks and avail benefits provided by the government.
Challenges for the sector
Higher costs
The industry is marred by higher costs which affects not only the profitability but also the viability of various indigenous local players in the sector. Higher cost of capital, higher manufacturing cost and other costs are the key disabilities for the sector.
The cost of capital for the local manufacturer at 12 to 14 per cent is on the higher side when it compares to the global players who are able to raise capital at not more than 6 to 7 per cent which is the global average. The higher cost of working capital and capex related financing leads to higher cost of finance for the local manufacturers which pushes the break even for new set ups.
Due to higher real estate prices and inadequate availability of power and reliability on power, the cost of doing business goes up for manufacturers in India. The frequently changing energy efficiency norms forces manufacturers to focus on high ratings products which involves heavy investments.
The problem with Indian consumer durable manufacturer is that the Indian brands are not globally recognised and hence attract heavy advertisement expenses and also to keep demand growth floating for the products the consumer durable companies have to launch various schemes to attract buyers and make the product affordable by dolling out "buy now pay later" kind of schemes.
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Under developed local supplier base
There is inadequate availability of components in India which hampers the consumer durable manufacturers’ volumes. The inadequate components availability is due to lack of manufacturing activity in the components segment in India. Also there is no special trading hub to facilitate imports of components in large quantities. This leads to longer supply chain for components which in turn leads to higher inventory and carrying costs. Due to low manufacturing, locally the imports constitute almost 60 to 70 per cent of input in major appliances. The few Indian component manufacturers that act as suppliers are not able to compete with the manufacturers in South East Asia and China.
Poor Infrastructure
India lacks in basic infrastructure which is a hurdle not only for the consumer durables manufacturers but also for any other manufacturing industry. The basic infrastructure like roads, water, electricity, telecommunications, ports and logistics is missing in India.
Another hurdle for the sector is the poor rating of India on the ease of doing business in India. India intends to scale up in ranking on ease of doing business in India but the painful fact remains that the country's procedural and regulatory clearances are time consuming and complex. It may take at least one year to set up a new plant and almost six months to make new production line fully operational. And there are unpredictable but strong political interventions mainly in the parts of southern, eastern and north-eastern parts of India dampening the spirit of the investors, manufacturers.
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Dr Mahesh Gupta, Chairman and Managing Director of Kent RO, a significant player in the consumer durables sector responds to questions raised by DSIJ.
Q1. Kent RO is the market leader in the water purifier segment with 40 per cent market share. What is Kent Ro doing to increase and consolidate its market leadership in the water purifier segment?
Kent focuses on constantly improvising its technology and product line up with innovative solutions, and offers the consumers the World’s Best RO water purifiers. We also endeavour to spread awareness about the threats from consuming contaminated drinking water and the importance of purifying one’s drinking water to prevent oneself from water borne diseases.
Q3. How do see the impact of 7th Pay Commission recommendations’ implementations and GST Bill being implemented on this sector?
Implementation of the 7th Pay Commission report will leave the middle class with more disposable income and any increase in their spending power will positively impact the penetration of our products.
And implementation of the GST bill will benefit not only us, but all industries as the cascading taxation burden will reduce and may lead to supply chain optimization. Eventually the benefits of this structural reform would trickle down to the consumers.
Q4. Kent has a strong foothold in the Indian market today with a wide network with over 1500 distributors, 10000 dealers and over 500 direct marketing franchises. What is the key, in your view, to increasing and retaining the distributor network and how important is the distribution network for a company like Kent RO?
For retaining the wide distributor network, it is important that our business partners make profit from selling our products. Besides offering world class products, we focus on aggressive promotion through various channels of advertising, so as to strengthen the brand and create a demand. The distribution network reaps the benefits as the consumer comes to them with a positive frame of mind for Kent’s products.
Q5. Is Kent RO able to leverage on the digitisation wave in India? What per cent of your total sales happen online and are you planning to increase your digitisation spend?
The growth in sales from ecommerce platforms is outpacing the growth from any traditional channel. Our promotion strategy is also evolving with the changing scenario and we are investing in the digital media as well.
Hope for the industry
Ease of doing business
Several measures taken by the current government intends to amend the situation on ground and facilitate ease of doing business considerably. Proposed e-Biz portal will facilitate and integrate 14 approvals in one go and online central excise and Service Tax registration be done in two working days , several such measures are expected to further ease the red-tapism and paper work
GST Bill
In the ongoing monsoon session of Parliament, the probability of GST Bill being passed is very high with the main opposition party Congress showing signs of convergence with the NDA government. In all likelihood the GST system will start being implemented by April 2017. This augurs well for the consumer durable manufacturers in India. A uniform tax code is something the global manufacturers, especially American consumer durables manufacturer in India have been asking for. GST system will give lot of confidence for global manufacturer on reform front and will help India attract foreign investments.
Fostering R&D and Innovation
With Atal Innovation Mission (AIM), the GOI intends to promote research driven entrepreneurship in India. The government has earmarked almost Rs 1,500 million for R&D and innovation.
Policy support :-
a. Electronic Manufacturing Clusters
b. Modified Special Incentive Packaging Scheme (MSIPS)
c. Merchandise Exports from Indian Scheme (MEIS)
d. Export Promotion Capital Goods
Growth Drivers for the consumer durables
a. Rise in disposable income
b. Rise in organised retail
c. Growth in rural demand
d. Urbanisation trend in full swing
e. Increasing brand awareness
f. India seen as global manufacturing destination
Challenges for the consumer durables
a. Lacks of economies of scale for domestic manufacturers
b. Competition from Chinese and South East Asia manufacturers
c. Capital intensive nature of business
d. Ease of setting business and running them
e. Lack of Infrastructure
f. Cost of capital
Solution for Industry problems
a. Building local scale by driving domestic consumption
b. GST implementation with additional taxes by states and Octroi
c. Incentivize component manufacturing to improve local supplier ecosystem
d. Attract global OEM and component manufacturers
e. Improve ease of doing business in India and attract investments in the sector
Digesh Shah, Research Analyst, Veracity Financial Services
We believe that there are lot many opportunities to invest in this sector at current juncture. Looking at the current macro as well as micro economic environment, we are focusing on consumer durable segment, where we do foresee excellent growth opportunity in terms of volume as well as margin compared to other segments.
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Symphony is our top pick in the sector with the rationale being:
Financial:
1. Profit Margins: The company enjoys highest profit margin among peers. For last 4-5 years the company has enjoyed a PAT margin of more than 20%, which is highest among peers.
2. Debt Free Company: Since 2013 the company has zero debt that strengthens the balance sheet for Symphony. Being debt-free, the company is in excellent position to grow both organically and even open to grow in-organically.
Non-Financial:
1. The 7th Pay Commission: Recently recommended 7th pay commission augurs well for the stocks and help increase the volumes.
2. GST Bill:
The passage and implementation of GST Bill will help the sector in general which is marred with significant number of unorganised players. It is expected that the organised players like Symphony will see a boost in volumes by capturing the market share of unorganised players. That makes Symphony an excellent opportunity to play on the GST theme.
Chitij Jain, Senior Research Analyst, Rudra Shares
Growing purchasing power, rising influence of the social media, wage hike with push to capital expenditure will help achieve 8% growth with implementation of 7th Pay Commission recommendations have enabled Indian consumers to splurge on good things.
Also, Government of India has increased liberalisation which has favoured foreign direct investments (FDI) combined with policies such as National Electronics Mission and digitisation of television and setting up of Electronic Hardware Technology Parks (EHTPs) is expected to boost the growth for this sector.
Our take:
There is a trend emerging where India is increasingly perceived to be the manufacturing destination for global players. The broader trend where India is trying to grab global manufacturer's attention should help consumer durable sector. The benefits derived by the sector will depend on the impetus and right support provided by the government. Clearly the Indian brands have the potential to become leading consumer durable global brands. The key determining factor for the growth will be the ability of Indian manufacturers to add value to the goods manufactured locally by the consumer durable players.
To realise the full potential of 'Make in India,' the country will need to build volumes and increase local base which will happen only if the consumer demand increases. The exports will increase only if the cost of production is lower compared to its competitors sitting pretty in Asia. If India is able to promote and incentivise component manufacturers in India, it would be a game changer for the industry as it will help build the supplier ecosystem. Once the supplier ecosystem is in place, it in turn will help attract OEM (original equipment manufacturer) and component manufacturer as well. Lowering cost of finance and ease of doing business will only add flavour to an already acrobat sector that is consumer durable sector.
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Stock recommendations
Titan
Titan today is the 5th largest watch maker in the world with more than 1283 stores and almost 1.72 million sq ft of sales area. The revenue for the firm is approximately $2 bn with the market cap being at around $4.5 bn. The company boosts of more than 11k multi brand outlets.
The company has recently in the month of May acquired majority stakes in Carat Lane Pvt Ltd. Carat Lane is leader in online jewellery sales in India and sells its products online through its website caratlane.com and mobile app.
Titan can expect to gain from the acquisition by adding of a new customer profile to the existing portfolio and developing significant capabilities in the e-commerce space.
The company has been disappointing recently with its performance on both the revenues and margin front. Titan has delivered a CAGR of 6 per cent since 2011-12 as far as its net income from operations is concerned. The income from operation stood at Rs 11,264.53 crore for FY16 versus an income of Rs 11,903.21 crore in FY 15. The profit after tax has delivered a CAGR of not more than 4 per cent during the similar period. The net profit margins for the company stood at 6.21 per cent for FY16 compared to 6.91 per cent for FY15.
Symphony
Symphony is a world leader in evaporative air coolers and is a market leader in India. The company is in news lately for its launch of much awaited wall mounted cooler. The innovative product is touted to be a game changer with Symphony expected to further consolidate the market leadership.
The company's asset and capital light model is a unique strategy working for the company. A leader in terms of innovation & brand and category status the company is in sweet spot to grow substantially.
The total income from operations stood at Rs 414.85 Crore for FY 16 Vs Rs 0.01 crore for FY 15. The net profit stood at Rs 123 crore for FY 16. The net profit margin for FY 16 stood at 29.64 vs 21.81 for FY 15.
The profit after tax delivered a CAGR of 25 per cent over a period of 2010 till 2016. For the similar period the gross revenue grew by an impressive 23.47 per cent.
Whirpool India
Whirlpool India is one company with strong financials, is debt free and cash rich. The company grew by 17.51 per cent in terms of profitability in FY 16 and has grown at a CAGR of 19.4% from last 3 years. Cash availability as on March 31, 2016 has reached up to ` 856.30 crores & other income at ` 54.17 crores for FY 16.
The total income from operations stood at Rs 3,488.12 crores for FY 16 versus Rs 3,293.78 Crores for FY 15. The Profit After Tax of the company stood at Rs 247.38 Crores for FY 16 vs Rs 210.51 Crore for FY 15. The net profit margin improved for FY 16 at 7.09 vs 6.39 for FY 15.
Whirlpool India has diversified its product portfolio to washing machine, air conditioners, microwave oven, induction cook top etc.
Kitchen Studio and Whirlpool RO Water purifier are the two key products for the company. Kitchen Studio is an interactive tool designed to help visualise dream kitchen. Whirlpool RO water purifier is the India's first in its class that comes with the WQA Gold Seal on all of its internal filters.
Nilkamal
The company on growth trajectory is set to benefit from the increasing disposable income with resident Indians and also the change in lifestyle where people in India are willing to spend more when it comes to luxury living.
Conservation of energy and technology absorption are the key drivers helping the company cut cost. The Company continues to enjoy the market leadership & holds the market share of approx. 32%, which is double over its closest competitor.
The net profit margin improved for FY 16 substantially at 5.55 per cent for FY 16 compared to FY 15 margins which stood at 2.37 per cent. The company registered operating Profit of ` 22,376 lacs against ` 14,381 lacs in the previous year, an increase of 56% over the previous year.
The operating margin for the year was 12% as compared to 8% in the previous year. The operating margin of plastic business stood at 14% compared to 9% in previous year. The company has made net profit after tax of ` 10,389 lacs as against ` 4,246 lacs, an increase by 145%.
TTK Prestige
TTK prestige, a unique combination of manufacturing, design and marketing system is a turnaround story to bank on.
Excellent product development capability and it unique model of exclusive retail outlets are its key strengths. Strong focus on innovation by the company management reassures investors of higher growth for the company. Category/Model Mix, improved capacity utilisation and favourable commodity price movements helped margin improvement. Except Kerala all other markets registered growth during FY 16. New product launches and focus on e-commerce is expected to drive growth for the company.
The total income from operations stood at Rs 1,525 Crore in FY 16 vs Rs 1,388.29 crore in FY 15. The net profits for the company stood at Rs 114.82 crore vs Rs 92.32 crore. The net profit margins for the company improved at 7.52 per cent for FY 16 from 6.64 per cent for FY 15.