Key Sector Data   Market Cap (Rs Crore) 54521 Market Cap (USD Million) 7932 P/E 45.5 P/BV 6.7 Debt/Equity 0.2 ROA (%) 6.3 ROE (%) 14.7 EV/Sales 2.0 EV/EBITDA 23.6

*Videocon Industries and Hanung Toys is excluded and MIC Electronics included aggregate key sector data and graph

The scrapping of Rs 1000 and Rs 500 notes, an attempt to curb black money, counterfeiting and terror finance, has led to a cash deficit as banks struggle to replace the demonetized notes. The move has dashed hopes of consumption jump in Asia's third-largest economy, which was looking up with a good monsoon and implementation of the Seventh Pay Commission's recommendations. Also, consumption that would have been fuelled by black money will come to a halt as well.

Prior to demonetization, industry players we were bullish on the discretionary consumption theme on a mix of cyclical as well as structural factors. Corporate earnings that were poised for a consumption-fuelled take-off on the back of a good monsoon and sharp wage hikes have been brought back to ground by the sudden withdrawal of high-value currency notes as the effects of a severe cash crunch ripple through the system.

Consumption-led firms are the first to feel the heat as consumers scramble for cash, impacting demand for consumer durables and discretionary items. In the case of ACs, Blue Star has indicated that cash sales account for 30-40% of the overall sales. Several dealers especially in the Tier II and III towns do not have card swiping facility with them. Most of the big brands like LG, Samsung, Godrej, Hitachi, Whirlpool and Videocon have launched offers that have helped in reducing the impact of demonetization

Mobile handset sales have crashed since the government demonetized old 500-1000 notes, pushing handset makers' average daily revenue down by half from Rs 350-400 crore. Mobile phone makers plan to cut production by up to 50%, with some even considering laying off factory workers on the face of falling sales following the demonetization announcement. About 1.2 lakh direct and indirect jobs have been created by around 40 new handset manufacturing units that have come up in the last 12-18 months under the Make in India initiative. Now many of these jobs appear to be under threat as brands such as Panasonic, Micromax, Intex, Lava, and Karbonn consider production cuts as they brace for staggering shipments on inventory pileup in the market.

Production index of consumer durables inclined 2.3% in August 2016 over the year, while inclined marginally by 1.3% over the month. The production index inclined 6.3% during period April – August 2016 as against the 7.5 % incline of April – August 2015.

Highest weigthage items - passenger cars showed growth while gems & jewellery showed decline. Production of passenger cars increased by 5.85 % in August 2016 compared with a 10.49% increase in August 2015. Production decreased by 0.14% during period April – August 2016 as against a 9.14% increase in the same period a year ago. Gems and jewellery production decreased by 19.62% in August 2016 compared with a 170.73% increase in August 2015. Production grew 0.44% during period April – August 2016 as against a 68.80% incline in the same period a year ago.

Production of room air conditioner has shown highest growth, it has increased 59.14% in August 2016 compared with 20.49% decrease in August 2015. Production grew 29.23% during period April – August 2016 as against 8.23% increase in the same period a year ago. Along with it, refrigerators and scooter & mopeds saw good production growth. Production of refrigerators has increased 53.81% in August 2016 compared with a 25.46% decrease in August 2015. Production grew 17.23% during period of April – August 2016 as against 9.19% decrease in the same period a year ago. Production of scooter & mopeds has increased 33.32% in August 2016 compared with a 11.92% increase in August 2015. Production grew 26.85% during period of April – August 2016 as against 8.36% increase in the same period a year ago.

There was fall in production of mixers & grinders by 53.28% in August 2016 compared with a 243.72% increase in August 2015. Production de-grew 67.07% during period April – August 2016 as against 357.30% increase in the same period a year ago. Production of water meter of all kinds decreased 44.31% in August 2016 compared with a 16.75% increase in August 2015. Production de-grew 15.54% during period April – August 2016 as against 3.13% decrease in the same period a year ago.

TV buyers had far wider choices this Diwali

Prospective TV buyers were wooed by new players such as LeEco, Micromax and Intex, brands that have emerged as serious alternatives to established TV manufacturers such as Samsung, Sony, LG, Toshiba, Videocon and Panasonic in recent times. The strategy adopted by newer entrants is to deliver feature-rich products at affordable prices. In a crowded market, where there is so much to choose from, disruptive pricing is inevitable to target market share gain. The price differential between the newer names and the established brands can vary between 15 and 35% depending on the screen size. The domestic TV market today is similar to the smartphone market seen in 2013, where players like Micromax brought down price points and democratised the category.

Industry players believe there will be more of low price offering as technology increasingly becomes accessible to all. TVs are the most promising consumer electronics category in India, given that they remain a key provider of information and entertainment in many households. TV sales are expected to grow 14% touch 16.5 million units by the end of calendar year 2016. One way these new players have managed to keep prices low is by taking the online-only route which keeps a check on distribution expenditure. For example, yesteryear's famous brand BPL which is back in the market after 10 years, has taken online only route for many of its models as it finds physical presence a costly proposition.

Indian Cellular Association seeks a 10-year tax holiday to scale up mobile manufacturing

Mobile industry body Indian Cellular Association (ICA) has sought a 10-year tax holiday to scale up mobile manufacturing to international standards to help India become competitive as against preferred destinations like China and Vietnam. ICA recommends that the 10-year tax holiday may be granted on a block of 15-20 years on all profits and gains under Section 80 IA of the IT Act, 1961, for manufacturing or rendering of services in or in relation to mobile handsets, parts, component accessories and various core components subject to fulfilment of value addition norms. The industry body acknowledged that some of the tax measures of the government led to growth of mobile handset manufacturing by approximately 185% in value and 90% in volume in 2015-16 over 2014-15.

The industry aims to produce 50 crore mobile handsets annually in the country with valued around Rs 1.5-3 lakh crore by 2019 and production of 125 crore handsets with an estimated value of Rs 15 lakh crore by 2025-26. The industry has set export target of 12 crore handsets by 2019-20, which can go up to 20 crore by 2019-20, and 80 crore by 2025-26, as per the ICA submission. Currently, India does not offer income tax incentives on manufacturing of mobile handsets and components

In the immediate term, demand growth for appliances would slow down as cash transactions account for 70-75% of the overall sales of consumer durables. Within brown goods, 30% of demand is generated from tier I/rural and semi urban areas. Sales from these areas is likely to be impacted more severely than the tier I counterpart in the near term. However, over the medium to long term, the impact on the sector will be neutral as penetration for most durables in India remains low and consumers would adjust to other forms of payments. Being low ticket items, the impact in the medium term for brown goods (like fans, mixers etc.) could be less severe. Moreover, unlike real estate, consumer durables are not bought for speculative reasons. In the case of room ACs, close to 75% of buyers are first time and purchases are for captive use. Hence, the inherent strength in the demand remains intact but there could be a temporary blip in the near-term. ACs, Front loading washing machines, High end TVs and Refrigerators may take longer to recover, because of negative sentiments arising out of demonetization.