Key Sector Data   Market Cap (Rs Crore) 52027 Market Cap (USD Million) 7776 P/E 43.5 P/BV 6.4 Debt/Equity 0.2 ROA (%) 6.3 ROE (%) 14.7 EV/Sales 1.9 EV/EBITDA 22.5

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

About 35 new smartphone factories have set shop in India in the past two years, with a production capacity of about 18 million devices a month, since the central government announced a tax rationalisation for electronics products to boost local electronics manufacturing.

The new manufacturing units have generated employment for 37,000 people and led to fivefold increase in capacity. Overall mobile phone production capacity was estimated to about 68 million units in 2014, 100 million in 2015 and 350-400 million till July 2016. With India becoming a global hub for mobile phone manufacturing, the government has set a target of 500 million devices a year by 2020, riding on an incentive policy and availability of good talent.

According to Indian Cellular Association (ICA), the government has set up a task force with a vision to produce 500 million phones by 2019-20 and create five million jobs. The aim of the initiative is to export 120 million phones founder and president. ICA expects the industry to reach Rs 3 lakh crore by 2020. The new units that have come up include that of Foxconn with five facilities, Micromax, Lava International, Intex Technologies, Videocon, Vivo Mobile, Celkon Mobiles and Flextronics.

According to the Electronics and Information Technology Minister, the mobile phone production in the country has doubled on the back of reforms announced in the 2016-17 Budget. Due to the initiatives announced in the budget, especially duty rationalisation, there had been a remarkable acceleration in the field of electronics manufacturing.

To boost domestic manufacturing, Finance Minister Arun Jaitley had proposed a hike in levies on components and peripherals like batteries and chargers. However, it was later rationalised after the industry players believed the hike in levies will hurt manufacturers as some of these parts have to be imported. The government had removed basic customs duty (10%) and special additional duty (four per cent) proposed on charger, adaptor, batteries and wired headsets.

Apart from phones, the reforms were helping domestic manufacturers to get into other areas like medical devices, consumer electronics, broadband equipment and set-up boxes.

Industry Overview

In the past three years, while there have been expectations of demand turnaround, industry is yet to see a pick-up in consumers' discretionary spending. FY16, mirroring this trend, was highlighted by several factors like subdued demand, including deflationary movement across commodity sectors, weak monsoon impacting rural spending, flat industrial production trends with period of fluctuating growth and another disappointment in corporate earnings expansion. Usage patterns of the industry are influenced by variables such as discretionary spending, inflation, interest rates, rural demand, agricultural growth, construction activity and weather patterns. India has the potential to become a leading global player in the electrical equipment sector depending on its ability to improve competitiveness, upgrade technology regularly, enhance skill availability, develop export markets and optimize demand potential..

During the year 2015-16, consumers' discretionary spending remained weak as a result of a further push back to the expected economic momentum. While inflation saw a declining trend, the complete benefit in terms of interest rate transmission has taken longer and may be expected to materialize only in 2016-17. As a consequence, housing demand and construction activity remained muted with potential consumers choosing to defer their decision making cycles. Another weak monsoon was a dampener on rural demand and spending capabilities.

Finally monsoon rains for 2016-17 have arrived and as per India Meteorological Department they will be above normal this year, boosting rural demand. This is positive news for consumer durables industry. Usually in a good monsoon year, the consumer discretionary sector starts outperforming the consumer staples from September onwards.

Indians are watching television on bigger screens with the 32 inch and above category emerging as the largest and fastest-growing segment in the flat panel market. The bigger screen size market now accounts for more than 60% of TV sales (flat panel) and the growth is being fuelled by affordable price points and rising aspirations. Market size for below 32-inch screen has been contracting by 7-10%. Smaller screen sizes 22-inch and 24-inch are not finding much favour with buyers as many people are going for up gradation. 32-inch is becoming the new entry segment. Less than 30% of the total HD LED televisions sold in the past year were smaller than 32 inches. Better viewing experience and compatibility of HD LED technology with 32 inches or above screen sizes is a major factor. More premium categories such as 40-inch and above are also growing.

Products from local brands such as Micromax, Intex and Vu Televisions are driving the growth of larger screen sizes as their products are available at affordable prices. A 32-inch flat panel TV from Micromax costs around Rs 14000 against Rs 23000 by Samsung, while a 40 inch screen comes for Rs 21500 while Samsung is priced at Rs 34000 - 35000. Local companies and private labels from retail chains such as Chroma are offering TVs at very low costs, sourcing panels from places such as China and Taiwan and then going for local assembly. A big contributor to the growth has also been the online market, which is aiding the reach of affordable TVs.

Samsung eyeing 35% share in the television market

Samsung, which announced a slew of new products across various price points, expects the television market to grow at a healthy pace this year on the back of a robust monsoon and seventh pay panel recommendations for government employees. Indias biggest consumer durable company, Samsung, is eyeing 35% share in the television market by the end of this year. The firm currently has 31% market share in the domestic television market. To ramp up its portfolio the firm has launched 44 new television models to stay prepared for the upcoming festive season in the country.

Production index of consumer durables increased 11.8% in April 2016 over the year, and by 0.5% over the month. The production index increased 11.2% during period April – March 2016 as against the 12.6 % decline of April – March 2015.

Highest weigthage items - gems & jewellery showed a good growth while passenger cars growth inclined marginally. Gems and jewellery production increased by 42.03% in April 2016 compared with a 0.10% increase in April 2015. Production grew 68.62% during period April – March 2016 as against a 6.99% incline in the same period a year ago. Production of passenger cars increased by 0.24% in April 2016 compared with a 12.49% increase in April 2015. Production increased by 4.16% during period April – March 2016 as against a 4.53% increase in the same period a year ago.

Production of calculators has shown highest growth, it has increased 164.46% in April 2016 compared with 29.31% decrease in April 2015. Production grew 50.28% during period April – March 2016 as against 18.33% decrease in the same period a year ago. Along with it, clock / watch / timepiece movement and wood furniture saw good production growth. Production of clock / watch / timepiece movement has increased 124.24% in April 2016 compared with a 16% decrease in April 2015.

Households spend highest on vehicles among durables

As per study by the National Sample Survey Office, households spent the highest proportion of their consumer durable expenditure on vehicles during 2014-15 (July-June). Within the durable goods category, households allocated the most to expenditure on transport equipment. In rural areas, expenditure on transport equipment accounted for 83% of total expenditure on durable goods when the purchase was done mainly for enterprise purpose. It was followed by expenditure on heating, cooling and electricity generation devices, information technology (IT) communication devices and productive equipment accounted for 4% of the budget separately. For domestic consumption, too, households allocated the highest share to transport equipment, at 45%. It was followed by jewellery (23%) heating, cooling and electricity generation devices and IT and communication devices (both at 7% each). A similar pattern was observed in urban areas. Expenditure on transport equipment accounted for a lion's share of total expenditure on durables, followed by expenditure on heating, cooling and electricity generation devices (about 8%) and IT and communication devices (8%) for enterprises and jewellery for domestic consumption

Outlook

The approval of 7^th Pay Commission recommendations is a big bonanza for over 1 crore central government employees and pensioners. This is positive news for the consumer durables industry as this will definitely spur demand for discretionary and aspirational products. Consumer spending will be on the rise owing to an increase in salary levels by 23%. With the rise in disposable income and scaling of e-commerce, the consumer durable industry is expected to grow by 15% in FY 2017. Overall sentiment for the industry is looking quite robust coupled with at par monsoon.

Strong construction demand driven by Government ambitious target of housing for all by 2022 will require 111 million housing units, increase penetration into Tier II and III cities and add to the demand. Easy access to credit and a rising middle class population with increasing levels of disposable income will fuel the demand for the industry. Roll out of GST will enable shift from unorganized to organized and also substantially reduce warehousing and logistics costs, and facilitate faster movement of goods across the country.