Key Sector Data   Market Cap (Rs Crore) 53329 Market Cap (USD Million) 7867 P/E 44.5 P/BV 6.5 Debt/Equity 0.2 ROA (%) 6.3 ROE (%) 14.7 EV/Sales 2.0 EV/EBITDA 23.1

Demonetisation has taken a toll on the sales of prime consumer durable retailers such as Vijay Sales, Croma, eZone and Next Retail, all of whom are now tightening their budgets when it comes to buying fresh inventory from consumer durables manufacturing companies like LG, Samsung, Godrej and Voltas.

According to industry players, sales have derailed despite organized retailers trying to push EMI schemes and it will become a serious issue for the high-end durable brands who might also have to shut down production. Mobile phones are the only category which seems to be selling faster than the rest of the consumer durable categories. Smartphones is growing the fastest at more than 30% even post demonetisation at retail stores.

According to industry players, MNC players like Samsung are believed to have halted production in certain categories and have prolonged their maintenance period at their factories when they are supposed to refurbish and repair their machinery by exceeding a week, as they do not want to undertake any production at this stage. Others like LG are being cautious and would try and practice ‘just in time' inventory control.

According to Godrej Appliances, as demand has dropped by nearly 40%, they have decided to cut down production across all our categories like air-conditioners, washing machines and refrigerators by almost 20%.

According to AC manufacturer Voltas, in November 2016, sales have dropped by 50%. If this trend continues in the long run, Voltas may have to cut down on production.

Industry Scenario

India's consumer durables industry is expected to grown from $ 9.7 billion in 2015 to $ 20.6 billion by 2020 and become the fifth largest in the world by 2025. About two-thirds of India's consumer durables are currently sold in urban markets. The most popular consumer electronics are color television sets. Electric fans, refrigerators, washing machines and air conditioners are popular selling products. The consumer durables industry can be categorized into two segments: Consumer electronics (brown goods) and Consumer appliances (white goods)

• Consumer electronics (brown goods) – such as televisions, laptops, cameras, computers, and audio systems
• Consumer appliances (white goods) –washing machines, kitchen appliances, microwave ovens, cleaning equipment, air conditioners, and fans

With the continuous inflow of disposable income and the advancement of technology, the need for the varied consumer durable goods are increasing. This in turn is leading to a strong competition among the different consumer durable brands available in the nation as well as the price gap between the same consumer goods of different companies are narrowing down. Day by day these goods are becoming cheaper. The rural and urban market of consumer durables has been growing at a rate of around 15 % on an average.

Sales of consumer durables and appliances more than halved year on year in November 2016 even as the government's demonetization drive have severely impacted the industry. The cash crunch has impacted the consumer durables and the mobile phone market as inventory levels are piling up with retailers. For categories like refrigerators, washing machines, microwave ovens and televisions, where half of the sales were transacted through cash, especially in smaller cities, the impact has been significant. November, when it was announced, the impact was a bit low because people were still using the old currency notes and exchanging them. However, December has seen a bigger impact especially in the Tier-III and Tier-IV towns where it has been impacted to the tune of more than 50%. And even in the bigger cities, the impact or the effect of this is about 25-30% on consumer durable business.

Even trade partners are scared of stocking up because probably the secondary sales are affected in a big way, so they are holding back inventories and even the brands are planning to cut down on their inventory costs. Consumer products companies production cycles are down more than 20% due to inventory piling up at wholesale points and destocking by the supply chain after the note ban created a cash crunch across the country. All of major electronic retailer companies like Vijay Sales, Croma, eZone and Next Retail are tightening their budgets when it comes to buying fresh inventory from companies. Demonetization has taken a toll on the sales

The drop in sales has forced some of the consumer durable companies to cut down the production or else they will stuck with unsold inventories since most retailers have stopped buying from them. Godrej Appliances have decided to cut down production across all categories like air-conditioners, washing machines and refrigerators by almost 20%. Samsung are believed to have halted production in certain categories and have prolonged their maintenance period at their factories. While the Centre is asking people to use digital payment services to move to a cashless economy, sales of mobile phones have plummeted in the last three weeks after the demonetization drive began.

Production index of consumer durables inclined 14% in September 2016 over the year, while also inclined marginally by 14% over the month. The production index inclined 7.6% during period April – September 2016 as against the 7.7 % incline of April – September 2015.

Highest weigthage items - passenger and gems & jewellery showed growth. Production of passenger cars increased by 18.36 % in September 2016 compared with a 1.40% increase in September 2015. Production increased by 2.95% during period April – September 2016 as against a 7.77% increase in the same period a year ago. Gems and jewellery production increased by 31.88% in September 2016 compared with a 147.45% increase in September 2015. Production grew 6.73% during period April – September 2016 as against a 80.25% incline in the same period a year ago.

Production of wollen carpets has shown highest growth, it has increased 148.97% in September 2016 compared with 58.41% decrease in September 2015. Production grew 25.27% during period April – September 2016 as against 0.49% increase in the same period a year ago. Along with it, battery charger and pvc/plastic suitcase saw good production growth. Production of battery charger has increased 65.63% in September 2016 compared with a 61.79% decrease in September 2015. Production de-grew 3.14% during period of April – September 2016 as against 5.76% increase in the same period a year ago. Production of pvc/plastic suitcase has increased 38.73% in September 2016 compared with a 22.61% decrease in September 2015. Production de-grew 26.75% during period of April – September 2016 as against 6.75% increase in the same period a year ago.

There was fall in production of mixers & grinders by 59.22% in September 2016 compared with a 214.07% increase in September 2015. Production de-grew 65.63% during period April – September 2016 as against 321.98% increase in the same period a year ago. Production of electric meter of all kinds decreased 36.82% in September 2016 compared with a 17.90% decrease in September 2015. Production de-grew 22.16% during period April – September 2016 as against 3.99% decrease in the same period a year ago.

Single-door refrigerators may turn costlier on stricter BEE norms

s stricter energy labelling norms kick-in from January, prices of direct cool refrigerators are expected to shoot up by Rs 2,000-4,000. Industry players believe this would impact the demand for 5-star and 4-star-rated direct cool refrigerators, also known as single-door refrigerators.

While the industry is already dealing with the dip in demand due to demonetization, the new energy labeling norms will act as double whammy. The Bureau of Energy Efficiency (BEE) has tightened norms for single-door refrigerators by two levels. This will mean that in January the existing 5-star and 4-star-rated direct cool refrigerators will be downgraded to 3-star and 2-star, respectively. The industry will need to introduce more efficient and costlier 5-star and 4-star-labelled single-door refrigerators to meet these new norms. Nearly 75% of the sales in the direct cool refrigerator segment currently come from the 4-star and 5-star models. But the new norms will push the costs up for manufacturing the 4-star and 5-star direct cool refrigerators. The new energy labeling norms as well as the increase in commodity prices may lead to increase in costs for direct cool refrigerators by as much as 10%. This may lead consumers to increasingly opt for 2-star and 3-star rated single door refrigerators. Since refrigerators do not consume a lot of electricity, industry players believe consumers may not want to pay a premium to shift to more energy-efficient ones.

Panasonic remains bullish

Panasonic India remains bullish about growing at more than twice the market rate for the next three years even though there are some short-term blips given the ban on large denomination currency notes. The company announced an investment of Rs 115 crore for setting up a factory in Jhajjar, Haryana for manufacturing refrigerators. It is also strengthening its R&D function in order to expand its appliances business in India. The factory will have capacity for 500,000 units and be operational by November 2017 and it would help the company double its sales in the refrigeration business from the targeted Rs 330 crore in FY 2017 to Rs 600 crore in FY 2018.

In FY2016, Panasonic India recorded sales of Rs 8700 crore and is expecting to close the FY2017 with sales of Rs10800 crore. The company is growing at a compounded average rate of 25% annually for the last three years and hopes to drive growth at a similar rate for the next three years. The company will post a small profit this year as it had broken even two years ago.

LG Electronic focusing on reviving growth

LG Electronics' India sales growth tapered down by 4% to Rs 14498 crore in FY2016, growing below the market rate attributed to increased competition from newer brands, shying away from online sales and failure to revive smart phone business. The low growth rate last fiscal comes at a time when the home appliances market grew by around 8%, and the television market grew by 18%. The company has constantly grown, across categories, and has been ahead of competition in the consumer durables business. Smartphone is indeed an important segment where the company has recently started manufacturing its handsets in India to localize them. The major chunk of LG India's revenue comes from distribution to smaller stores and its exclusive showrooms

The company has rejigged its senior leadership team, as it tries to spruce up business. It has made changes in about 30 key roles at its local headquarters as well as regional and branch levels, apart from deciding to decentralize the marketing function to focus on localized initiatives and consumer promotions

The company is the market leader in refrigerators, washing machine and microwave ovens, while it is among the top two brands in LED televisions and air-conditioners.

Demonetization has taken a toll on consumer durable industry. This industry is extremely dependent on cash and hence there will be a short-term impact of demonetization. The sector is in a state of flux due to demonetization and question mark on GST implementation. The only silver lining to the above two dark clouds could come in form of largesse announced for rural and semi-urban segment and increase in income tax slab in the Budget. However, given the 7^th pay commission hand-outs and good monsoons, demand will pickup. Also, industry players are coming up with innovative finance schemes and offers to lift the demand. About 30-35% of the sales in the sector are through consumer finance and the majority of the interest costs at 80-85% on these financing schemes are borne by the manufacturer, making transactions attractive for the consumer. Industry players expect the impact of demonetization on the industry should be around 2-2.5%. The near-term impact of demonetization could be on the secondary sales but long-term is still positive for the sector. Demonetization coupled with upcoming GST will ensure higher tax compliance for the unorganized segment and create a level playing field for large organized brands in the long run.