Why consumer durable stocks may disappoint investors

Present valuations of the leading companies in the consumer durables space – Voltas, Whirlpool, Blue Star, Hitachi and Lloyd (embedded in Havells) – are ripe for disappointment. Valuations are pricing in estimates, which are very optimistic, primarily for the penetration-led growth rates and underestimating the competition and ability to premiumise. Whilst Voltas is set to gain market share in washing machines and refrigerators, we foresee a marginal market share loss in room air conditioners.

Similarly, Whirlpool, which leads the value for money positioning in the washing machine and refrigerators, could be the one losing ground to Voltas, Lloyd, and other tail brands.

Against this backdrop, we believe investors should consider Indian EMS players such as Amber, a key ODM supplier to most RAC brands and a key beneficiary of the import substitution push by the GoI. Amber, through its scale and capabilities, will grow in segments apart from RAC and also gradually export.

Why will growth rates for consumer durables disappoint
Large Indian appliances appear significantly under penetrated compared to countries like China. However, this under-penetration needs to be looked at in the context of multiple India-specific factors.

Key factors deterring Indian appliances growth are:
1) High share of low-income households, which form 84% of the Indian population
2) Low urbanization at 35% vs China above 65%
3) Factors like low women labour participation, which is at 20% for India vs 70% for China.

The preferences of Indian customers with respect to appliances are clear. TV and mobile phones are preferred over other categories like refrigerators owing to their perceived entertainment utility (>50% penetration for both categories). Refrigerators in India are income-elastic, with washing machines and ACs remaining significantly under-penetrated.

Washing machines continue to remain under-penetrated owing to the availability of cheap house help and low women labour participation which is at 20% vs 60%+ for countries like China; could be even lower for suburban and rural India. ACs continue to remain under-penetrated owing to the high overall cost of ownership (mainly power) despite scorching heat in most parts of India. Since large appliances remain a discretionary spend, the shift in population from poor/low-income households to middle-income households is also a key factor for appliance growth ahead.

China early on incentivized manufacturing and consumption
In China, favourable government incentives and policies drove foreign capital to invest in appliance manufacturing. After this, we saw home-grown Chinese companies such as Midea learning the tricks of the trade from their global partners. Gradually, these companies struck out on their own. Presence of a large domestic market aided scale and innovation.

China also focused on creating a large vendor base and improved its supply chain significantly. This aided them to become a key export player and thus become a ‘factory for the world.'

Manufacturing growth across sectors led to a massive 50% shift of the Chinese population from poor/low-income groups to middle-income groups. Astronomical appliance growth was a consequence of these factors in China. A similar opportunity exists for India by coupling top-down investment (PLI schemes) with domestic innovation.

Going forward, India needs to drive technology transfer and ease out the logistics inefficiencies. While we remain hopeful, this is easier said than done. Over the last 10 years, we saw Indian washing machines, and refrigerators grow in high single digit, with ACs outperforming with double-digit growth. We don’t expect this trend to materially reverse over the next decade unless some of the above-mentioned factors change.

Voltas: Winning new ports, losing old forts?
After a decade of accelerating RAC market leadership, Voltas now faces challenges of increased competitive intensity (Lloyd: market share importance and Blue Star: afresh focus residential) and supply chain shift but more importantly, transition to manufacturing-cum-marketing brand.

Attempts to pivot to a diversified consumer durable brand appear promising with an impressive partner in Arcelik, but market share climb would be steep for efforts on marketing/SKU addition and distribution expansion. We built a market share of 10% for Voltas Beko by FY29E and EBITDA breakeven only by FY26E, a tough task after the initial few percentage points of market share wins. Other businesses remain unexciting and the narrative of the spin-off is embedded in multiples. We build in 16%/21% revenue/EBITDA CAGR for UCP business (on a low base of FY22) and factor 200 bps market share loss over FY22-25. Voltas trades at 39x cons. FY24E EPS, leaving no margin of safety.

(Nitin Bhasin, Co-Head and Head of Research, Ambit Institutional Equities)