A blissful 2019 for consumer appliances industry
Elara Capital

The replacement cycle of consumer appliances market is shortening, which could drive growth in some product segments, boltering volume growth

A blissful 2019 for consumer appliances industry
A blissful 2019 for consumer appliances industry

Rising spending habits, improved electricity availability, technology advancement and evolving lifestyles are driving demand for consumer appliances in India. Exposure to global technologies and lifestyle has created a shift in perception, with consumer durables no longer just viewed as utility products. Indians today are seeking better designed products for comfort and convenience. For more insight on emerging trends, we organised a consumer durables conference, Ghar Maange More, recently where we invited contract manufacturers, consumer durables & electricals companies, modern retail stores and experts in the appliances & electricals industry.

A blissful 2019

The Year 2018 was expected to be washout year for the consumer appliances industry, owing to unseasonal rains, a weak festival season (Onam & Diwali) and floods in South India. The rise in customs duty and currency depreciation further dampened overall market sentiments. Looking at the trends of the past seven years suggest every bad year is followed by a good year. If this trend were to continue, which is believed by industry participants, 2019 would be a blissful year. The consumer electronics and household appliances market size currently stands at Rs 900 billion, according to Indian Brand Equity Foundation (IBEF), and is expected to post a CAGR of 8% to Rs 2 trillion by 2030.

Shortening of replacement market cycle

The replacement cycle of consumer appliances market is shortening, which could drive growth in some product segments. This is expected to bolster volume growth over the medium term. The replacement cycle has reduced over the past decade with TV at five years, washing machine at 8-10 years and mobile phones at 2-3 year.

Lights up on volume but down on prices; few firms to remain in the long run

India’s lighting industry is expected to grow by 15-20%, according to Electric Lamp and Component Manufacturers Association (ELCOMA), driven by strong volume growth due to shift to LED lighting from CFL & incandescent bulbs. However, increased competition, low barriers of entry, and fall in raw materials prices are leading to a decline in product prices. Although prices have hit bottom in LED bulbs, there is still a room to reduce prices in other LED luminaries by 10-20% due to change in design. In the long run, only 6-7 firms will remain in the lighting industry, just as in the CFL industry.

In-house manufacturing & outsourcing over imports

Lower penetration of consumer appliances goods, uptick in demand, sustained product quality, inventory management, rise in customs duty and currency depreciation have led companies in India to reduce dependence on imports and look to alternatives, such as domestic outsourcing and in-house manufacturing.

Online to grow faster than offline

In the home appliances segment, the online channel share is expected to jump two-fold to 7-8% in 2018 vs 3% in 2017. Further, the share is expected to rise to 10% by 2019 and 12% by 2020 according to the consumer durable company industry Online channel constitutes ~30% of total mobile phone market and expect its share to touch 40% by 2020. The online platform is expected to grow by 25-30% over the same period while overall industry to grow by 10%. Implementation of GST has led to better warehouse facilities, pickup in volume, cost efficiency and improvement in overall supply chain along with removal of price differences across states.

Crompton Greaves Consumer Electricals

Crompton Greaves Consumer Electricals (CG Consumer) is the demerged entity of Crompton Greaves, a leading capital goods company in India. Crompton is one of the oldest brands in the consumer electricals space in the country. The company was demerged in October 2015 and listed in May 2016. It has split its product portfolio into two business heads: 1) lighting & luminaries, and 2) electrical consumer durables, which covers fans, pumps and household appliances, such as geysers, mixer grinders, toasters and irons. Over the past two decades, it has become a market leader in fans, domestic residential pumps and street lighting. The company has six manufacturing units across four states: Goa, Gujarat, Maharashtra and Himachal Pradesh. It has 100,000 touchpoints. CROMPTON operates an asset-light business model with 50% of revenue from outsourcing. The company has 1,530 employees.

Key highlights

*The company has hiked prices in the LED bulbs segment by 2% in Q3FY19 vs expectations of 5%.

*Revenue growth in Q3FY19 is expected to be along similar lines in Q2FY19. Revenue grew by 8% in Q2FY19.

*The strategy is to recoup margin by 400bp in the lighting segment through cost reduction initiatives, such as 1) in-house design, 2) direct sourcing from China than aggregators in India, 3) purchase via eAuction, 4) indigenization of the LED lighting portfolio (LED bulbs outsourced at 20% in Q2FY19 vs 80% in Q2FY18), and 5) price hikes.

*Ad spend stood at INR 388mn in FY18 largely towards creating awareness in the minds of young population and attracting customers. However, ad spend currently is aimed towards communicating new, innovative and differentiated products.

*Reduction in the LED lighting prices is largely due to lower cost. The company does not anticipate another big price erosion in the LED lighting segment, which could impact margin.

*Initiated intervention (cross-selling of product portfolio) to increase distribution and reach. For eg, started promotion of fan dealer channels to drive increased sales of water heaters.

*Premium fans market constitutes 26-27% of the total market.

*Gross margin from lighting sales to EESL stood at ~15-16% as there was no marketing spend and lower distribution cost. Gross margin is lower in the government program for the lighting business, but hails similar on a net margin basis.

*The company would continue to focus on its existing product portfolio, where it believes there is a further scope to increased penetration, rather than adding new product categories. Within its existing product portfolio, the focus would be on driving sales from premiumization in fans & pumps and introduction of new & differentiated products in the marketplace (such as Antidust & Air360 Degree fans and LED lighting).

*After the launch of water heaters and air coolers in the appliances segment in 2018, the company is working on the kitchen appliances portfolio.

*Over the past 2.5 years, the company was able to save cost in the range of INR 1.0-1.2bn pa through various cost reduction measures.

*One of the highlights of the go-to-market strategy is to have a single distributor or maximum of 2-3 distributors in each state. The primary benefit would be to help in uniform pricing and ensure price stability across the markets.

Voltas

Voltas, a part of the Tata Group, is an engineering solutions provider and India's leading room air-conditioning company with a market share of 22.1% at multi-brand retail outlets in FY18. The company’s three business verticals are 1) electromechanical projects, engaged in turnkey projects, comprising HVAC, refrigeration & electrical power, 2) engineering projects that cater to sectors, such as textiles machinery & mining and construction equipment, and 3) unitary cooling products that assembles room & split air conditioners, commercial refrigeration & air coolers. Voltas entered into 50:50 JV with Arçelik AS (a household appliances subsidiary of Turkey-based KOC Group) to access the INR 350bn consumer durables market in India, which is growing at 10-12%, according to the management. The JV would launch products, such as refrigerators, washing machines (WM), microwaves and dishwashers under the brand, VOLT BEKO.

Key highlights

*Owing to a weak festival season and higher carrying inventory of 2.0-2.5 months in the room air conditioner (RAC), the company expects volume growth to remain weak in Q3FY19 but return to normal by March 2019.

*The past seven years’ data trend shows that every bad year is followed by a good one. The company expects 2019 to be a good year for the air conditioner industry in India. Accordingly, it expects Q1FY20 to grow by 18-20%.

*The RAC industry is expected to witness volume growth of 10-12% over the next five years.

*There has been the twin adverse impact of rise in customs duty in air conditioners (compressor hiked from 7.5% to 10.0% & RAC from 10% to 20%) and the currency depreciation on working capital as the payment cycle is from May to September in the unitary cooling products segment.

Landed RAC cost is higher YoY, but it is lower than in Q2FY19

Despite the rise in customs duty and currency depreciation, the company has not taken any price hikes while peers have raised prices by 5%.

§ According to the company, Voltas maintains its leadership position in the RAC segment, with a market share of 25%, followed by LG Electronics at 15%, Lloyd at ~9-10%, Hitachi & Daikin in the similar range of 8-9% and Samsung at 5%.

Key reasons for the rise in market share of Voltas in the past six quarters are: 1) strong brand recall, 2) attractive marketing (Mr Murthy with All Weather AC), 3) dealer push, 4) consumer pull, and 5) highest distribution reach at 15,000 retail outlets (11,000 retail outlets five years ago).

The company continues to be asset light with an assembly unit of RAC at Pant Nagar, Uttarakhand. It does not have high cost items, such as compressor and paint work.

Recently, three franchisee-based exclusive brand outlets were opened at Bokaro & Ranchi in Jharkhand and Faridabad in Haryana.

The Sanand manufacturing unit of the VOLTBEKO JV is expected to be operational by Q2FY20. Refrigerator will be manufactured followed by WM. Currently, the four appliances are imported from Thailand, Turkey and China. In WM, semi-automatic would be locally outsourced and front-load would be imported.

The refrigerator industry is expected to post a value CAGR of 9-10% over the next five years, with a penetration level at 27-30% while WM is expected to grow faster, owing to penetration of 22-25%, according to the company. Currently, order inquiries are high.

VOLTBEKO products are available in select Croma stores and online at Tata CliQ. They are expected to be available across all modern format retail stores by January 2019.

Of the domestic orderbook of INR 28.5bn as on September 2018 in the electro-mechanical projects business, one-third is towards rural electrification, one-third is urban infrastructure (metros, airports, educational institutions & hospitals) and the rest towards private projects, including large projects of convention centre. Metro orders are underground work at Chennai, Bengaluru, Kolkata and Ahmedabad. Smart cities, water management, education institutions, hospitals and metros are expected to drive inflows in the domestic market.

International orderbook of INR 20bn as on September 2018 comprises INR 2bn towards ventilator order from Singapore and the rest from Abu Dhabi, Dubai & Oman. It has reduced exposure in Qatar and expects lower business from the Middle East region in the medium term.

V-Guard Industries

V-Guard Industries is one of India’s leading consumer electricals company. Incorporated in 1977, the firm was set up by K Chittilappily, with the manufacturing and marketing of voltage stabilisers under the brand, VGuard. Over the past four decades, the company has diversified into other consumer-related products to become a multi-product firm. The products portfolio consists of voltage stabilisers, digital UPS (inverters) & inverter batteries, electric & solar water heaters, domestic & agricultural pumps, industrial motors, switchgears, wire, induction cooktops, mixer grinders & fans. The company has seven manufacturing facilities: two at Tamil Nadu, one at Uttarakhand, two at Himachal Pradesh and two at Sikkim. About 60% of product sales are through outsourcing. The southern region sales constitutes 65% of total revenue in FY18.

Key highlights

*The Year 2018 is expected to be bad year, owing to a weak Summer, muted festival season (Onam & Diwali) and floods in its home market, Kerala (25% of total revenue in FY18).

*With the recovery in Kerala, H2 is expected to be much better than H1.

*Overall revenue CAGR of 15% over five years, driven by increased penetration in non-south region, rise in distribution network and entering into new product categories (over the past 10 years, the company has added nine products in its portfolio).

*Non-south revenue is expected to grow by 22-23%, according to the management.

*The revenue share from the non-south region for stabilisers, inverters and fans is in the range of 35-60% whereas kitchen appliances, switchgears and wires are small.

*As the product replacement cycle is shortening, volume growth is expected to rise over the medium term.

*The in-house manufacturing share has increased to ~45% currently from 40% in FY16, owing to increased production from its two facilities at Sikkim and Himachal Pradesh. Outsourcing constitutes about 55%.

*India’s fans market size is at INR 70bn, according to management. About 65-70% of the fans market is the economy class of INR 1,000-1,200. The mid-range is priced at INR 1,200-2,000 and fans price above INR 2,000 are in the premium segment. Recently, it has introduced Brushless DC (BLDC) fans, which reduces power voltage.

*Demand drivers vary across products segments. Wires are driven by new housing demand, fans largely due to replacement (aesthetics, color and energy efficiency), stabilisers largely dependent on the sale of air-conditioners, which depends on weather. In the water heater segment, 15% of revenue is from the replacement market.

*Water heaters are sold through two distribution channels: 1) electrical stores, and 2) sanitaryware stores. Around 90% of sales is from electrical and retail outlets.

*eCommerce is ~2% of total revenue. Two product categories, i.e. water heaters and stabilisers, are sold through the online platform. Margin is higher in the online channel.

*Kitchen appliances cover products, such as induction cooktops (the largest), mixer grinders, rice cookers and gas stoves. Revenue from kitchen appliances stood at INR 440mn in H1, largely comprising the South India market.

*The company’s distribution network is 700+ strong, largely from the non-southern region, with 6,000+ direct dealers and ~30,000 retailers across India.

*It plans to add products in the kitchen appliances categories, such as the ovens, toasters & grills market, which is estimated to be INR 8bn and electric kettles with a market size of INR 5bn, according to management.

eCommerce Expert

The expert is head of the eCommerce division of one of the largest consumer durables firms in India.

Key highlights

*The mobile phones market in India is expected to post a value CAGR of 10% to $16.5bn by 2020 from $13-14bn in 2017, according to management.

*Online channel constitutes ~30% of total mobile phone market (equivalent to most developed markets) and expect its share to touch 40% by 2020. The online platform is expected to grow by 25-30% over the same period.

*Implementation of GST has led to better warehouse facilities, pickup in volume, cost efficiency and improvement in overall supply chain along with removal of price difference across states.

*In the home appliances segment, online channel share is expected to jump two-fold to 7-8% in 2018 vs 3% in 2017. Further, the share is expected to rise to 10% by 2019 and 12% by 2020 according to the company.

*Currently, online volume share in TV is at ~20% and refrigerator at ~8%.

*The branded companies are concerned about oligopoly of Amazon and Flipkart. Therefore, these companies are pushing sales on their own websites.

*Debit card EMI will be positive for the durables industry as it will expand the market and reduce cannibalization from traditional credit card purchases.

*Top 3 online financiers are HDFC credit card, Bajaj Finance & ICICI Bank. Total financing share would be ~30% in online and ~40% in offline financing.

*The replacement cycle of TV is five years, washing machine is about 8-10 years, mobile phones is one year (renting is an upcoming market for devices with a two-month security deposit).

*Around 40-45% of total festival season sales comes via online channels.

*At Flipkart 50-60% of sales is still cash on delivery for mobiles. The high growth segment in mobiles is priced at INR 10,000-15,000.

*The online sales of washing machines have grown by 30%+ in H1CY18.

*Xiaomi is expected to launch washing machines in the online market in 2019.

*Online sales starts from the metro and then picked up by Tier I & II cities.

*Higher display area and high SKU (for product comparison) has led to a significant shift in buying from individual retail stores to modern format stores.

Lighting expert and electrical distributor

The expert is a retired professional with 36 years of experience. As vice president of one of India’s leading consumer electricals company, the individual was part of the core team of the company’s consumer business and was credited to turn around the manufacturing unit. Currently, the person is a distributor of Crompton Consumer products.

Key highlights

*The lighting industry is INR 210bn industry currently with light source constituting ~50% of industry and the rest luminous fittings, according to ELCOMA.

*The LED lighting business is growing while the CFL lighting business is on the decline. One key reason in the shift from CFL to LED is pricing as prices of LED and CFL are similar.

*Pricing pressure in the lighting industry is due to increased competition and low entry barriers. Firms in the industry earn ~5-6% margin due to competition. Currently, retrofit lamps have no margins. Companies like Phillips are unable to make more than 6% margin.

*LED lighting industry is estimated to post a value CAGR of 15-20% over the medium term, driven by replacement of LED lighting.

*In the current lighting market, there is a price gap of INR 40 between market retail price and market operating price.

*The price flow structure of the LED lights is as follows: the cost of production is at INR 40-45. The cost to distributer is at ~INR 70, which is sold by distributer at INR 77. The retailer sells LED lights at INR 100 to final consumer, with a MRP of INR 140.

*The LED bulbs prices have hit bottom, and there is no scope for further price correction.

*Under the government program, UJALA, it had targeted to distribute LED bulb of 770mn units until 2019, but currently only 44% or 317mn units of LED bulbs have been distributed to date. The lighting industry distributed LED bulbs of 970mn units to date.

*From May 2018, LED bulbs are required to have star rating to ensure quality of the product.

*The grey channel from China is a big cause or concern, which is expected to reduce owing to steps taken by the government.

According to the survey conducted by the Lighting Association, around 74% of products are non-compliant with regulatory requirements.

Over the next several years, lighting products are expected to be standardized (mostly for 7W-18W). Standardization would lead to margin compression and may lead for only Top 5 companies to sustain while smaller firms would phase out.

In luminaries, critical components are control gear, optics, thermal management & light source.

There is scope of further reduction in LED luminaries (ex LED bulbs) by 10-20%, due to change in product design.

In the long run, only 6-7 firms will remain in the lighting industry just as in the CFL industry.

About 47% of total lighting revenue is from South India as brand recall is strong.

Rural markets are still serviced by the wholesale channel in the lighting industry.

Modern Retail Format Store in Maharashtra

Currently, the company has 33 modern retail stores across Mumbai, Thane and Pune in Maharashtra. The company has plans to add 20 more retail stores over the next two years. It plans to expand stores in other neighboring states like Gujarat, Madhya Pradesh and Chhattisgarh. Around 60% of total stores are mature and contribute ~70-75% of total business. The retail stores have consumer durables products, such as air conditioner, LED TV, refrigerator, washing machine, air purifier, water purifier, mobile phones, and small appliances. In refrigerators, major brands are LG, Samsung, Whirlpool, Voltas and Haier. In LED TV, major brands are LG, Samsung, Sony & Panasonic and other brands such as VU, TCL and Akai. In washing machines, major brands are Samsung, LG, Whirlpool and IFB Industries. In air conditioners, major brands are Voltas, Daikin, Blue Star, LG, Lloyd, Whirlpool and Eureka Forbes. Retail format stores revenue stood at INR 3.5bn in FY18.

Key highlights

*Out of 33 stores, about 88% are EBITDA -positive and rest which have been recently opened are expected to turn EBITDA-positive over the next year.

*Same store sales growth of retail outlets was at 4% YoY. About 50% of revenue is derived from the sale of air conditioners and refrigerators.

*Retail outlets gross margin stands at 14% and net margin is about 4%. At the product level, gross margin in air conditioner is ~17%, TV at 15% and mobile phones at 8%.

*According to the store owners, less than 10% of customers come with a pre-conceived notion of buying a particular brand.

*About 60% of total sales are financed with 50- 55% are financed through NBFC, such as Bajaj Finance and 12-15% are financed through credit card sales.

*Bajaj Finance is the best at financing, followed by Capital First (which has currently merged with IDFC).

*The air conditioner industry is expected to witness the fastest growth in the consumer durables industry. LED TV are expected to witness strong growth of 8-10%; however, the distribution network is expected to shift from offline to online retail, owing to lower prices. The refrigerator industry is expected to grow at 10-12% YoY and washing machine by 4% YoY.

*Over the upcoming years, brands from China are expected to perform well as some are already in the process of setting up manufacturing plants in India.

*In case of India brands in the durables industry, Godrej and Voltas are doing well. Onida’s revenue is declining due to management issues. If management issue is resolved, it can perform better.

*Whirlpool is performing well, driven by the right brand, and price strategy and also good inventory management.

*The LED TV industry is expected to post a revenue CAGR of 8-10% over the long term. Currently, the TV industry is witnessing a downward price trend (prices have declined by 40% YoY). However, the downward price trend is offset by strong volume growth.

*Demand for new products categories, such as air and water purifiers are expected to perform well over the long term. The IoT-based products are seeing increased traction.

The stores have 1m customer base

*During NBFC financing issue, the company had faced a minor issue with one of the NBFC, which had frozen its limits for a period of ~10-15 days, but the situation has since returned to normalcy.

*Online sales constitutes 6% of total sales with channel partners such as Amazon & Flipkart.