Agencies
With raw material prices rising sequentially in Q4 FY23, margins of fast moving electrical goods (FMEG) companies could witness pressure as they refrain from hiking prices and demand remains soft.
Transition to a new regulatory regime—fans moved to new BEE standards from January 1—poses additional risk for firms. Business depends on volume trends in summer for key sub-segments, which account for a significant chunk of the sector's overall sales pie.
“Post strong pent-up demand over April-May 2022, fast-moving electrical goods space excluding cable and wires remains soft to date due to an inflationary environment, lower spend on discretionary goods, and consumer spending in travel & healthcare.
“Currently, FMEG companies (excluding cable and wire) are cautiously optimistic on demand recovery.
“The only variable which can drive demand is a good summer while price hikes are largely ruled out.
“It implies continued margin pressure in Q4 FY23,” said analysts led by Harshit Kapadia of Elara Securities.
While raw material prices in Q3 FY23 saw a 12-25 per cent decline compared to the year-ago quarter, overall prices continue to trend above pre-Covid levels.
Barring exceptions, FMEG players posted a 90-450 basis points fall in margins on a sequential basis in the December quarter. For a three-year period, margins are down 140 basis points. Gross margin improved due to a stable raw material environment, but operating margin remained under pressure.
This was on the back of low-operating leverage on weak demand, competition in the form of schemes to stimulate volume and sustained investments in brand building and go-to-market initiatives, say Achal Lohade and Paarth Gala of JM Financial. Prices of key commodities have inched up 5 per cent-13 per cent on a sequential basis the March quarter to date.
With most of the high-cost inventory now liquidated, recovery in volume remains a key monitorable if margins are to recover to pre-Covid levels by 1QFY24, says the brokerage.
Within sub-segments of the consumer durable space, fans and kitchen appliances could see headwinds. In the fans segment, star rating and excess inventory could delay sales to dealers.
Further, there is a 5-8 per cent hike in prices of fans given the transition to the new norms.
