Teji Mandi: Consumer durables - Dealers expected to pile up inventory ahead of price hike in April

The uptrend in commodity prices has continued into 4QFY21. As a reason, The makers of white goods - Refrigerators, washing machines, air-conditioners, etc are staring at an imminent price hike.

The prices of most of these products are set to go up by 5-6% from April onwards. This will be the second price hike post-January as the companies are looking to pass on the rising input cost to the consumers.

Commodity prices are in a prolonged uptrend:

The commodity prices are on a boil for a while now. It has brought the margins of the companies under severe pressure as they are finding it difficult to absorb the rising cost of raw materials. Various commodity prices have surged by 30-60% on a yearly basis. On a quarterly basis, current prices have gone up by 5-15%.

For instance, copper/steel/aluminum is up 15%/9/5% in the last two months.

Plastic prices are also seeing a strong upsurge, with prices of Polypropylene up 8% QoQ. This could prompt the companies to undertake price hikes in April 2021 despite taking a price hike in the first week of January 2021.

Summer onset a major tailwind:

Despite the likely price hike, the upcoming summer season is expected to be a major booster, and demand for cooling products is expected to remain intact. It would help Electrical Goods- Fans, Air conditioners, refrigerators makers to tide over the inflationary risk with relative ease.

As per a Motilal Oswal report, the retail demand for discretionary items is relatively weak currently. However, the confidence level is good among dealers, especially for cooling products. The companies are also expecting strong pre-buying from dealers before the price hike is applicable. This could lead to an upward revision in Q4FY21 revenue estimates.

The risk factors:

While the outlook is positive for the cooling products, the same can not be said for the other categories like washing machines or other kitchen appliances. These categories are prone to face the adverse impact of price hikes. Their discretionary nature allows consumers to postpone the purchasing decision if they opt to save more with resurging numbers of covid cases.

Pre-buying ahead of the price hike could also expose the sector to high inventory-related issues. However, the dealers will have to be careful here. The peak season might help the sales of cooling products. However, excess stocking could result in a liquidity crunch, leading to the inventory pile-up and leave little room to play with for the rest of the season.

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