Appliance Makers May Hike Prices Even As Input Costs Ease. Here's Why
Prices of washing machines to air conditioners may not fall till the festive season begins.
Imported inflation due to a sharp fall in rupee may more than offset the benefits of easing raw material prices, leaving consumer appliance makers with little room to cut prices.
Despite the fall in raw material prices, makers of air-conditioners, TVs, washing machines, refrigerators and fans may only slow the rate of prices hike without actually reducing the prices of goods, at least till the onset of festive season, according to industry executives BQ Prime spoke with.
That's because of two factors—the industry has been taking price hikes with a lag amid muted demand, and, the constant fall in rupee has negated the benefit of falling global commodity prices for an industry that relies on imports of these commodities for inputs.
"While softening of global commodity prices provides some relief, the gains are limited due to a weakening rupee," Saurabh Baishakhia, president, appliances at Usha International Ltd told BQ Prime. Currently, there is a gap between the input cost increase in comparison to the price increase of finished products. "Only 75- 80% was passed on to the consumer," he said.
Rupee has plunged to near 80 against the dollar due to rising global interest rates, foreign portfolio outflows, and widening trade deficit. Key raw materials such as copper, steel and aluminium have corrected 21%, 19% and 36%, respectively, in the past three months. Brent crude, which impacts input costs including packaging, has fallen below $100 a barrel from the peak of $139.
Kamal Nandi, business head and executive vice-president of Godrej Appliances, concurred. Rupee depreciation has made imports costlier, which can push prices up by 2-3% in the ongoing quarter, he said.
"But now, since there are positive changes observed in the commodity prices, we shall not rush into steep price increases," Nandi told BQ Prime.
BSH Home Appliances will initiate its planned price hike this month. "But we don't have specific plans for further hikes during the upcoming festive season," said Managing Director and Chief Executive Officer Neeraj Bahl.
The industry had taken a cumulative price hike of 20% in the past two months as against the raw material inflation of 40-50% impacting demand especially in the hinterlands. "Our channel checks indicate rural demand will continue to be weak in the near term with such high level of inflation," said brokerage firm Prabhudas Lilladher in a July 4 report.
While sales momentum in April were quite robust for seasonal products like ACs and fans, demand started softening from mid-May with June being quite weak especially for entry-level products. Inventory remains elevated and the current production is running 20-25% low compared with the original plan, according to industry executives BQ Prime spoke.
"July and August are usually weak months for the consumer durable industry, and this year the demand is very low," said Eric Braganza, president of Consumer Electronics and Appliances Manufacturers Association. He, however, expects demand to pick up by August-end as the festive season kicks off with Onam, unless rupee and input inflation play spoilsport.
"It's hard to predict these days so we remain cautiously positive," Godrej's Nandi said. "We anticipate consumers, who are postponing their purchases now, will buy during the festive months. But that's only if inflation is controlled and commodities soften further."
Avneet Singh Marwah, chief executive officer of Super Plastronics Pvt., which manufactures brands like Kodak, Thomson, and Blaupunkt, said there would be little difference in the profit margins as stable input costs get offset by volatile rupee that pose a challenge in a weak demand scenario.
Analysts have a similar forecast.
"We do not expect margins to improve in the second quarter of FY23 due to inventory with durable companies," ICICI Securities wrote in a note on July 6.
Prabhudas Lilladher expects sales growth to improve during the first quarter due to a soft base of previous year, while margins will remain under pressure in the near term.