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Dixon Technologies, Amber Enterprises, Blue Star, Voltas, Havells, Kaynes Tech, et al: The black & white of white goods stocks
India is said to be transitioning from sustenance to convenience. Right around the corner is also the $3,000-per capita benchmark, from where an economy leaps ahead from low-income to a middle-income one. A front-line sector to such a transition is the Consumer Durables sector — a second-order play on the rising Indian middle class. Each season, the demand for appliances and the level of premiumisation at play should capture the gradual transition in the economy. So far, the evidence has supported the hypothesis of a transition.
During the next two years, earnings growth in the sector is expected to range from 2x GDP growth for basic goods to significantly high levels in the EMS sector (electronics manufacturing services), a nascent industry. The valuations have kept pace too, doubling in the post-Covid phase, but correcting recently.
The Budget announcements will be critical for the industry. The EMS operators are obviously eyeing new schemes for their foray into the value-added portfolio. The earlier PLI schemes, especially in this sector, have rewarded shareholders. For every investment these companies have made in EMS, the government has, through various schemes, matched the investment in specific categories, allowing for boosted production.
The consumer durables sector will be waiting for government measures to revive consumer spending, as the government is expected to slow down on capex spending and focus on boosting consumption.
At this juncture, we lay out the basic drivers of the industry, the factors that differentiate leaders from laggards and the outlook for individual players.
Industry tailwinds
The essential drivers for the consumer durables sector are the rising middle-class and its preference for convenience. The middle-class (51 per cent in 2023) is already the dominant group replacing low-income class (37 per cent) and is expected to grow further, along with a rise in the upper middle-class. The rapid pace of urbanisation and the growing number of nuclear families are also supporting the industry, driven by a higher reliance on washers, driers and cleaners.
Increased financial literacy and digital connection have improved access to credit for the consumer. Consumer durables are high-impact price products and improved access to credit has also been a tailwind to the sector, especially in the last five years, while also leading to premiumisation (feature-rich products) in the sector. A leading AC company reports that close to 50 per cent of its sales are credit-driven.
Premiumisation aids the industry expand the product portfolio not only in terms of appliances, but also the level of technology within a product class. The wider and higher price-points in the industry are a reflection of such trends.
Right to win
While industry tailwinds are strong, for the individual players, the right to win depends on a combination of several factors, which must be skilfully developed by the management teams.
A right seasonal mix is the basic alignment for the industry. The hot weather portfolio led by room air-conditioners (RACs) must be balanced with the all-season portfolio of refrigerators, home appliances, fans and lights. For instance, Voltas is making the transition from a company known for RACs to kitchen and home appliances. This even extends to EMS players who are into contract manufacturing of appliances and are now engaged in developing all-season portfolios.
Companies must also periodically align to a portfolio with the right penetration metrics. RACs have a penetration of 12 per cent in FY24 compared with 34 per cent for refrigerators. In the last several seasons, RACs have grown at a much higher pace than refrigerators. This is reflected on the bottom-line metrics. In the last five years, Whirlpool, focussed on refrigerators and washing machines, has returned -32 per cent compared with Voltas (107 per cent) and Blue Star (352 per cent), both focussed on RACs. Apart from company-specific issues, the lack of RAC thrust in Whirlpool has had a telling impact on shareholder returns.
On the other hand, kitchen appliances have a 3-4 per cent penetration. Identifying the right under-penetrated product at the right time is a crucial driver.
Premiumisation is at play starting from refrigerators to even fans and lighting. The pace of growth at the premium end has been higher across product categories. This makes product innovation and featurisation a crucial differentiator for the industry. This also makes the case for the EMS industry. Brands, from being OEM (original equipment manufacturer) centric should focus on design and transition to an ODM (original design manufacturer) model, allowing for outsourced manufacturing.
But while premiumisation is the current trend, presence in entry-level category allows for a volume participation which is crucial for building distributor-based supply chain. Even in the entry-level categorisation, there is scope for value addition. The semi-auto washers from Whirlpool have supported the segment growth for the company along with front-load washers.
While consumer durables are largely focussed on household demand, commercial demand is also significant at 10 per cent of the industry. Railways, roads, office real estate, warehouses, hotels & hospitality, and others account for demand in lighting, cooling and refrigeration solutions, wires and cables. Data centre construction, a recent phenomenon along with a revival in office real estate, is supporting growth for Blue Star and Voltas. After a subdued year for road and railway project announcements, 2025 is expected to support lighting and cooling solution providers respectively. A strong focus on B2B segment alleviates the volatility that is prevalent in household-focussed consumer durables segment and is an important metric to differentiate companies.
Finally, the managements’ strategy on supply chain management is also a differentiating factor. The domestic vendors for production have increased significantly, owing to a sustained PLI and incentivisation push, but China and other APAC countries remain critical to the supply chain. This is reflected in established dominance by Korean majors, Samsung and LG, and also upcoming and intense competition from Chinese players including Haier. Domestic-listed operators must scour for better input supply chains to compete against such players, making use of EMS operators.
On the distribution and sales side, alternate trade channels led by e-commerce segments have emerged as counterweight to MFR (multi-format retail), which is the established channel. Crompton Greaves reports 21 per cent of sales from e-comm channel. Based on product profile, companies with an effective trade channel will gain advantage in the segment.
Outlook of companies
The industry can be classified as white goods (RAC, refrigerators), home appliances (fans, lighting) and EMS operators. The outlook for the three sectors is generally positive. The consumer durable brands can aim for 15-20 per cent earnings growth for the medium term aided by the above-mentioned demand drivers. But the fans and lighting space are facing slower demand growth. The EMS segment continues to report high growth rates and is also scaling up on complexity. The primary headwinds are from intense competition and valuations. As seen in the chart, the valuations have started correcting from high ranges for the sector and companies.
White goods
Blue Star is driven by strong growth in RACs, as noted. The RAC demand for CY25 is expected to be in a high range of 25-30 per cent year on year, similar to CY24 and the inventory filling is expected to take off from H2FY25, benefitting Blue Star and Voltas. Blue Star’s B2B segment is also reporting strong growth, aided by data centres on one side and export orders from the UAE and West Asia on the other. With tariff wars likely to start soon investors have decided to side with caution in the early phase, as witnessed in the recent correction. But over a longer term, a view to diversify from over-reliance on Korea, China and Japan should favour Indian consumer durables manufacturers with an export front that includes Blue Star.
Similarly, Voltas replicated two million AC sales of FY24 in the first eight months of FY25. Voltas, with a view to diversify into home appliances market, formed a JV with a Türkiye-based company to form Voltas Beko. The JV is bearing fruit with increasing market shares in washing machines, refrigerators and dish washers.
Whirlpool faced headwinds to growth owing to higher pricing compared with peers in refrigerators and washing machines. At a time when there was intense price competition to gain market share post-Covid, this impacted the company further. The growth stabilised recently, as the company took up promotion and offered sales incentives to focus on regaining volume share. New product launches in semi-auto and front-loading washing machines and value-added portfolio in refrigerators are expected to stabilise the growth from here. But the company must deliver on innovative product launches to compete with others.
Home appliances
Havells, post Llyod’s acquisition, which specialised in RAC, is now closer to white goods segment, but the company does derive a significant portion from wires, cables and institutional sales. The company is further scaling up in durables segment with a new refrigeration capacity in Gujarat at a project cost of ₹480 crore. The strong presence across appliances, institutional sales and now durables should support Havells’ growth in the medium term.
Crompton Greaves, which has a strong presence in fans, is expected to gain from the implementation of BIS standards. This should push more sales in the organised segment. The company is turning around its Butterfly acquisition with sales in the South for kitchen appliances and leverage it with its strong presence in the North and West markets. The lighting segment continues to be facing slow demand growth and is making a recovery in the recent periods.
The weakness in lighting is profound for Bajaj Electricals, which is its major segment. Morphy Richards’ portfolio of products (with which it has a distribution agreement) and air coolers are fast growing, thereby offsetting slow growth in fans and lighting. The recent recovery in rural economy is expected to support Bajaj Electricals portfolio, focussed on entry-level fans and lighting, and in rural segments.
EMS players
Dixon has secured a strong position in manufacturing mobile phones for various brands including Motorola, Oppo, Xiaomi and now Vivo. The company reported 100 per cent revenue growth in the last one year owing to two factors: Mobiles and timely PLI incentives. Mobile phones now account for 80 per cent of its revenues in 9MFY25. With mobile phone production being a low-margin operation (2-3 per cent PAT margins despite subsidies), the PLI incentives were a big factor for the company securing clients on cost-competitive basis. The recent correction in the Dixon stock (13 per cent) in the last one month is on concerns of the scheme running out in FY26. The company has secured new contracts in mobiles and the operating leverage should enable the company in case incentives run dry.
The company is also eyeing mobile components manufacturing — starting with display FABs; it is exploring a partnership with HKC – a Korean company with presence in display screens. The expected capex, running into $3 billion, will need a fresh PLI scheme to support the project.
Similarly, Amber Enterprises, with established presence in RAC and other durables manufacturing, is eyeing an expansion into PCB operations to turn into a full-stack EMS operator. It has recently inked a JV with Korea Circuits for a PCB portfolio along with 30 per cent equity from that company and a two-year sales purchase agreement. Again, this project relies on incentives and subsidies for operations.
Overall, the consumer durable industry growth rates and the tailwinds to continue supporting such growth are fairly robust. But the valuations have rallied significantly in the last one year. At current valuations, investors cannot get a margin of safety on several headwinds the industry may face. The RAC uptake in the last five years has illustrated that not having the right portfolio can lead to significant underperformance. This could play out with several such appliances that are yet underpenetrated. The shifting trade winds have to be assessed for their impact on input/output supply chains especially in the EMS sector. If India is currently a diversification for global mobile production, other countries (including the US) can emerge as a threat to the industry.
Investors with an eye on the long term can consider the stocks, but with a margin of safety to accommodate the risks.
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Published on January 25, 2025
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