According to Motilal Oswal Financial Services, rising interest rates as a result of rising oil prices are expected to dampen demand for white goods (MOFSL)
At the moment, the main raw materials used in the white goods sector are zinc, plastics, brass, and aluminum.
Almost any commodity increased to multi-year peaks in 2HFY21 – copper, steel, aluminum, and polypropylene all increased by 44%, 38%, 22%, and 29%, respectively.
MOFSL reports that price hikes ranged from 5% to 10% around the board padded profit margins slightly but stifled demand.
“The primary reasons for this are the large ticket sizes of the product groups relative to other product categories, as well as the availability of alternatives,” the study said.
“Across the board, market increases of five to ten percent have helped in cushioning profit margins.”
Additionally, the third and fourth quarters of FY21 saw a decline in corporate gross margins due to high oil prices.
Additionally, it noted that although retail prices impacted gross margins, the majority of firms’ EBITDA margins improved as a consequence of continuing wage reductions and reduced discretionary spending on other expenses, such as ads.
“While cost reductions may be realized by increased performance and cost engineering, certain additional expenses may continue to be borne before the Covid situation stabilizes.
MOFSL said that in today’s environment of product price inflation, it prefers ‘Electrical’ companies to ‘Durables’ companies.
“Our sector selections are Orient and Crompton. Havells can also prosper in the current climate owing to its premiumization structure, which makes it less susceptible to consumer price inflation.”