The Hindu Business Line : Profitability margins in consumer durable cos may fall further

WITH higher raw material costs, price erosions and cutthroat competition driving selling expenses, the margins of consumer electronics and durables firms are likely to be subjected to further reduction.

"The profitability margins in the consumer durables industry are likely to decline further. In a scenario of intense competition, reducing prices without being able to achieve a concomitant reduction in costs would not be counted as sound strategy," an ICRA study on the Indian consumer durables study said.

Citing the example of the air-conditioners sector, the study said that in spite of an increased customer tendency to go for greater value-added products, the average sales realisation on ACs have shown a declining trend over the past years.

Incidentally, the operating margins in the AC sector have decreased from 4.5 per cent in the financial year 2001 to 0.7 per cent in 2004. The net margins too have declined from 1.6 per cent in 2001 to 0.6 per cent in 2004.

"The realisations have declined because of increased competition from market entrants such as LG and Samsung, which forced established players such as Carrier and Voltas to reduce their prices in order to protect their market shares. Price realisations are estimated to have declined further in FY2004 because of the excise reductions announced in the Union Budget for 2003-04," the ICRA study said.

Similarly, there has been a downward trend in the average sales realisations on white goods, namely refrigerators and washing machines, primarily due to intense competition and excess capacity. The high increase in cost of sales resulted in a decline in operating profits and operating margins. According to the study, because of lower operating margins, the net margins for the white goods sector have turned negative since financial year 2002. In fact, the consolidated net margins for the white goods sector have declined from 0.9 per cent in 2001 to - 12.0 per cent in 2004.

Meanwhile, in the consumer electronics segment, despite an improvement in sales realisation in 2002 due to efforts by companies to differentiate premium models (such as flat CTVs), the net margins for the sector have seen a steady decline.

According to the study, the net margins have declined significantly during 2001-2004 because of lower operating margins and higher interest and depreciation costs.

The consolidated net margins for consumer electronics have declined from 3.1 per cent in 2001 to 0.9 per cent in 2004.