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With the arrival of the festive season, there is a lot of activity in the shares of consumer durables and consumer discretionary sectors in the stock market. On the occasion of Ganesh Chaturthi, Navratri, Dussehra and Diwali, a huge surge in demand for home appliances, LED TV, smart refrigerators, washing machines and inverter air conditioners is recorded in the Indian markets. Amidst signs of increasing consumption in both rural and urban areas, leading brokerage firm Axis Securities / Axis Direct has released its latest research report on LG Electronics India Ltd., a leading player in the consumer durables sector. The brokerage reiterated its ‘BUY’ rating on the stock and set a new target price of ₹1,965 per share. At the current market price, investors are expected to get excellent returns of around 16 to 19 percent.
In Indian culture, the festive season is considered the most auspicious time for new purchases, house warming and replacing old household items. This season, which starts from the end of August and continues till November, records 30 to 35 percent of the country’s total annual consumer electronics sales. Mega festive sales on e-commerce platforms and attractive exchange offers, no-cost EMI and cashback deals offered by offline retail stores motivate middle-class households to buy premium appliances. Additionally, Tier-2 and Tier-3 cities as well as rural India are expected to see strong volume growth this year due to good monsoon rains and potential improvement in farm incomes, which will have a direct financial impact on the balance sheets of leading companies in the sector.
According to brokerage house Axis Direct, LG Electronics India is established as a trusted household brand in the Indian market. The company continues to hold the top market share in high-margin segments such as refrigerators, washing machines and OLED TVs. The brokerage report lists several strong reasons to be bullish on the stock:
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Rapidly increasing trend towards premium products: Indian consumers are now preferring energy-efficient (5-star rating), AI-enabled smart appliances and larger capacity models over basic models. The company’s operating margin in the premium category is much better, due to which sustainable growth in its EBITDA is being seen.
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Strong Distribution Network: With more than 30 thousand direct and indirect retail touchpoints, exclusive brand outlets and omnichannel presence spread across the country, the company is at the forefront in serving customers even in remote towns.
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Stability in Raw Material Costs: Input cost pressures have eased due to stabilization of major commodity prices like copper, aluminum and steel. Due to this, the company has been successful in keeping its gross margin strong without increasing prices drastically.
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Domestic Manufacturing and Supply Chain Efficiency: Due to local production of parts and ‘Make in India’ initiative, logistics costs have reduced and product delivery time has significantly improved.
At present the stock is trading strongly in the range of around ₹1,630 to ₹1,650. Chart structure and fundamental indicators show that the stock has formed a strong base above its key moving averages (50-DMA and 200-DMA). Brokerage analysts believe that the financial results for the second and third quarters (Q2 and Q3) are expected to be quite strong due to volume delivery from the festive season. As the quarterly results reveal the pace of revenue and profit growth, the stock can easily cross the initial resistance of ₹1,780 and ₹1,850 and touch the long-term target price of ₹1,965.
According to industry body CII and various market research reports, India’s consumer durables market is expected to grow at a CAGR of about 10 to 11 percent in the coming five years. Rising per capita income in the country, rapid urbanization, real estate boom (delivery of new houses) and nuclear family structure are the fundamental factors that are continuously driving the consumption of home appliances. Additionally, the market penetration of many key appliances (such as dishwashers, front-load washing machines and premium TVs) in India is still quite low compared to global standards, presenting unlimited expansion opportunities for organized companies.
Market experts say that the consumer durables sector is an excellent option for investors who want a balance of growth and safety in their portfolio for the coming 6 to 12 months. However, stock market experts have also advised that instead of investing huge amount in lump sum, investors should adopt the strategy of buying in installments (Buy on Dips / SIP Mode) during downturns. Additionally, you should always consult your financial advisor to assess your risk appetite and stop-loss levels before making any investment decision. Volume uptrend and margin expansion during the festive season is making this stock an attractive investment opportunity on Dalal Street.