A not-so-festive season for electronic appliances

Akshara (0:04)

In today's episode, we'll do one deep dive and cover another story for the day. First, we'll talk about a not so festive season for electronic appliances, and then we'll talk about what's behind the recovery of India's golden fiber. Welcome back to The Daily Brief by Zerodha, where we cut through the noise to help you understand what's actually happening in the most important stories from business and markets. I'm your host Akshara, and today is Wednesday, 23rd September.

Coming to the first story.

So earlier this year, ACs, refrigerators, and TVs became more expensive in India, and the increases did not stop after one round. As per hire, prices had risen by around 10-12 percent since January over the previous few months. Now, LG raised prices by a cumulative 16-17 percent in two rounds during the April to June quarter, while Blue Star increased AC prices by about 5 percent.

These were not uniform increases across every company and model. Some companies passed on most of their higher costs quickly, while others absorbed a larger part of the increase through lower margins. Now, the timing makes this more interesting. Durga, Puja, Dasera, and Diwali are approaching, bringing the usual discounts, exchange bonuses, and AMI offers. But does a large festive discount necessarily mean an appliance has become cheaper?

So an AC works by absorbing heat from a room and releasing it outside. Copper tubes carry refrigerant between the indoor and outdoor units, while aluminum fins help transfer the heat. The machine also contains a compressor, fan motors, and electronic controllers.

Now, as per CEW's estimates, in a non-inverter 1.5-ton split AC, the compressor accounted for around 30% of manufacturing cost. Copper and aluminum tubes made up another 20%, printed circuit boards and controllers 20%, and fan motors around 8-10%. So ACs are exposed to copper and aluminum prices, and by virtue of that, also those of PCBs and controllers. Now, refrigerators share many of these pressures, even if the precise cost mix differs between a small single-dough refrigerator and a large frost-free model. Their outer bodies are generally made of steel, while the inner lining, shelves, and drawers use plastic. Foam between these layers provides insulation, and the compressor contains steel, copper wiring, and a motor, while copper or aluminum tubes carry the refrigerant. TVs, meanwhile, are more exposed to electronics than either. Display panels, processors, and memory chips form a larger part of their cost. Now, Indian TV manufacturers warn that rising memory chip prices and the weaker rupee could push prices higher. And as we've covered before, the AI boom is the primary reason memory markets have tightened. Chipmakers have been directing more investment and production towards higher value memory used by AI servers. But AI is not the only factor. Inventories, production decisions, and demand across the wider electronics industry also influence chip prices. And as we've covered before, copper and aluminum have both become very expensive. Industry estimates cited in August placed copper around 45% higher than a year earlier, and aluminum around 25% higher. So India is import reliant for more than half of its copper needs, leaving manufacturers exposed to both international copper prices and currency movements. And then there are plastics, whose rising costs have been affecting various industries beyond electronics. The straight-o-formo's blockade has disrupted the flow of crude oil, which is what plastics are ultimately derived from. And in its latest earnings call, Volta's included higher plastic costs among the pressures affecting AC prices. Now, shipping costs have also increased. And for Volta's, cost pressures faced included higher ocean freight charges. Globally, higher fuel costs and disruption from the conflict in West Asia have pushed container rates sharply higher on some major routes. Now, many of these commodities are benchmarked in the dollar. And as the rupee depreciates more against the dollar, another layer of cost pressure is created. Now, when raw material costs rise, a manufacturer has a limited number of choices. It can absorb the increase through a lower margin, negotiate with suppliers, substitute materials, reduce other expenses, or pass the increase on to customers. Rare or still, companies may redesign the product altogether.

Recent earnings calls show that companies have made different choices. So, Bluestar entered the financial year hoping to pass on a total cost increase of around 13%.

But by the June quarter, it had managed to pass on only about 5%.

The company's revenue grew 13.3% during the quarter, but its profit before tax and exceptional items fell approximately 24%.

Management attributed the pressure to higher commodity prices, the weaker rupee, the delayed summer, and its inability to raise prices by the full amount it had planned.

This doesn't mean Bluestar absorbed exactly 8 percentage points of cost directly through its profit margin. Its calculation included several pressures, and the relationship between price and profit is not one for one. But it does show that the entire increase had not reached customers.