Current valuations of the leading companies in the consumer durables sector – Voltas, , , Hitachi and (integrated in Havells) – are ripe for disappointment. Valuations take into account estimates, which are very optimistic, mainly for growth rates driven by penetration and underestimate competition and the ability to premiumize. While it is poised to gain market share in washing machines and refrigerators, we expect a marginal loss of market share in room air conditioners.

Similarly, Whirlpool, which dominates value for money positioning in washing machine and refrigerators, could be the one losing ground to Voltas, Lloyd and other trailing brands.

In this context, we believe investors should consider Indian EMS players such as Amber, a key ODM supplier for most RAC brands and a key beneficiary of the Indian government’s import substitution push. Amber, thanks to its size and capabilities, will expand into segments other than RAC and also export gradually.

Why Consumer Durable Goods Growth Rates Will Disappoint
Indian major appliances seem vastly under-penetrated compared to countries like China. However, this under-penetration needs to be viewed in the context of multiple India-specific factors.

The major factors restraining the growth of Indian devices are:

1) High proportion of low-income households, which constitute 84% of India’s population

2) Low urbanization at 35% vs. China above 65%

3) Factors such as the low participation of women in work, which is 20% for India against 70% for China.

The preferences of Indian customers when it comes to home appliances are clear. Television and cell phones are preferred over other categories like refrigerators due to their perceived entertainment usefulness (>50% penetration for both categories). Refrigerators in India are income elastic, with washing machines and air conditioners remaining largely under-penetrated.

Washing machines remain under-penetrated due to the availability of cheap household helpers and the low participation of women in the labor force, which is 20% compared to 60% and more for countries like China; could be even lower for suburban and rural India. Air conditioners remain under-penetrated due to the high overall cost of ownership (mainly electricity) despite the scorching heat in most parts of India. Since major appliances remain a discretionary expense, the population shift from poor/low-income to middle-income households is also a key driver of future appliance growth.

China early encouraged the manufacture and consumption
In China, favorable government incentives and policies have attracted foreign capital to invest in the manufacture of household appliances. After that, we saw local Chinese companies like Midea learning the ropes from their global partners. Gradually, these companies started on their own. The presence of a large domestic market has fostered scale and innovation.

China has also focused on building a broad supplier base and significantly improving its supply chain. This has helped them become a key export player and thus become a “factory for the world”.

The growth of manufacturing across all sectors has resulted in a massive shift of 50% of China’s population from poor/low-income groups to middle-income groups. The astronomical growth of home appliances is a consequence of these factors in China. A similar opportunity exists for India by linking top-down investment (PLI programs) with domestic innovation.

Going forward, India needs to boost technology transfer and eliminate logistical inefficiencies. While we remain hopeful, that’s easier said than done. Over the past 10 years, we have seen Indian washing machines and refrigerators grow in single digits, with air conditioners outperforming with double digit growth. We do not expect this trend to reverse significantly over the next decade unless some of the above factors change.

Voltas: Gaining new ports, losing old forts?
After a decade of accelerating leadership in the RAC market, Voltas now faces challenges of increased competitive intensity (Lloyd: importance of market share and Blue Star: a new residential focus) and shifting supply, but more importantly, transitioning to brand manufacturing and marketing.

Attempts to pivot into a diversified consumer sustainable brand look promising with an impressive partner in Arcelik, but the market share increase would be steep for marketing add-on/SKU and distribution expansion efforts. We have built 10% market share for Voltas Beko by FY29E and EBITDA breakeven only by FY26E, a tough task after the first few percentage points of market share gains. Other activities remain uninspiring, and the spin-off’s narrative is integrated into the multiples. We create a CAGR of 16%/21% of revenue/EBITDA for the UCP business (from a low FY22 base) and factor in a 200 bps market share loss over the exercise 22-25. Voltas is trading at 39x against. FY24E EPS, leaving no safety margin.

(Nitin Bhasin, Co-Director and Head of Research, Ambit Institutional Equities)