The next multibagger industry: Consumer Electronics

Analysis of the consumer electronics industry of India

You may have bought a new phone or laptop in the past year, here's why you should consider investing in the industry too.

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India is the second largest mobile manufacturer in the world and has the fastest growing tablet market. The consumer electronics industry is expected to reach Rs. 1.48 lakh crores (US$ 21.18 billion) by 2025.

Since the formation of Electronics Commission in 1971, this industry is growing speedily and now contributes 2.7% to the GDP, creating approximately 13 million jobs directly and indirectly combined.

In the year 2021 alone, per person generated a revenue of is US$50.3. Innovative government schemes and favourable demographic composition are likely to boost the demand further.

Here is the market size and predicted growth for this industry in the coming years:

Before diving into how to invest, let's first understand how the market works.

Fundamentals

Consumer electronics comprise of 3 types of goods: white goods which are home appliances like refrigerators and washing machines; black goods which are for entertainment and recreation like speakers and television, and finally personal appliances like a laptop, mobile phone, etc. Not to mention there is also a relatively new category of goods classified as wearable devices which comprise of mainly headsets and smart watches. Below is a estimation of the market size along with its different component drivers, presented by Grand View Research:

Every industry is dependent on them in some way.

The consumer base is mainly divided into three types of people: One is the affluent class which is rising at a steady rate, who are the most loyal customers as they adapt to new features and innovations faster. Next is the middle class which is growing at a rapid rate because of urbanization and the major growth prospects are based on the buying preferences of these people. Then comes the rural market which comprises of more than 60% of India and presents a huge untapped opportunity.

Since the internet age began, people have been increasingly opting to buy electronic devices and appliances online as it facilitates comparison between different brands and models enabling them to make a better choice.  Evidently, e-commerce retail sales makes up 28% of the total sales.

The Indian Consumer electronics market is dominated by global players like Samsung, LG, Oppo etc. and being adaptive to the Indian mentality, companies use competitive prices to gain market share.

Challenges

Though opportunities seem bright,  companies do face certain constraints.

Manufacturing of most of the electronic components takes place in China because of the availability of labour and cheap resources. Hence a lot of foreign companies set up their manufacturing hubs over there. To win in such a competitive market profit can only be achieved through economies of scale which is difficult in India given the supply constraints.  Recently, the Indo-China trade ban has affected the supply chain severely since most of the raw materials used to be sourced from there.

Also so for Indian companies to establish a market share, it is difficult to break the dominance of large global players who have already established a name for themselves because of the internet.

To add to the misery, the Covid-19 pandemic led to decline in the demand for high profit margin luxury products.

Positives > Negatives

Despite the above points, the industry has an overall positive outlook.

The pandemic actually did us more good than bad. For example, countries turned hostile towards China and many of the manufacturing orders have now moved to India. The government schemes like "Vocal for Local", the "Atmanirbhar Bharat" campaign and providing a PLI scheme for manufacturing, with CAPEX subsidies of 15-20% have boosted the number of exports tremendously. 

Also, since education and jobs have moved online, the work from home environment demanded more of electronic appliances, compounding sales of mobile phones, laptops and entertainment sets like television units rapidly.

However one can argue that the main drivers of  expected growth are the young growing population, most of them comprising of people who would benefit from urbanization. Not to mention the share of working women is also increasing, thus raising the total disposable income of the population drastically. The ever increasing number of technology and online jobs created is also a contributing factor.

Technology has become a necessity and one of those sectors to first revive after a recession.

Various Government initiatives and most importantly, private joint ventures like the Google-Jio combination is expected to to penetrate into rural markets and drive growth for mobile phones and other electronic items supported with internet availability tremendously. If this market is tapped well, technology can be one of the leading industries driving growth for the Indian economy.

Invest!

The S&P BSE Consumer Durables index rose 1.58% in May 2021 alone, 78.4% higher than last year.

Though Indian consumers are largely dominated by foreign players like LG and Samsung, changes in the dynamics of this industry in India can benefit already listed companies.

Fundamentally strong stocks, who have dominated the markets in the industry like Voltas, Havells and Bajaj Electricals would gain the most since they have already established themselves.

But due to irrational investors' sentiments, many companies see a rise in their stock prices, even after low performance. For example, as of 18th September 2021, Blue Star is trading at a much higher price than its intrinsic value (more than a 60% premium) and is recognized as overvalued, given its not-so-up-to-the-mark financial performance. One should be careful of maintaining a good buying price in the long run.

Therefore, leading analysts are currently bullish on the following stocks:

However, analysts are also bearish on some stocks in this industry for various reasons, one of the most prominent ones being the company not being able to procure raw materials at an affordable cost, which in turn leads to very insignificant profits. So make sure that you thoroughly research the company's business model before deciding to invest in it.

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In a nutshell,

Though supply constraints and the prevailing pandemic have made business tough for most consumer electronic companies, a recovering economy and lifestyle changes of people signal a strong revival, that will effectively contribute to the economy.