Foreign institutional investors have reversed their four-month selling streak in consumer durables stocks, signaling a potential shift in investment strategy toward Indian domestic consumption themes. Market experts view this development as a tactical move driven by compressed valuations and expectations of stronger earnings growth in the coming quarters.

Earnings Growth Expectations Drive Revival

The renewed FII interest stems from optimistic earnings projections for the second half of fiscal 2026. According to Vipul Bhowar, senior director and head of equities at Waterfield Advisors, many companies in the sector are projected to achieve 20-30% growth in profit after tax, supported by strong festive-season sales and reduced raw material costs. "This reversal may mark the beginning of a more substantial reallocation of global funds towards Indian domestic themes," Bhowar noted.

Sector Performance Shows Sharp Divergence

The consumer durables sector has experienced mixed performance over the past year, with the BSE Consumer Durables index declining approximately 1% compared to the Nifty 50's 12% rise. However, individual stock performance has varied significantly:

Valuation Compression Creates Opportunities

Manish Valecha, co-head of research at Anand Rathi Institutional Equities, attributes the FII buying to substantial valuation derating over the past six to seven months. The compression resulted from multiple factors including weak summer demand, subdued festive sales, and uncertainty around government approvals for joint ventures, particularly those involving Chinese partners.

Current valuations show most consumer durable stocks trading below their long-term averages:

Q3 FY26 Performance Outlook

Brokerage firms expect mixed results for the third quarter of fiscal 2026. Nuvama Institutional Equities projects moderate growth for electronic manufacturing services companies, with revenue growth of approximately 11%, Ebitda growth of 17%, and profit after tax growth of 11%. However, appliance companies across both large and small categories are likely to show weak performance due to subdued consumption trends.

Kotak Institutional Equities expects faster growth in the wires and cables segment, driven by higher volumes and rising average selling prices due to raw material inflation. Room air conditioners may see smaller declines helped by advance channel stocking, while water heaters growth is expected to offset weakness in fans.

Investment Risks and Market Outlook

Despite the renewed FII interest, several risks remain for the sector. These include potential weak summer demand that could delay recovery, rising input costs particularly copper prices affecting margins, and ongoing delays in government approvals for joint ventures impacting electronics segment growth. Valecha notes that while the sector benefits from long-term structural tailwinds and government-led demand measures including tax cuts, the current FII buying appears more tactical, positioning for stronger performance in the first half of calendar year 2026 versus 2025.

In a significant move for the consumer durables sector, Blue Star has taken the initiative to compensate its dealers for blocked GST credits on pipeline inventory following recent GST rate reductions. The tax cuts, which lowered rates from 28% to 18% on air conditioners and large TVs, have left dealers grappling with inventory challenges.

Blue Star's Proactive Approach

B Thiagarajan, Managing Director of Blue Star, announced that the company will compensate dealers for the interest burden on blocked working capital. He expects the adjustments to be completed within 3-4 months, demonstrating the company's commitment to supporting its distribution network during this transition.

Industry Response Varies

While Blue Star leads with a comprehensive compensation plan, other major players in the sector are adopting different strategies:

• Voltas plans to handle compensation on a case-by-case basis, indicating a more tailored approach to dealer support.
• Godrej expects dealers to adjust the difference over time, suggesting a less direct intervention in the short term.

Market Challenges and Opportunities

The consumer durables industry faces a complex landscape:

• AC dealers are currently holding high inventory levels due to sluggish summer sales.
• The Shradh period has led to a pause in stocking, further complicating inventory management.

GST Rate Cut Impact

The GST Council's rationalization has brought significant changes:

• ACs, TVs beyond 32 inches, and dishwashers now fall under the 18% tax rate, down from 28%.
• Industry executives estimate potential price reductions:
  • ACs could be Rs 2,500 - Rs 3,000 cheaper
  • Large-screen TVs may see price cuts up to Rs 4,000

Festive Season Outlook

Despite current challenges, the industry remains optimistic about the upcoming festive season:

• TV industry players, like Super Plastronics, anticipate 20-25% growth in festive season sales.
• The 10% price cut is expected to catalyze consumption, particularly in the 55 inches and above TV segment.

Conclusion

As the consumer durables sector adapts to the new GST regime, companies like Blue Star are taking proactive measures to support their distribution networks. With the festive season approaching and potential price reductions due to tax cuts, the industry is poised for a potential upturn in sales, especially in the premium segments of air conditioners and large-screen televisions.