PL Sector Report - Consumer Durables - Apr-Jun’23 Earnings Preview – Unseasonal rains, Soft demand + Competitive pricing

Consumer Durables - Praveen Sahay - Research Analyst, Prabhudas Lilladher Pvt Ltd

Apr-Jun’23 Earnings Preview – Unseasonal rains, Soft demand + Competitive pricing

Quick Pointers:

♦ ECD segment impacted due to unseasonal rains, higher fan inventory in the channel and weak demand environment.

♦ Strong volume growth in C&W segment; KEI/Polycab to outperform in sales.

Consumer Durables sector continues to witness 1) muted demand environment, 2) competitive pricing and 3) higher channel inventory. Seasonal product sales like RAC and fan impacted due to unseasonal rain, soft demand and higher inventory in channels. Rural demand continued to remain weak. However, Cable & Wire segment continues with healthy growth, largely from B2B segment. We expect our consumer durable universe to register Sales/EBITDA/PAT growth of 7.4%/20.0%/23.2% YoY in 1QFY24. On sales front KEI Ind & Polycab to outperform, while Crompton Consumer & Bajaj Electricals to underperform. On profitability Havells, Polycab and Voltas are expected to outperform.

We prefer Havells India given its robust return profile, controlled working capital, cost leader and continuously expanding opportunity market. Our second pick is Crompton Consumer who took corrective measures towards growth such as 1) restructuring business in five verticals, 2) hiring/appointing second level management team, 3) addressing frontend sales team attrition, and 4) increasing focus on A&P and R&D for driving growth. Although this strategy may impact FY24 financials, we expect better growth FY25 onwards.

♦ FMEG (ECD and lighting) segment’s soft performance to continue: ECD segment impacted because of higher fan inventory at the start of Q1FY24, which was pushed by the brand through discounts & incentives. Our channel check suggests gradual decrease in inventory of fans at dealers’/retailers’ level which reached normalcy by Jun-23 end. The channel also suggested that price hikes due to rating norm changes has not been fully absorbed in the system, while inventory has been pushed by players through discounts & incentive. Lighting segment continued to face challenges in B2C segment, while pickup in B2B/B2G drive segmental growth. Crompton faced challenges due to weak demand & competitive pricing in fan, pump & lightings in Q1FY24. However, Havells with its distribution expansion, increase in product portfolio and channel supports is expected to outperform (est. 6% YoY growth vs coverage universe of 0.5% YoY in ECD segment).

♦ RAC segment - weak demand sentiment: Unseasonal rains, competitive pricing and weak demand environment have all impacted RAC segment. Our channel interaction in Jun-23 suggests slowdown in demand besides higher channel inventory (45-50days) restricted primary sales. Competitive pricing and slowdown in demand restricted price action, whereas, companies are offering discounts & promotions to liquidate inventory. Summer season impacted due to unseasonal rains mostly in North India, where industry saw decline of 15-20% in volume, which indicated sluggish FY24. However, Q4FY24 should be better in demand/volume growth, else sector may see de-growth. Voltas expected 2.5% growth in UCP revenue in Q1FY24. However, in race of market share, players like Voltas/Lloyd are expected to see contraction in margins.

♦ Cable & Wire – to continue with healthy growth: The KEI/Polycab will continue to benefit from industrial volume growth mainly in B2B business. Correction in commodity prices in second half of Q1FY24 saw strong volume improvement. KEI/Polycab to show volume growth of ~15% and outperform our coverage over sales growth. However, stretched valuation keeps limited upside potential for the stocks.

♦ Key changes in target multiple: In our coverage universe, we have upward revised our target multiple for KEI Ind./Polycab to 28x/31x FY25 earnings (earlier 23x/29x FY25 earnings). KEI is expected to deliver 25.1% CAGR in earnings over FY23-25 (increase FY25 earnings by ~5%) with higher RoCE of 28%. Polycab, on the other hand, is expected to deliver 15.1% CAGR in earnings over FY23-25 with higher RoCE of 27%+. We maintain our ‘HOLD’ rating on KEI/Polycab. For Voltas, we have downward revised our target multiple to 34x FY25 earnings (earlier 36x FY25 earnings), due to weak performance in UCP segment and slow pick up in EMPS segment. We maintain our ‘HOLD’ rating.

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