Ms. Naveen Trivedi, Institutional Research Analyst, HDFC Securities
Pent-up demand driving recovery: Our coverage universe is expected to post 15/27% revenue/EBITDA growth in 3QFY21 (-2/-1% in 3QFY20 and +8/+30% in 2QFY21). Easing of restrictions across the country and the lower number of COVID cases lifted sentiments, leading to a revival in demand. Companies are seeing the benefits of pent-up demand from 1HFY21 and revival in housing activities that are driving B-C products. GT and e-comm have been sustaining robust growth while MT remained slow due to weak footfalls. Continued work from home is driving demand for large home appliances. Recovery in semi-urban and rural markets was quick while the recovery in metros remains gradual. We expect the urban recovery to gain pace over the next few months. Category leaders have been continuing to gain market share, and top 5 players of most categories are further strengthening leadership.
B-B recovery is gradual: B-B segments, which were laggards in 2QFY21, saw recovery as business operations resumed across industries. 2HFY21 will see the benefit of pent-up Capex and delayed projects as government and companies start to undertake projects that were put on hold in 1HFY21. Improvement in labour availability and increased mobility of people will also lead to a faster pace of execution and revenue recognition.
Margin expansion to continue: Commodity headwinds are likely to impact gross margin, but we expect companies to offset the impact through price hike and cost-saving initiatives. We expect most companies to continue the EBITDA margin expansion trend, led by cost rationalisation and favourable base. Improved product mix due to work from home and higher salience of e-comm will also aid margin expansion.
3QFY21 Outliers: Havells, Crompton and V-Guard
Sector outlook and stock recommendation: Despite a strong show by Appliances stocks, we believe there is further room for a run-up. Our coverage universe has run up 52% since our last thematic in July'20 (Looking beyond near-term disruption). Leading players are gaining market share and capatilising the strong demand for across B-C products. Demand trends are sustaining even after festive season and most core categories are showing a healthy underlying trend. Metros, which were impacted the most in 1HFY21, are seeing good recovery. Increased salience of e-comm is also providing an edge to leading companies that have developed a strong presence in this channel. Many seasonal categories (RAC, Fan, Air Cooler, and Stabiliser) will be benefited by pent-up demand, work from home and pickup in housing activities in the upcoming season. While categories like Cables, Wires, Lighting, and Switchgears will be benefited by Capex, PLI schemes and improving housing activities. We roll forward our TP to Mar-23 earnings. We upgrade our rating on Voltas (pent-up demand for RAC, market share gain) and Crompton (pick-up in housing activities, market share gain) to BUY from ADD, Symphony (pent-up demand in upcoming season) and V-Guard (pent-up demand in upcoming season, pickup in housing activities) to ADD from REDUCE. We maintain ADD rating on Havells and TTK Prestige (Rating and earnings change table).