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Consumer Durables - Demand-driven recovery continues - HDFC Securities

Posted On: 2021-02-26 05:21:06 (Time Zone: Arizona, USA)

Mr. Naveen Trivedi, Institutional Research Analyst, HDFC Securities

In continuation to our take in our Appliance Thematic (Looking Beyond Near-term Disruption), wherein we talked about faster recovery of B-C categories, share gain by leading players, and multi-year growth opportunity drivers, our HSIE CD index clocked robust 11/26% revenue/EBIT growth in the past two quarters. We maintain our view that Appliance companies would grow through multiple drivers like penetration, housing demand, industrial Capex, convenience, and cheap finance. Leading players are present mainly in the urban markets with incremental distribution expansion around semi-urban and rural markets. A large untapped market is available to leading companies, which provides headroom for growth in the coming years. RAC, Kitchen Appliances, Ref and W/M will be driven by consumers' convenience, rising electrification, aspirational demand, and expansion of distribution. Appliance products are expected to increase the wallet share over the next three years. Government's enhanced focus on Make-in-India and Aatmanirbhar Bharat would push domestic manufacturing. The availability of the entire value chain and manufacturing incentives given by the government should boost domestic manufacturing. It would reduce the impact of currency volatility, improve working capital, and lead to better development of new products. Companies will also be able to accelerate export opportunities, which, as of now, are in nascent stages. We expect growth to be robust across categories, driven by continued lifting of restrictions and increasing economic activity. We have a BUY rating on Crompton and an ADD rating on Havells, Voltas, V-Guard, Symphony and TTK Prestige.

Universe clocked robust 3Q: Our HSIE CD Index posted a robust recovery in 3QFY21 with revenue/EBIT growth of 21/38% YoY (7/3% in 3QFY20 and 1/15% in 2QFY21). The revenue recovery was led by cooling products, ECD and OEMs, which clocked growth of 33/30/88% YoY. The key drivers of growth during the quarter were pre-buying, pent-up demand, reduced restrictions on movement of people and improving sentiment. C&W and lighting also returned to growth, after a tepid 1HFY21, as construction activity resumed. However, recovery in these segments was gradual compared to other segments.

Outperformers and Underperformers: Within the Consumer Durables universe, Dixon, Havells, Voltas, IFB and V-Guard outperformed, clocking revenue growth of 120/39/33/33/32% YoY. Growth in categories like RAC and ECD was robust, aided by work-from-home as well as pent-up demand, while OEMs benefited from an increased focus on Make-in-India. Symphony, KEI, Blue Star, and Amber continued to struggle with revenue contraction of 40/12/9/3% YoY, owing to channel/company inventory and supply constraints.

Margin recovery faster-than-expected: Companies across segments saw strong margin expansion, despite the high commodity inflation impacting gross margin. Oplev, price hikes, product mix as well as an increased focus on cost rationalisation drove EBITDA. EBIT growth was robust across the board as Cooling Products/ECD/Lighting/Cables/OEM clocked 77/50/45/11/73% YoY growth. Lighting margins sustained recovery, driven by price hikes by most players since 2QFY21.

Near-term outlook: Pent-up demand (most seasonal categories missed out massively in the last season), work-from-home (to support convenience driven categories), improving housing activities and resumption of Capex will sustain strong revenue traction in the coming quarters too. Leading companies are expected to pass on raw material inflation while restoring operational cost will be compensated by oplev. Thereby, EBITDA margin will remain healthy in the coming quarters albeit margin expansion is expected to be slower than the past two quarters. Earnings potential will sustain the rich valuation and seasonal channel filling will be the key monitorable for stock performance.

Source: Equity Bulls

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