Mr. Naveen Trivedi, Institutional Research Analyst, HDFC Securities
Pent-up demand and pre-buying driving recovery: Our coverage universe is expected to post 39/67% revenue/EBITDA growth in 4QFY21 (-13/-13% in 4QFY20 and +31/+57% 3QFY21). Ease in lockdown has driven recovery across categories. B-C demand continued to be the key driver of growth, and companies are focusing on new product launches and improving distribution reach. The early onset of summer, pent-up demand and pre-buying aided growth for cooling products. Housing activity sustained the growth for core appliance categories in 4QFY21.
B-B recovery continues: B-B demand, which was a laggard up to 2QFY21, sustained recovery as Capex picked up across government as well as companies. Improved availability of labour and liquidity led to faster execution. New projects have also picked up pace as postponed projects from 2020 are being undertaken. Real estate demand has been robust in the affordable homes category, which indicates strong growth for categories like wires, cables, switches, switchgears and lighting.
Margin under pressure: Commodity inflation reached new heights, driven primarily by copper. Most companies took price hikes across categories. However, due to the steep inflation, price hikes were limited to passing on the increased cost to consumers. Hence, GM is expected to be impacted. However, cost control initiatives during FY21, along with oplev, are expected to support EBITDA margin for 4QFY21.
4QFY21 Outliers: Havells, Crompton and V-Guard.
Sector outlook and stock recommendation: The appliance sector has seen a sharp recovery during 2HFY21, driven by easing of restrictions, pent-up demand, and consumers spending more on convenience products. However, the rising fear of further restrictions across several states can potentially impact demand for appliances, particularly cooling products (considering lockdowns could impact peak season). We await further clarity on restrictions to evaluate the potential impact on our earnings estimates. Leading players gained market share across categories in FY21; thereby our coverage universe companies have the potential to bounce back quickly even after a stricter lockdown. Despite overhang on near-term performance, we remain positive on the multi-year growth potential for the sector.
We have a BUY rating on Crompton, and ADD rating on Havells, Voltas, TTK Prestige, V-Guard and Symphony.