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Consumer Durables - Fans - a compounding story but underrated - HDFC Securities

Posted On: 2021-10-18 11:45:51 (Time Zone: IST)

Mr. Naveen Trivedi, Institutional Research Analyst, HDFC Securities and Mr. Saras Singh, Institutional Research Analyst, HDFC Securities

The consumer durable industry, including fans, has seen numerous trends over the past decade. However, fan continues to remain an underrated category. The industry (>INR 90bn) has seen a shift across product evolution, customer preferences, and distribution. With the best RoCE amongst durables, fans have helped companies reinvest and diversify into other appliances. We see further transformation in the fan industry with the implementation of energy efficiency norms, which would consolidate the industry further. We believe top brands including Crompton Consumer, Havells and Orient Electric stand to benefit the most from the industry transformation. We initiate coverage on Orient Electric with a BUY rating and maintain our BUY rating on Crompton Consumer and ADD ratings on Havells, Voltas, TTK Prestige, V-Guard and Symphony. We roll forward the target price for our coverage universe to FY24.

Fan fits in India's consumption story: Fan is a part of India's traditional consumption story, with its journey evolving from being a necessity product to becoming an aspirational one. While the functional benefit of fans is 'necessity', the trends in design and technology are making this category aspirational. India's large consumption theme for electrical goods is around (1) electrification, (2) urbanisation, (3) premiumisation, (4) shift from unorganised, and (5) domestic manufacturing. We believe fans fit in well with India's consumption theme and will continue to enjoy all drivers.

New housing/home improvement theme to further drive premiumisation: We believe that if the ongoing housing theme sustains, led by low home loan rates and positive consumer sentiment, categories like fan would benefit. New house demand leads to higher consumption (with a higher number of fan units being installed in a new house vs. general replacement demand) and premiumisation.

Traditional but best RoCE business: The fan business at times was considered a commodity business with limited pricing power, high sensitivity to commodity inflation, and strong presence of regional/unorganised brands. Top players are driving the category with product innovation, strong marketing, and distribution expansion. The fan business requires limited capital investment and offers one of the best returns among all consumer durable categories. Low capital requirements along with superior operating margins are what makes this category unique amongst all other categories.

Fan is a crucial pie, important for reinvestment story: Many investors/analysts prefer companies' entry into non-traditional categories that offer non-linear revenue growth. However, such reinvestment is taking place due to the strong business economies of traditional businesses like fans. In our view, the fan business does not only have a superior return profile but is also one of the best compounding stories among all the CD categories.

Near-term outlook and future winners: We believe improving housing activities and resumption of Capex would sustain strong revenue traction in the coming quarters. Leading companies have already taken price hikes to pass on most of the costs; however, continued raw material inflation remains a concern. Leading fan players have initiated several effective strategies that are not only developing the category but will also help gain market share. Consumers prefer top brands across consumer categories, which would be of benefit to the top brands in the fan category. Crompton, Havells and Orient are category winners, and we believe their winning strategies will maintain their leadership position. Crompton remains our top pick in the coverage universe.

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