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Consumer Durables Sector Update Report - Inspiring recovery; rich valuation to sustain - HDFC Securities

Posted On: 2021-07-22 12:40:42 (Time Zone: IST)

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

The consumer durable sector has seen robust recovery in H2FY21, much better than ours as well as the street's expectation. The category leaders demonstrated a strong print in FY21, both in terms of revenue and margin. The strong earnings show justifies the sharp rerating of companies in FY21 (our coverage universe witnessed ~20% P/E rerating vis--vis the company's own past three-year average). Although the second wave decelerated the momentum, it was not as severe as in the first wave (in the previous year). Our channel checks suggest strong recovery in Jun-21 for electrical and cooling products. Revenues of most companies are expected to fall by ~15% in Q1FY22 over Q1FY20 vs. the 50-60% YoY decline in Q1FY21. Our checks further suggest recovery would be strong in July too and sustain in the coming quarters. This improves our confidence in our earnings estimates and we expect leading companies to sustain the earnings show. Rich valuations will sustain too, while for some companies, they may even expand. We maintain our BUY rating on Crompton and ADD on Havells, Voltas, V-Guard, Symphony, and TTK Prestige.

Recovery across B-B and B-C: Most categories have seen recovery, post the easing of lockdown restrictions in June 2021. Both B-B and B-C are seeing strong traction, led by healthy underlying demand, while category leaders are gaining market share. B-B business was a drag in FY21, despite which, leading companies could deliver healthy growth in FY21 due to strong growth in B-C. However, B-B seems to be in a good shape now and we expect the momentum to sustain in FY22. We maintain our view that appliance sector would grow through multiple drivers like penetration, housing demand, industrial Capex, convenience, and cheap finance.

Electrical products seeing better traction: The electricals products saw robust revenue growth in H2FY21, led by pent-up demand, work-from-home demand and price hikes. In FY21, the large brands managed to gain market share from fringe players, a trend that our channel checks suggest may continue for the coming quarters. It augurs well for companies like Crompton Consumer, which gained market share in the fan category. While this segment saw demand disruptions in Q1FY22, our channel checks suggest Q1FY22 revenue would be around 85-90% of Q1FY20 (vs. the 45-50% YoY dip in Q1FY21).

Demand from the north supports cooling products: Cooling products continued to see demand from pre-buying activities in Q4FY21, in anticipation of a strong summer season. However, with the second COVID wave, the demand was impacted from the second week of April. According to our channel checks, the RAC saw strong demand in Jun-21. Recovery in the north supported the overall demand. We expect revenues of the overall industry to decline ~20- 25% in Q1FY22 over Q1FY20, vs. the 60-65% YoY decline in Q1FY21.

Price hike to protect margin: Despite the commodity inflation in H2FY21, companies expanded EBITDA margin, driven by price hikes, op-lev, cost controls, and inventory gains. Raw material inflation sustained in Q1FY22 also, leading to further price hikes in June and July, covering the current commodity inflation. We expect EBITDA margin to be protected in FY22.

Near-term outlook: Pent-up demand (most seasonal categories missed out massively in the previous two seasons), 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 have taken price hikes to pass on the raw material inflation, while restoration of operational costs will be compensated for by op-lev. Hence, EBITDA margin will remain healthy in the coming quarters. The earnings potential will sustain the rich valuations, market share gain will be the key monitorable for stock performances.

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