Consumer Durables - Q4FY20 Result Preview - HDFC Securities

Covid-19 impact on cooling products: We believe Covid-19 will have massive impact on cooling appliances (RAC, Air Cooler, Fan, Stabilizer) for summer-2020. Lockdown being in the peak season has already impacted channel filling opportunity in March along with consumer demand in the last 15-20 days. Summer started late this year (by 10-15 days) but extension of lockdown will have significant impact on the demand. Transportation, installation and financing will be key challenges even after govt. opens the lockdown gradually. Thereby, we foresee bleak outlook for cooling products for summer-2020.

Our channel checks: As per our channel checks, extension of lockdown to May will have significant impact on cooling products demand. May-June can see healthy demand (if no further extension of lockdown), still it will not be able to cover up the revenue losses of April. Production shutdown will also impact availability of many brands and supply will be slow in May. Strong players (distribution, product range) can gain market share.

Recovery delays for core categories Core categories like Switchgears, Cables&Wires and Lighting were already under pressure in FY20 due to delayed recovery. We believe, Covid will further delay the recovery for core categories in FY21. Hence, companies may see washout for seasonal products along with weak performance of core categories in FY21. Such disruption will also impact operating margin for most companies. We expect that category leaders will gain more market share in such scenario. However, weak market growth will impact growth for most players. We cut EPS estimate by 20% to 30% for FY21 for our coverage universe.

Our recommendation: Appliance stocks have corrected sharply over the last 2 months with Havells / Voltas / Crompton / V-Guard / Symphony corrected by 10/24/24/21/29%. Despite, we do not see any value buying opportunity at the current prices as earnings cut is also sharp. We downgrade Havells and Crompton from BUY to ADD, maintain Voltas at ADD. Downgrade Symphony from BUY to REDUCE and V-Guard from ADD to REDUCE.

4QFY20 Preview: Appliances cos have seen strong growth in Jan-Feb (particularly for RAC) in anticipation of supply constraints from China in peak season. However, Covid-19 led lockdown has resulted in revenue loss for the last 10-12 days of March. Generally, March is important for channel filling for summer driven appliances. Thereby, it has higher weightage for the quarter. Covid-19 has taken away the advantage of healthy pre-buying by the distributors. Our coverage universe is expected to post 6/9% revenue/EBITDA decline in 4QFY20 (+13/-6% in 4QFY19, -2/-1% in 3QFY20).

Source : Equity Bulls

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