Consumer Durables Sector - Lockdown mars performance yet again - Institutional Research Desk at HDFC Securities

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

Q1FY22 turned out to be another disruptive quarter due to the onset of the second COVID wave. Our HSIE CD revenue/EBIT (ex-OEM) was up 58/114% YoY due to the low base, while it declined 13/29% on a two-year CAGR. Cooling products, ECD, Lighting, and C&W posted two-year revenue/EBIT growth of -24/-44%, -13/- 38%, -15/-3% and -1/-7% respectively in 1QFY22. Havells, Hawkins posted +13% and +5% EBITDA on two-year CAGR in 1QFY22 while all other CD companies had reported decline (Link). North region was the best performing market with lower impact of lockdown, while south and east regions were most impacted due to stricter lockdown. Reopening of businesses is still slow in south as compared to other regions. Unlike last year's lockdown, industrial and construction activities continued which drove demand for B-B categories; however, B-G demand remained weak.

Over the past 18-months, appliance companies were less impacted compared to other discretionary categories. With stability in trade and demand, we expect the core drivers to continue to fire. Demand recovery since Jun'21 has been inspiring and in the absence of any further lockdowns, we expect the companies to show healthy earnings in the coming quarters. We maintain our view that appliance companies would grow through multiple drivers like penetration, housing demand, industrial capex, convenience, and cheap finance. Further, despite the pandemic, companies have grown their distribution reach, especially into the semi-urban and rural markets, thereby tapping new markets. With housing and home improvement theme sustaining, appliance products are expected to increase their wallet share over the coming years. We expect healthy earnings growth will help sustain the rich valuations. We have a BUY rating on Crompton and an ADD rating on Havells, Voltas, V-Guard, Symphony and TTK Prestige.

Second wave marred growth momentum: Our HSIE CD Index revenue declined 13% two-year CAGR in Q1FY22 (-25% in Q1FY21 and 13% in Q4FY21) owing to the second wave led lockdown while EBIT was down 29% over the same period (-29% in Q1FY21 and 18% in Q4FY21). These companies saw strong momentum from Q2FY21 onwards but were impacted by the second wave. High commodity inflation has resulted into multiple price hikes across categories (higher for C&W).

Outperformers and Underperformers in LTM (two-year CAGR) (Link): In cooling products, Lloyd is the outperformer in LTM (two-year CAGR) while Johnson-Hitachi was the underperformer. In ECD, Polycab outperformed in LTM (two-year CAGR) while Whirlpool underperformed. In lighting, Orient outperformed while Crompton underperformed. In C&W, Polycab outperformed while Finolex underperformed. In OEM, Dixon outperformed over Amber.

Margin pressure seen: Loss of sales have caused sequential margin dip across the board, although over Q1FY21, margin is still healthy. Companies have taken price hikes to pass on the RM inflation impact, part of which will be seen with a lag. Strong demand has led to smooth absorption of the price hikes. Aggregate EBIT two-year CAGR decline was lower than decline seen in Q1FY21 two-year CAGR decline.

Near-term outlook: As regional lockdowns are being lifted, demand recovery is already visible. Unlike last year, we do not see large benefit coming from pent-up demand barring the cooling products, which can see some revival in its second summer season. We see improving housing activities and resumption of capex to 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.

Source : Equity Bulls

Keywords