White goods and durables - Star ratings on fans: Implications and likely winners

With star ratings likely to be implemented on fans in H2CY22, we believe most fan companies may need to ramp up their portfolio of premium and/or BLDC technology based fans. As per our understanding, Havells India (Havells) and Orient are well placed to gain market shares. Crompton Greaves (Crompton) has also created a portfolio of premium fans. However, we believe Bajaj, Polycab and V-Guard need to quickly ramp up their product portfolios. The unorganised / smaller companies may flood the market with popular and economy fans just before the implementation of star ratings. It may result in some market share gains for them initially, but Havells, Crompton and Orient stand to gain in the longer run. We believe, as the life of BLDC fans is relatively lower than their AC counterparts, the replacement time may reduce and drive faster growth of the fan market. Top picks: Havells (BUY) and Crompton Consumer (BUY).

• Ratings on fans in H2CY22: As per BEE rules, star ratings on fans will be implemented in H2CY22. Post implementation, consumers will be able to make better purchase decision as per pricing and electricity consumption of fans. Fan rating will be done as per service value (cubic meters per minute divided by wattage). If it is less than 4.5, the fan will have 1-star rating and if it is upwards of 6, it will have 5-star rating.
• Technology and ratings of fans: Fans use two different technologies: alternate current (AC), and brush-less direct current (BLDC). Most fans available now are as per the AC technology. However, we note most fan companies are steadily introducing new premium fans with BLDC technology. Most fans with AC technology may have 1-3 star ratings. However, BLDC technology fans can have 5-star rating too.
• Current breakup of fan market as per pricing and technology: Fans at price points of less than Rs1,500 are termed sub-economy or popular fans. Those priced between Rs1,500 to Rs2,500 are economy fans. We believe most fans in popular and economy levels will be in the range of 1-3 star rating. However, fans priced above Rs2,500 may have BLDC technology and may qualify for 4-5 star rating.
• Likely increase in purchase cost and savings in electricity bill: As consumers may prefer to purchase fans with higher star ratings, they are likely to upgrade to fans with BLDC technology. Hence, the initial cost to purchase fans is likely to increase by Rs500-700 per fan. However, we note there will be reduction in variable cost of fans. Hence, consumers are likely to benefit more by upgrading to BLDC fans.
• Key players in different sub-segments of fans: Crompton is market leader in overall fan, and popular and economy fans, market. Havells is market leader in premium fans. Orient also has strong positioning in premium fans. We note Atomberg too has created a strong portfolio in premium BLDC fans. While Bajaj has stepped up investments in premium and BLDC fans, its major portfolio still consists of popular and economy fans.
• Impact on trade and likely winners: Just before the star rating is implemented, the smaller / unorganised players may flood the market with popular and economy fans. While they may gain some market share initially, the larger organised companies like Havells, Crompton and Orient are likely to gain market shares in the long run.
• Sector view and top picks: We remain structurally positive on the white goods and durables sector given its strong return ratios, healthy growth potential and low penetration levels. We also expect migration from unorganised to organised sector to steadily generate value. Havells India and Crompton Greaves are our top picks. Key risks: Higher-than-expected rise in crude oil prices, failure of new product launches, and any irrational competition.

Source : Equity Bulls

Keywords

WhiteGoods Durables HavellsIndia CromptonGreaves OrientElectric ICICISecurities StarRating Fans