Consumer Durables - Jan-Mar'22 Earnings Preview - All eyes on summer season sales

Mr. Amnish Aggarwal- Director - Research at Prabhudas Lilladher

Quick Pointers:

- RM inflation, inability to take price hikes and return of discretionary costs to put pressure on margins.
- Expectations of normal summer season post 2 years to aide summer products

Demand softness witnessed towards end of 3Q sustained in the early part of 4Q before picking up in March in anticipation of a normal summer season after 2 years which will benefit AC, Refrigerator and Cooler segments. We expect our consumer durables universe to register a 14.6% YoY growth in sales. With sustained RM inflation (LME spot Copper/ Aluminum prices up by 3%/ 17.8% QoQ), inability to increase prices due to weak demand and return of some discretionary costs, we expect margins to remain under pressure. We expect EBITDA/PAT YoY growth of -5.4%/ -4.5% across our coverage universe. With sustained inflationary environment resulting into unprecedented price hikes, we anticipate near term pressures on demand and margins.

We maintain Crompton Consumer as top pick given strong market position in core categories, expected gains from Butterfly acquisition in coming few years and attractive valuations.

- Demand softness sustains in early part of 4Q; picks up in March: Post festive sales in 3Q demand environment softened. The trend continued in early part of 4Q with onset of 3rd Covid wave. However, with subsiding infection rates and increasing mobility, demand has started to pick up especially in March.

- As temperatures soar, Room AC sales set to sizzle: With temperatures already trending higher than average and expectations of a hot summer season bode well for cooling products like Room AC & Air Coolers. Our channel checks indicate that post a fairly muted month of Jan and despite unprecedented price hikes over the past year, channel is anticipating a strong summer season given summer intensity.

- Further rounds of price hikes delayed: Given an already weakened demand environment and onset of 3rd wave, industry was unable to take another round of price hikes. However, with prices of key commodities continuing to exhibit inflationary trends (Copper/ Aluminum prices were up by 3%/ 17.8%/ QoQ), further price hikes are likely to be implemented in April22 which can negatively impact demand given unprecedented price hikes over the past year.

- Inventory at normalized levels; 2nd half of march holds the key: Inventory levels remains at comfortable levels despite certain supply chain bottlenecks (container availability/ chip shortages etc). With expectations of a normal summer season after 2 years and anticipated price increase due to inflationary environment, we expect channel filling in the 2nd half of March.

Source : Equity Bulls

Keywords

ConsumerDurables Q4FY22 EarnignsPreview PrabhudasLilladher