PL Sector Report: Consumer Durables - Jul-Sep’23 Earnings Preview – Dry monsoon help seasonally weak quarter

Consumer Durables - Praveen Sahay - Research Analyst, Prabhudas Lilladher Pvt Ltd

Jul-Sep’23 Earnings Preview – Dry monsoon help seasonally weak quarter

Quick Pointers:

§ Dry monsoon in Aug-23, benefit seasonal product sales.

§ Strong volume growth in C&W segment in quarter, KEI/Polycab/RRKABL expected to outperform our coverage over sales.

Seasonally weak quarter for sector, sluggish consumer demand and inflationary pressures continue to impact revenue & profitability. Cable & Wire segment continue its outperformance in quarter over other segments with healthy growth, largely from B2B segment. Being weak season for RAC/Fans, the sector is not expecting major improvement in volume in Q2FY24. However, there has been recent improvement in secondary sales of seasonal products, driven by dry monsoon season, resulting in channel inventory levels returning to normal. We expect our consumer durable universe to register a sales/EBITDA/PAT growth of 11.5%/17.1%/18.7% YoY in 2QFY24, excluding RR Kabel. On sales front RR Kabel, KEI Ind & Polycab to outperform, while Crompton Consumer & Bajaj Electricals to underperform. On profitability C&W companies and Havells are expected to outperform.

We prefer C&W companies, with robust growth & return profile, controlled working capital and continuously expanding opportunity market, continue our top pick as RR Kabel. Our second pick in sector is Havells, which expected to report healthy recovery in Q2FY24 even after weak season for its seasonal products. Our contra pick continues to be Crompton Consumer, the company has taken corrective measures towards growth like 1) restructured the business in five verticals, 2) hired/appointed second level management team, 3) addressed the frontend sales team attrition, and 4) increased focus on A&P and R&D for driving growth. Although the strategy might impact FY24 financials, we expect better growth from FY25 onwards.

§ Cable & Wire – healthy traction continues: KEI/Polycab/RR Kabel are poised to capitalize on volume growth, primarily in the B2B sector, and traction in the real estate industry. Despite some disruption caused by early quarter rains, stable commodity prices have allowed for consistent volume growth in their business. It is expected that KEI/Polycab/RR Kabel will achieve a volume growth of around 15-20%, outperforming our coverage in terms of sales growth. However, stretched valuation keeps limited upside potential for the stocks.

§ FMEG (ECD and lighting) segment seasonally weak quarter: The seasonally weak quarter for seasonal product in ECD segment, while dry monsoon helped secondary sales in Q2FY24, resulting in channel inventory levels returning to normal. Demand within ECD segment (primarily catering to B2C) continues to face challenges due to sluggish consumer demand, inflationary pressures and offseason for fans. The lighting segment continue to face challenges in B2C segment while B2B/B2G continues to see strong traction. Havells with its distribution expansion, increase in product portfolio and channel supports, expected to outperform (est. 6% YoY growth vs coverage universe of 4.6% YoY in FMEG segment).

§ RAC segment - weak demand sentiment: Being weak season for RAC, the sector is not expecting major improvement in volume in Q2FY24. However, due to dry monsoon in some parts of India, improvement in secondary sales has normalized the channel inventory. Voltas/Lloyd expected 12%/23% growth in UCP revenue in Q2FY24.

§ Key changes in target price: In our coverage universe, we have roll forward to Sept-25, upward revised our target price for Bajaj Electricals, Crompton, Polycab, RR Kabel and Voltas. We maintain our rating on coverage companies except Bajaj Electricals, upgrade to BUY from Accumulate.

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