Consumer Durables Q2FY24 preview: Subdued demand, softer commodity costs to aid gross margin

For the Consumer Durables space, the period from July to September is seasonally weak. In this backdrop, analysts are of the view that total demand during the quarter shall remain subdued as consumers cut down on their spending; softer commodity costs shall, however, enhance gross margin; nonetheless, a lack of scale, as well as higher discretionary spending, would cap EBITDA margin expansion. Further, there are expectations that growth in premium products will continue to outpace economy/mass variants.

As a whole, Centrum Broking expects its coverage universe within the segment to report 11 per cent YoY growth in revenue at Rs 197 billion (19,700 crore), while the EBITDA margin is likely to expand by 70 basis points (bps) YoY to 7.9 per cent.

Category-wise outlook

Cooling products

As Q2 is a lean season for room air conditioners (RACs), the segment is unlikely to see major improvements in volumes during the period. “However, due to the dry monsoon in some parts of India, improvement in secondary sales has normalised the channel inventory,” notes brokerage firm Prabhudas Lilladher.

For air conditioners and refrigerators, Centrum Broking expects sales to be in the high single-digits year-on-year (YoY). The washing machine market, however, is seen to witness low double-digit growth as Q2 is a seasonally strong quarter for the category. In terms of revenue growth during Q2, the brokerage expects Voltas and Blue Star to emerge as outperformers.

“For the Consumer Durables coverage universe, we expect revenue growth of 12 per cent YoY at Rs71.3bn. The operating margin for the universe is likely to expand by 60 bps YoY to 5.2 per cent with key outperformers being VOLT (+80bps YoY), BLSTR (+20bps YoY) and WHIRL (+20bps YoY). Coverage PAT likely to rise by 22 per cent YoY to Rs2bn, mainly driven by the outperformance of BLSTR (+31 per cent YoY),” Centrum Broking adds.

Consumer Electricals

During the September quarter, the Cables and Wires (C&W) category continued to register healthy growth over other segments, primarily led by the B2B segment. Also, realisations will be favourably aided given the higher copper prices year-on-year (YoY).

The lighting category is likely to see a de-growth in sales on a year-over-year basis as the industry faces low demand and falling LED prices. Furthermore, growth in the kitchen appliances segment is likely to be in the lower double digits.

“For the Consumer Electricals coverage universe, we expect revenue growth of 11 per cent YoY at Rs126bn. The bottom line is expected to grow by a healthy 25 per cent YoY to Rs7.8bn, largely driven by the outperformance of key cable and wire brands such as Polycab India (+30 per cent YoY), Havells (+41 per cent YoY on a low base), and V-Guard Industries (+16 per cent YoY),” Centrum Broking adds.

On the sales front, Prabhudas Lilladher sees RR Kabel, KEI Industries, and Polycab to outperform, while Crompton Consumer and Bajaj Electricals are likely to underperform. In terms of profitability, C&W companies and Havells are expected to outperform.

Other key monitorable

Other key watch-outs during the earnings announcement from the sector will be the management commentary regarding demand revival, i.e., when consumer spending is expected to see a revival, capex plans, any price review decision, and the revised outlook on the margin profile for FY24 given the heightened competition.

Preferred stock picks from the space

Prabhudas Lilladher prefers C&W companies, given their robust growth and return profile, controlled working capital, and continuously expanding market. RR Kabel continues to be its top pick. Its second choice in the space is Havells, which is seen reporting a healthy recovery during Q2. The brokerage’s contra bet remains Crompton Consumer.