By Deeksha Janiani
A sense of inertia engulfed the Indian markets in the past month. The Nifty 50 index traded flat as a surprise rise in inflation, muted industrial output and crisis in Adani group stocks took away the sheen of a favorable budget. One sector that stood out in this inconclusive month was Consumer Durables. It was among the top five best performing sectors.
Consumer durable makers have been in investment mode in FY23 because of the PLI boost, housing upcycle and higher government capex. They also intend to take advantage of the large export opportunity within the broader electronics sector. Players like Havells, Voltas and KEI Industries are expanding their room air conditioning and cables capacities.
However, there is one missing link in this encouraging story – healthy consumer demand. Consumer durable players have suffered in previous quarters owing to higher input cost inflation and weak demand in mass segments.
Now, with the relaxation in income tax slabs effective FY24 and declining retail inflation, companies anticipate a strong revival in discretionary spends. The good news does not end there. The hike in the Centre’s capex budget will attract higher private investments and bodes well for the institutional businesses of these players.
With this two-pronged push to boost demand, the consumer durables sector could well be on the cusp of a new upcycle.
Consumer durable makers see healthy top-line growth in Q3, profit growth lags behind for some
Major consumer durable makers posted double-digit revenue growth in Q3 led by higher sales volumes. Apar Industries saw its revenues jump over 75% YoY in Q3, outperforming the entire pack by a margin. Revenues from its flagship power conductor business doubled owing to acceleration in exports.
Apar Industries’ EBITDA grew faster than its revenues on margin expansion. Polycab also saw its margins improving on lower copper prices and a superior product mix. Basically, Polycab sold more wires than cables and the former category carries higher margins.
Havells saw its EBITDA fall during Q3 as its margins contracted in the switchgears and lighting divisions. Continued losses in the Lloyd consumer division also weighed negatively on the profitability of the company.
Wires and cables emerge as the star segment in Q3
For Havells, wires and cables was the only segment which performed well both in terms of revenue and operating profit growth. The volume growth in this segment was over 20% in Q3. The company saw strong demand in the industrial and infrastructure sectors (B2B).
According to the Havells management, dealers were stocking up on wires in anticipation of their prices rising in tandem with copper prices. Contrary to this, the management of Polycab saw a genuine rise in demand for this segment and didn’t perceive it as a one-off. For Polycab, wires outperformed cables on strong demand from the real estate sector in Q3.
For Apar Industries, the cables segment contributed around 22%-24% of its revenues. The segment’s topline grew over 75% YoY, not just in Q3 but also in 9MFY23. The company witnessed robust demand for elastomeric cables from the renewable energy, railways and defence sectors, both abroad and back home.
B2B business makes up for the drag in consumer-facing business
Commenting on the consumer business in an interview, Anil Gupta, Managing Director at Havells, said, “In this quarter, consumer and residential demand went down despite the fact that real estate continues to do well.” Havells derives 75% of its revenues (ex. Lloyd) from the B2C segment. Inflationary pressures have resulted in its lackluster performance.
Similar trends were visible for players like Polycab and Blue Star. The revenue for Polycab’s FMEG business (10% share in top line) was flat YoY and also made operational losses owing to higher advertising spends.
While Blue Star’s unitary product division (room ACs etc.) posted healthy growth, the projects division grew ahead of it in Q3. Its order book jumped nearly 50% at the end of Q3 on strong traction from infrastructure, railways, factories and data centre sectors.
For KEI Industries, its domestic institutional sales excluding extra-high voltage (EHV) cables posted robust growth and grew ahead of dealer sales (B2C) in Q3. However, growth for the overall B2B segment was hindered by the fall in exports and EHV sales during Q3.
Consumer durable players line up investment in wires, cables and AC segments
Enthused by the performance of its flagship division and strong government capex, Polycab is foraying into the EHV cables segment. Polycab will set up a production facility for EHV cables in Halol, Gujarat, and it will be ready for commercial use by 2025. KEI Industries is already present in this segment.
According to the management, power demand is rising manifold in tier-1 and tier-2 cities and smart cities are also coming up. This means that overhead transmission lines would have to be set up underground. This will create higher demand for EHV cables. Polycab sees a market of Rs 4,000-5,000 crore for this segment in FY26.
Polycab also tops the charts in terms of capex planned for FY24. KEI Industries and Apar Industries are next in line. Notably, Havells has not announced an outlay for FY24 and will do so in Q4FY23.
KEI Industries has drawn a three-year capex plan of Rs 700-750 crore to speed up its revenue growth rate to 17-18% from an average of 15%. The company is seeing strong demand from the transmission and distribution space as well as the real estate space. Apar Industries is set to spend on greenfield projects in both the cables and conductors’ business.
Blue Star recently completed phase 1 of its Sri City project and expanded the capacity for room air conditioners by 50%. It plans to invest another Rs 200 crore in this project by FY27. Ultimately, this project will aid in market share gains for the company.
Consumer durable makers are upbeat on the air conditioning space, owing to the hot weather conditions in India and lower market penetration of this appliance. Notably, Blue Star has continuously gained market share within this growing yet competitive market.
The company is also in the process of buying additional land in Sri City SEZ for producing commercial ACs and catering to export markets. B2B business certainly looks promising. Blue Star envisages a minimum investment of Rs 250 crore in this project.
Analysts are optimistic about near-term growth prospects
Analysts expect consumer durable players to clock double-digit top-line and bottom-line growth between FY22 and FY24, according to Trendlyne’s Forecaster. However, valuations are quite pricey for players like Havells and Polycab. Havells’ management indicated that the company could face challenges on the margin front as input costs are rising again.
Although Blue Star is also trading at a higher PE of 52X, its earnings growth prospects are in line. Analysts are most optimistic about the prospects of Apar Industries. The company sees its cables segment growing at a 25-30% rate backed by railways and renewable energy projects. Its PE valuations are also quite attractive at 19X.
Now that the B2B business is holding up strongly, companies are awaiting a rebound in consumer demand for appliances. February and March are crucial for sales of ACs while the entire Q4 happens to be the peak construction period. The consumer durables sector is at an inflection point and investors should watch out for the Q4 results.
This analysis by Trendlyne is meant for investor education - to help understand companies and make informed investment decisions on their own. It should not be considered an investment recommendation.