Consumer Durables share price target

Currency Outlook: Pressure on INR. Monthly Strategy Wrap: Mixed outlook. Consumer Durables: FY22 Review Margin gains elusive

War, inflation, supply chain disruptions and Covid all dented consumer durable margins, but likely to be transient

Indonesia, the largest producer/exporter of palm oil, has announced a ban of palm oil exports. The ban comes as another blow after the surge in oils due to the Ukraine-Russia war. Given that plamoil is 60% of oil imports and...

OUR TOP PLAYS Positive: Amber Enterprises, Polycab India Negative: Symphony Ltd

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...

After showing some signs of stabilisation in Q3FY22, crude & palm oil prices (both up ~60% YoY), started shooting up from February-end due to RussiaUkraine crisis. This resulted in another steep rise in inflation for consumer companies. Most FMCG companies are likely to witness 200-400 bps gross margin contraction due to continued inflation in crude, palm, milk & wheat. Copra & tea prices are down 10-20% YoY. Gross margin contraction is likely to be offset by cut in ad & overhead spends. We expect a 25 bps contraction in operating margin for our coverage universe. TCPL would see ~400 bps expansion in gross as well as operating margin. We estimate 50-150 bps...

Key raw materials such as titanium dioxide (TiO2), vinyl acetate monomer (VAM), aluminium, high density polyethylene (HDPE), low density polyethylene (LDPE) witnessed upward movement in the range of 9-60% YoY. We believe limited price hike against the steep rise in raw material prices is likely to weigh on gross margins. As a result, the EBITDA margins of coverage companies are likely to decline 245 bps YoY. However, on a sequential basis the EBITDA margin is likely to remain flat supported by price hikes taken by the companies....

The I-direct consumer discretionary universe will be negatively impacted by rise in key raw material prices followed by sharp rise in crude oil prices by 30% QoQ in Q4FY22. Key raw materials such as Titanium Dioxide (TiO2), vinyl acetate monomer (VAM), aluminium, high density polyethylene (HDPE), low density polyethylene (LDPE) witnessed upward movement in the range of 9% to 48% YoY. Our coverage companies have already taken price hikes in the range of 15-20% by 9MFY22 to offset the higher raw material prices. The recent surge in raw material prices will require...

While these new age companies presently account for only 3% of total revenue, given targeted white spaces their share could reach 8-10% in the next few years, which can potentially slice off 100-200bps of growth for incumbents. For new age brands with critical scale in terms of income levels, ease of distribution, and funding, a flywheel effect is in motion. While the majority of these individual brands will likely not scale beyond a certain point, a long tail of brands will emerge. In comparison to other sectors, the FMCG sector has historically been more resilient to external challenges, leading to strong earnings (12.5% CAGR) and valuation rerating (2x) in the last two decades. Earnings traction was steady, driven by (1) share gains from regional/small players, (2) distribution expansion (particularly in rural areas), (3) consistent success with brand extensions, (4) high brand recall to drive premiumisation, and (5) outsourcing to help deploy funds to increase competitiveness. Top-tier mainstream companies have had a smooth ride, boosting investor confidence in earnings visibility. However, in the evolving competitive landscape, we remain sceptical about sustaining these drivers/assumptions. D2C/New age consumer brands are far more disruptive/ agile than traditional/regional competition. Established incumbents are no longer protected by entry barriers (distribution and brand), resulting in a level playing field and category fragmentation - a structural trend.