Consumer Durables share price target

We note expenses amounting to ~10% of net sales are directly impacted by change in crude oil prices for white goods and durable companies. There is negative correlation between change in crude oil prices and EBITDA margins of Durable companies. Historically higher crude oil prices have impacted margins for 2-3 quarters but we also note the durable companies have managed to pass on the inflation via pricing actions.

In our recent visit to a high-end, popular consumer products store in a Mumbai suburb, we could palpably sense tremendous buoyancy in consumer sentiment, with extremely high footfalls. Change in consumer behaviour - a move from traditional to aspirational products which are high on convenience was apparent. Glass-based products were in high demand as the consumer stayed away from plastic, and more notably, steel products have been and continue to outprice themselves in the ongoing commodity price increase wave. Our...

Though crude, vegetable oil, palm oil & milk prices have shown some signs of cooling off in December due to import/custom duty reduction, these prices have remained elevated for most part of the quarter. Moreover, it is difficult to call out at this time that commodity inflation has peaked out. We believe high commodity inflation would result in 200-400 bps contraction in gross margins for FMCG companies. However, marketing spends always give a leeway to these companies to protect operating margins. We estimate flat operating margins for our coverage universe. Nestl, Marico, Colgate, Zydus...

Most dealers indicated that volume growth is likely to be in low teens during Q3FY22. While there was healthy growth in Oct-Nov’21, the month of Dec’21 saw deceleration. (2) While Apr-June quarter is key season for waterproofing, most dealers indicated that there was strong demand in Oct-Dec’21 too as consumer habits are changing

India lighting market, ~Rs212bn in size, is largely dominated by the organised sector (~65% share). We believe organised players such as Bajaj Electricals and Crompton Greaves would likely be the net beneficiaries of a further share shift away from the unorganised segment. LED lighting is a high growth sub-category which alone is expected to reach Rs 259bn by FY23 (86% of the overall lighting market).

An upper middle class growing 2.8x over 2018-30E and low ownership levels will spur new, upgrade and replacement demand for durables

Air cooler is a high-growth category largely dominated by the unorganised sector (75% market share as of FY21). Covid, GST implementation and increased consumer preference for branded products has pushed the share of organised sector up from 10% in FY11 to 25% in FY21. We believe organised players such as Bajaj Electricals, Havells India, and Crompton Greaves will likely be net beneficiaries of further shift caused by high inflation in commodity costs and supply chain disruptions.

We believe two divergent strategic approaches are at play in paints industry (prior to Grasim's entry in CY22) - (1) market leader Asian Paints is endeavoring to accelerate industry formalisation by dropping profit pool (so that Grasim can't reach the "easy 5% share" by gaining from informal players), (2) Indigo, Akzo etc. is likely (somewhat) protecting their profitability to have adequate ammunition for the inevitable heightened competition in CY22 and beyond.

We initiate coverage on Orient Electric with a BUY rating and maintain our BUY rating on Crompton Consumer and ADD ratings on Havells, Voltas, TTK Prestige, V-Guard and Symphony. We roll forward the target price for our coverage universe to FY24. The consumer durable industry, including fans, has seen numerous trends over the past decade. However, fan continues to remain an underrated category. The industry (>INR 90bn) has seen a shift across product evolution, customer preferences, and distribution. With the best RoCE amongst durables, fans have helped companies reinvest and diversify into other appliances. We see further transformation in the fan industry with the implementation of energy efficiency norms, which would consolidate the industry further. We believe top brands including Crompton Consumer, Havells and Orient Electric stand to benefit the most from the industry transformation

Our coverage universe is likely to witness a 15 bps contraction in operating margins but ex-ITC it is likely to contract by 80 bps. Most commodities have remained elevated in the last three months pressurising FMCG companies to take prices hike & reduce advertisement spends. Average palm oil prices are up 60% YoY and 6% QoQ. Similarly, average crude prices have increased by 68% YoY and 6% QoQ. Copra prices have been flat YoY but cooled off by 22% from the peak in March 2021. Tea prices have also declined ~30% in last two months. Despite price hikes, we believe operating margins of HUL,...