Consumer Durables share price target

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.

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.