Consumer Durables share price target

To assess impact of the third phase of the lockdown in India on the room air conditioner (RAC) industry, we interacted with various stakeholders and attended several conference calls.

4QFY20 Preview: Appliances cos have seen strong growth in Jan-Feb (particularly for RAC) in anticipation of supply constraints from China in peak season. However, Covid-19 led lockdown has resulted in revenue loss for the last 10-12 days of March. Generally, March is important for channel filling for summer driven appliances. Thereby, it has higher weightage for the quarter. Covid-19 has taken away the advantage of healthy pre-buying by the distributors. Our coverage universe is expected to post 6/9% revenue/EBITDA decline in 4QFY20 (+13/-6% in 4QFY19, -2/-1% in 3QFY20). Covid-19 impact on cooling products: We believe Covid-19 will have massive impact on cooling appliances (RAC, Air Cooler, Fan, Stabilizer) for summer-2020. Lockdown being in the peak season has already impacted channel filling opportunity in March along with consumer demand in the last 15-20 days. Summer started late this year (by 10-15 days) but extension of lockdown will have significant impact on the demand. Transportation, installation and financing will be key challenges even after govt. opens the lockdown gradually. Thereby, we foresee bleak outlook for cooling products for summer-2020

We expect apparel sector to be most significantly impacted by COVID followed by QSRs and grocery retailers. Weak demand will bring down overall volumes of the business in FY21E. Companies will prioritize stabilizing existing business over installing new ones. Hence, we expect drastic decline in store addition rates and SSSG in FY21E. We expect DMART to face significant challenge to re-gain normalcy in business as the company will have to ensure minimum customer per store to address social-distancing. In 4QFY20, except DMART, all other retailers will face contraction in PAT due to high fixed cost. At current prices, our top picks are JUBI and Trent....

We have BUY rating on ITC and Radico, ADD rating on Jubilant, UNSP and Colgate The impact from Covid-19 on the FMCG sector will be sharper on revenues for cos in 4Q, despite many essential categories have witnessed pre-buying at offtake level in Mar. Lockdown has impacted transportations and channel filling opportunities for the quarter. Trade inventory has reduced for most categories. Lockdown of the last 12 days will impact revenues by 13-15% for the qtr for most cos. Channel filling benefits will add to FY21 revenues (~3%).

We believe paints and adhesive companies are likely to benefit from lower raw material prices as TiO2 and VAM prices declined 5% and 16% YoY, respectively, in Q4FY20E. Under our coverage universe, Asian Paints, Pidilite Industries are likely to report gross margin expansion of ~300 bps, ~100 bps YoY, respectively, in Q4FY20E. On piping front, while Astral Poly may benefit from price hikes in the CPVC product categories, a drop in PVC prices by 5% YoY is likely to benefit Supreme Industries in Q4FY20E. However, lower operating leverage in the paints, adhesive and piping...

We have not assumed an increase in working capital cycle due to the liquidity crunch faced by the distribution channel. Weak demand and tight liquidity could also lead to price disruption in an effort to liquidate existing inventory (especially for summer products). Although it is difficult to assess when the demand will be fully recovered, we believe that companies with dependence on seasonal products and B2B segments will take longer to recover. In our coverage universe, this could adversely affect Havells. We prefer Crompton and Dixon, and have Buy rating on both. We maintain Hold on Blue Star, V-Guard and Voltas, while the risk of delayed recovery and premium valuations lead...

Our interaction with managements and dealers indicates significant prebuying activity of consumer goods during January-February 2020 on fears of supply related issues from China. While companies have secured supplies to avoid any disturbance in sales in Q4FY20, demand was negatively impacted in March 2020 owing to holiday and post that lockdown across countries. We also believe a late recovery in demand for consumer goods will also impact Q1FY21 performance due to 1) shortage of workers (due to heavy migration), 2) shift in focus on essential goods compared to discretionary products and 3) streamlining of supply chain....

On account of the spread of Covid-19 on a global scale, we have seen Government of India announcing a lockdown across the country for 21 days with effect from March 24, 2020. However, the lockdown could continue for much more than 21 days. This lockdown would result in shortage of workers to factories in addition to many of our FMCG coverage companies shutting down some of their manufacturing facilities for discretionary products in addition to supply chain disruptions. However, we believe demand for daily use items such as staples, soaps, toothpaste, milk, sanitisers, grocery would...

COVID-19 impact on retail and consumer durable sector: Management interactions

To assess the impact of novel coronavirus, or COVID-19, on sales of consumer durables products, we conducted channel checks across four Indian cities from 18th to 20th March.