Consumer Durables share price target

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.

The Coronavirus has had a widespread impact across major economies and is now becoming a global emergency. China's (the epicentre of Coronavirus) manufacturing capacities have shut down for over a month now, creating a supply disruption of finished goods/components for consumer durable companies operating in India. However, most vendors had already made provisions for inventory due to the Chinese Lunar New Year holidays. Hence, there may not be an immediate impact in the current quarter. Our interaction with the management suggests that extension of plant shutdown...

We remain constructive on the company as (1) 55% revenues come from MNCs, which ensures stickiness of business, (2) EBITDA margins are stable at >12% since fluctuations in RMC are easily passed through to customers, and (3) Return ratios are strong (RoE/RoIC of 22.0/20.0% in FY21 and 21.4/19.9% in FY22 respectively). Galaxy is a preferred supplier of surfactants to leading FMCG companies. Thus, it is important to value it against FMCG and chemical stocks at extreme ends. Since, its products are specialised but lack branding and pricing power, it should trade at a multiple closer to chemical and at a discount to FMCG companies. Our TP of Rs 1,811 is at 22x Dec-21x EPS (versus the consensus TP of Rs 1,593). Galaxy performed moderately in Q3. However, we maintain our BUY owing to its loyal customer base, stable margins profile and healthy return ratios.

Our optimism on longevity of appliance sector is driven by (1) Rapid change in consumer affordability & preferences, (2) Rising share of branded products, (3) Multi-year growth opportunity (under penetrated), (4) Untapped rural market (rural electrification, rising rural focused strategy by leading companies) and (5) Scope of premiumisation. Appliances are more sensitive to GDP growth. Thereby, any improvement in the economy in 2020 will provide better prospects for the sector. We continue to like companies who are leaders in their respective categories and have ability to tap opportunity in other categories. In consumer appliances, we have BUY rating on Havells, Voltas, Crompton Consumer and Symphony. We did a roadshow with an industry veteran for consumer appliances. Key discussion was around (1) Robust performance of appliances in CY19, (2) Structural drivers of appliances, (3) Disruption from Chinese players and (4) Winning strategies.