Consumer Durables share price target

White goods and durables companies benefitted significantly in the previous capex and infrastructure upcycle of FY02-FY08. Most companies under our coverage reported 20%+ revenue and EBITDA CAGRs over FY02-08. Segments such as switches and switchgear, cable and wires, commercial refrigeration, commercial air conditioning, B2B lighting were key beneficiaries.

EMS companies offer strong growth potential due to rising domestic demand, import substitution, China +1 story and PLI benefits. However, we note they do not generate strong EVA as the return ratios are similar to cost of equity (Exhibits 1-4). Their competitive advantages are limited (apart from their long-term relationships with large brands).

Trends from interaction with companies and channel checks in July-Aug’23 are as follows: (1) B2B demand has remained strong, (2) B2C demand has recovered in July-Aug’23 partially helped by favourable base YoY, (3) There is improvement in demand for fans, and fan companies are likely to raise prices by 1-1.5% of BLDC fans, (4) Lighting segment continues to be under pressure and the deflationary trends continue.

As paint industry evolves from a ‘somewhat rational competition’ to a ‘perfect competition’ market, we expect accelerated industry consolidation (read M&As, divestitures by listed players and/or new entrants) over FY23-FY30. Drivers are: (1) market leaders’ focus on protecting their market shares even at the cost of profitability, (2) high growth ambitions of new entrants and (3) survival for mid-sized players.

Woodpanel companies under our coverage reported a tepid Q1FY24 and we expect near-term headwinds to persist due to rising wood cost. We however remain optimistic about demand in the medium term due to continued uptick in the real estate sector and increased acceptance of readymade furniture.

Kajaria Ceramics (KJC) and Somany Ceramics (SOMC) have reported volume growth of 7.2% YoY and 8.1% YoY in Q1FY24 as tile revenues grew 5.4% and 5.8% YoY, respectively, due to modest demand. Consolidated EBITDA margin for KJC/SOMC was up 67bps/59bps YoY due to lower RM cost (including gas cost).

This is NOT a template-based results review report (of aggregate performance, charts et al). This is a portfolio manager summary of the under-appreciated, yet very important takeaways from the 1QFY24 results season on consumption (Staples, Retail, Paints, Jewellery, Building Materials, Durables, etc.). We decipher management comments and add the layer of our views.

Bajaj Consumer (BaCo), Emami and Jyothy Labs (JYL) – the trio – continue to trade at a considerable discount to Consumer Staples peers (all three companies (still) appear great value picks). These companies have gradually improved execution with: 1) focus toward distribution expansion, 2) improving performance in new-age channels, 3) diversifying their product portfolio (acquisitions, digital-first launches).

We note two divergent trends in white goods and durables sector as (1) B2C segment continues to report muted growth rates due to high inflation, regulatory changes and unseasonal weather conditions and (2) B2B segment is driving strong revenue growth led by revival in infrastructure, capital goods and real estate sectors.

Post interacting with companies and channel partners in the white goods space, we note: 1) revenue growth has recovered slightly in July’23-TD after remaining muted in Q1FY24, 2) trade schemes as well as consumer offers are at elevated levels owing to steep competitive pressures, 3) adspend too has increased post decline during FY21-FY23, and 4) B2B demand remains strong vs B2C demand.