Consumer Durables share price target

Paint industry has likely grown in low-mid-single digits in volume terms in July-Aug’23 and dealers are expecting strong Sept-Oct’23 due to favourable base and delayed Diwali in CY23 - that's the insight from our conversations with paint dealers in Mumbai. They told us: (1) There are still no price cuts. Paint companies are permitting trade to generate higher profitability. However, some dealers are partially passing on the excess benefits to consumers.

We analyse the progress of CG Power in consumer durables as it completes two years after the launch in H2FY22. We note: (1) It has reached revenue of INR ~4bn and is currently profitable, (2) it has 2%+ market share in fans, 3%+ in pumps and geysers have just been introduced and (3) its products are available pan-India and manufacturing is outsourced. Since CG Power is generating profitability and its product pricing is comparable with peers, we do not model any material impact on industry profitability in the short term.

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).