Our comprehensive channel checks on consumer durables/electrical products to assess overall demand and the impact of slowdown suggest: While retail sales have been weak across segments (white goods, fans, cables & wires, etc) led by weak demand in a lean season, large cooling product brands managed early channel stocking. Despite cost-push and weak retail demand affecting pricing power of brands, FY20 OPMs may not see a drag with companies already resorting to cost control (reduction in ad spends/ other expenses). New construction/ government infra spend is impacting sale of wires, switchgear etc. Our sector-top picks are Voltas and KEI given superior long-term growth and scalability and are revising earnings and TP for our coverage factoring in recent tax cuts.
Channel stocking leads to better Q2 even as retail demand tapers. The broad-based economic slowdown and prolonged monsoon is dampening retail sales across durables/light electricals products. Dealers across regions are witnessing a drop in retail sales YoY, except those in the south, which have done better across categories in a lean season. However, our feedback suggests that brand-to-dealer sales were better, particularly in the beginning of the quarter, especially for cooling products (RACs, refrigerators). The light electricals segment, i.e. cables & wires, fans and switch gears, may have seen muted single-digit growth. Festival/summer demand remains a key variable for our 12% growth estimates for 9MFY20E.
Despite weak pricing/cost-push significant OPM dent unlikely Intense competition, especially in white goods with brands focusing on market share, coupled with weak demand scenario across categories, is restricting brands’ capability to pass through (duty/input cost). Despite this, we believe FY20E margins for the sector will improve by 40-50bps YoY as most players are focusing on cost control.
Voltas, Crompton, KEI lead the pack; weak infra impacts Havells. In the room AC space, market leaders (Voltas, LG etc) with strong distribution networks/ brand franchise continue to outperform as per our channel inputs for Q2. In light electricals, Crompton and KEI seem to be on a stronger wicket.―Financial Express