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Festival boost: Home appliance makers look to regain some lost ground

Consumer durables and electrical appliances companies remain in focus with the approaching festival season. Havells announced entry into the refrigerators segment under Lloyds brand recently. After a weak first half of FY21 — with summer season sales in the June quarter getting impacted due to the lockdown, and the September quarter being seasonally weak — the upcoming festival season is likely to see companies regain some lost ground, said analysts.

For Havells, which deals in electrical appliances (EA) and consumer durables (CD), its foray into refrigerators is timely and will help it utilise prevailing opportunities. Analysts at Motilal Oswal Securities (MOSL) said there is room for brands to gain entry given the structural double-digit growth opportunity in the segment. Also, the work from home (WFH) culture has resulted in an increased requirement for larger, higher-end refrigerators. Havells — which offers consumer products, ranging from fans and geysers to water & air purifiers and other products — enjoys good brand recognition and this segment continues to grow well. But, there are hiccups, too.

Growth in its switchgear, lighting & fixtures and cables businesses hinges on pick up in real estate activities that are yet to see a revival. A turnaround in the acquired Lloyds business, which lost peak summer season air conditioner (AC) sales due to the lockdown, is still awaited. Thus, after considering festive season opportunities and refrigerator launch, MOSL has raised FY21 and FY22 earnings estimate by 14 per cent and 6 per cent, respectively, but maintains a “neutral” rating on the stock trading at 45x FY22 estimated earnings. A correction in valuations may be a good entry point.

While Blue Star is a strong player in cooling products, it has lower exposure to north India (unlike Voltas that benefitted from heatwave). Moreover, its higher share of B2B business (installations in office space, etc), which continues to see weakness, is keeping analysts watchful despite the company’s strong balance sheet and good product range.

In cooling products, analysts prefer Voltas as it remains better placed and had seen an exceptionally good June quarter (Q1). It is gaining market share in room ACs and strengthening its leadership. With decent summer season sales, channel inventories are estimated to be low and the company can still see growth in earnings. “Voltas remains an obvious choice in the cooling products segment as it has consistently outpaced the room AC industry and has a strong balance sheet; its Voltbek product range (white goods range launched under a joint venture) is growing well,” said Harshit Kapadia at Elara Capital. Voltas also remains the top pick of Nomura, which has a “neutral” stance on Havells because of its relatively high exposure to infra/real-estate segments and fair valuations.

Among others, analysts are positive on electrical appliances firms. These companies’ revenues reached close to 80-90 per cent of pre-Covid levels in June; July and August, too, witnessed decent sales momentum, Kapadia noted.

EA sales are also getting a boost from WFH culture and firms offering home and kitchen appliances see better growth prospects in the current environment.

Here, Crompton Greaves Consumer Electricals (CG Consumer) remains the top pick given its sharp consumer-focused approach and strong range of fans, water heaters, pumps, and other appliances. This segment has been performing well with double-digit growth for eight consecutive quarters before the Covid-19 outbreak in March. Although the lockdown impacted sales in Q1, the following period witnessed swifter recovery. Also, MOSL pointed out like-to-like category margin for CG Consumer is materially higher than Havells. Industry growth in its core segments of fans, lights and pumps is likely to remain at 8-10 per cent annually over the medium term.

“The company can potentially outperform (peers) led by its focus on premium fans, success in agri pumps, and market share gain in lights,” said analysts at Nomura who have a “buy” rating on CG Consumer because of its growth potential in the small appliances segment.

Bajaj Electricals and Orient Electric, too, remain well-placed to benefit from the demand in smaller home and kitchen appliances, such as mixers, and geysers. Orient is being looked at with optimism considering its strong position in the fans and lighting segments, besides a fast-growing kitchen appliances range. While the demand environment remains favourable, a further trigger for Orient can come from premiumisation-led growth.

Factoring in healthy growth and the cash flow trajectory for a resilient yet scalable consumer business, Edelweiss has raised its target price for Bajaj Electricals to Rs 600 (from Rs 420). This indicates an upside potential of 21 per cent from current levels of Rs 494.-Business Standard

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