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High failure rate in large appliance segment; focus on companies selling smaller appliances, ICICI Securities

The large appliances market in India is dominated by MNCs. Due to consistent technological changes and higher investments in R&D (usually by parent), we believe they will continue to dominate the said segment of the market. There is high failure rate too in large appliances with players like BPL, Videocon, Onida, Toshiba, AIWA, AKAI, Sony, Sharp, Allwyn, Sanyo succeeding initially, but failing to maintain / increase their market shares. We believe the domestic companies, which are focused more on smaller appliances, are likely to generate higher EVA. They can also generate healthy value in lighting, switches & switchgear, and cables & wires due to established distribution networks. Top picks in the sector are: Havells, Bajaj Electricals, TTK Prestige, and Crompton Greaves Consumer.

  • Large appliances market: This market consists of five major segments, viz. 1) television, 2) washing machines, 3) air conditioners, 4) refrigerators, and 5) dish washers. While dishwasher is a small segment, the other four have strong presence in India, having grown at low double-digit CAGR over the past decade and continuing to grow at a similar clip.
  • MNC-dominated market: The market of the above-named five product segments is dominated by large multinationals such as Whirlpool, Samsung and LG. MNCs like Bosch, Midea and Haier have also entered these segments in India. Only Voltas, among Indian companies, has strong market share in air conditioners.
  • High failure rate in large appliances: We note many Indian players as well as MNCs have failed to gain market shares (sustainably) in large appliances. Players such as BPL, Videocon, Onida, Toshiba, AIWA, AKAI, Sony, Sharp, Allwyn, Sanyo had initial successes in the segment, but failed to maintain / increase their market shares.
  • Steady changes in technology: We believe the key reason for high mortality rate in large appliances is the steady change in technology and steep competition. With steep competition, the incumbents need to lower prices to maintain market shares. However, they still need to invest in technology and R&D. Hence, most players may generate negative / negligible EVA over the longer term.
  • Advantage is with players focused on smaller appliances: We believe the domestic companies that are focused on smaller appliances (e.g. cookers, fans, mixers, water heaters, water purifiers, juicers, toasters) are likely to generate strong return ratios. We also believe the domestic players can benefit in segments like cables & wires, switches & switchgear, and lighting due to their large distribution reach.
  • Sector view and top picks: Considering strong return ratios, healthy growth potential, and low penetration levels, we remain structurally positive on the white goods and durables sector. We also expect migration from unorganised to organised sector to steadily generate value. Havells and Bajaj Electricals are our top picks. We have an ADD rating on TTK Prestige.

Breakup of white goods and durables industry

Source: Company data, I-Sec research

Current status of key brands in large appliances

Source: Company data, I-Sec research

Valuation and risks
We value stocks in the segment on DCF methodology (WACC and TG ranging from 10-13% and 3-6% respectively). Key upside risk: better-than-expected gross margins due to correction in input prices. Key downside risks: 1) unexpected irrational competition due to deceleration in general consumption demand, and 2) steep inflation in input prices.

White goods and durables sector valuation summary

TVJ Bureau

 

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