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High Valuations Of Appliance Manufacturers Get A Reality Check

Investors have taken a shine to shares of consumer electrical goods companies, attracted by their growth prospects from diversification. Their shares have soared so high that a few of them are even trading only a little below multiples of leading consumer staple stocks. While valuations soared, reality has begun to bite as the new businesses could take time to deliver. Meanwhile, their traditional business is also facing pressure.

Take the case of cooling products’ companies—Voltas Ltd, Blue Star Ltd and Symphony Ltd. All three are pursuing a strategy of diversification and selling more premium products in their existing range. Investors liked this initially, but this summer season was a dampener and affected their core business growth, affecting earnings of all three stocks. They have trailed the market in the past 6 months.

Of course, the future may look different as these companies are trying to launch new products and expand the market. Even then, analysts at Edelweiss Securities Ltd point out, progress is not uniform and investor discretion is warranted. Crompton Greaves Consumer Electricals Ltd has been slow in expanding the addressable market especially in new products, says the broking firm.

Similarly, as Voltas’s white goods joint venture with Arcelik of Turkey—Voltbek Home Appliances Pvt. Ltd—prepares to launch new products, success depends on market share gains and how its products stand out. “The Volt-Bek JV will entail immense incumbent benefits (strong brand image/robust distribution network). However, its success/market share ramp up will largely hinge on how well it marries Arcelik’s innovative product capabilities with value-focused Indian consumers’ needs,” add analysts at Edelweiss.

Blue Star’s introduction of new products—air and water purifiers—also shows that success will not come easy. Investments in new products are weighing on its profitability and meaningful returns will take time to show up. In May, Blue Star told analysts the water purifier business will take three more years to achieve critical scale break-even. “This category needs consistent and focused investment in marketing and branding initiatives, which entails quite a bit of spending in order to build momentum and scale and spread the overall product awareness in the market,” the management told analysts.

The market potential is still robust, with growing affluence and rising demand for electrical consumer durables. However, stocks have fairly captured these gains. “Solid brand leverage and asset-light business models have driven 19 percent and 21 percent earnings and cash flow growth, respectively, for our consumer durables coverage universe over the past five years,” Edelweiss said in a note.

The question is if the success seen in the past five years can be repeated, as implied by their valuations. “In our view, while valuations have seen significant PE re-rating—30 percent over the period, we believe valuation story for the sector is largely played out and it will be focused around stocks delivering on business growth and addressable market expansion,” says the Edelweiss note.

In other words, from here on, the companies that are able to execute their plans are the ones where these valuations could hold on. The others could struggle to justify their lofty valuations. The coming quarters and years will see the wheat separate from the chaff. – Livemint

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