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White Goods and Durables: Analyzing impact of input inflation on profitability

Though it is difficult to arrive at any logical EBITDA margin estimates for FY23E due to steep volatility in input prices, we have analyzed the profitability of durable companies at Mean-1SD EBITDA margins. Prices of key raw materials aluminum, steel, copper and HDPE are up 44.2%, 25.4%, 14.6% and 8.3% YoY, respectively, in Q4FY22 YTD. Mean -1SD EBITDA margins will likely result in 7.7%-32.1% decline in FY23E net profit for companies in our coverage. We also note (1) with ~15% price hikes in past 12-15 months, there will be some limitation on price hikes in FY23, (2) most durable companies have already cut costs significantly post covid. Hence, further cost reduction measures will be limited and (3) the increase in inflation and higher interest rates may further impact the volume growth assumption in FY23E. However, we believe large organized players are better placed to tackle the situation than smaller players and are likely to gain market shares. Top picks – Havells India (BUY) and Crompton Consumer (BUY).

  • Steep increase in raw material prices: Prices of key raw materials such as aluminum, steel, copper and HDPE are up 44.2%, 25.4%, 14.6% and 8.3% YoY, respectively, in Q4FY22 YTD. Ongoing geopolitical tensions have resulted in steep inflation in crude oil prices and other commodities. We expect sustained increase in crude oil prices and other commodities to result in lower profitability for Durable companies.
  • Profitability at Mean-1SD EBITDA margin: While it is tough to arrive at any logical EBITDA margin estimates for FY23E due to steep volatility in input prices, we have analyzed the profitability at Mean-1SD EBITDA margins. Our FY23E net profit estimates will decline in the range of 7.7%-32.1%, for the companies in our coverage at Mean-1SD EBITDA margins, ceteris paribus.
  • Limited scope for cost saving initiatives: As the durable companies have initiated multiple cost saving initiatives in FY20-FY22, there is limited scope to cut costs further. We do not expect ad-spend to cut further. Freight cost, Power & fuel and travelling expenses will inch up due to higher petrol & diesel prices.
  • Likely impact on volume growth: Most companies have hiked prices by ~15% in the past 12-15 months. We believe the companies will find it difficult to take further price hikes without affecting volume demand. Further, rise in consumer inflation and increase in interest rates will also reduce wallet share for white goods and durables.
  • Sector view & top picks: We remain structurally positive on the white goods and durables sector given its strong return ratios, healthy growth potential and low penetration levels. We also expect migration from unorganised to organised sector to steadily generate value. Havells India and Crompton Greaves are our top picks. Key risks: Higher-than-expected rise in crude oil prices, failure of new product launches and any irrational competition.

Current FY23E PAT and revised PAT at lower margins

TVJ Bureau

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