Consumer durable

Demand momentum robust, seen steady growth in the order book – Blue Star


 

Update on the Indian Equity Market:

On Wednesday, NIFTY closed in the green at 18,212 (+0.9%). Among the sectoral indices, REALTY (+1.9%), OIL & GAS (+1.5%), and AUTO (+1.5%), closed higher while  PHARMA (-0.2%)  and HEALTHCARE (-0.2%) closed in the red. M&M (+4.5%), BHARTIARTL (+3.7%), and INDUSINDBK (+2.8%) were the top gainers. TITAN (-1.6%), TATASTEEL (-1.5%), and SHREECEM (-1.1%) were among the top losers.

Excerpts from an interview of Mr. B Thiagarajan, MD, Blue Star with Economic Times dated 6th January 2022:

  • Right from August onwards, the company has had a good festival season, the demand held up till the New Year sale in quite a few markets. Building up to Sankranti, the sales are good, however, the spike in COVID cases can have some impact on the retail movement, and the company doesn’t expect much loss of sales as it is peak winter season.
  • The company had taken 3 price hikes in CY21 and it has no plans of further price hikes on the back of stabilising commodity prices, improved product portfolio, and efficient supply chain. The company expects commodity prices to be stable over the summer season.
  • The company has improved its supply chain efficiency with regards to insulating itself from shocks by ordering semiconductors till FY23 in advance, blocking raw material inventory for 6 months instead of its usual policy of 3 months. The supply chain challenges continue but it has somewhat eased and the company is fully secured for the summer season.
  • The company has seen robust demand in the room air conditioner industry owing to excellent momentum from tier-3, tier-4, and tier-5 towns. The penetration in the middle class is fast improving.
  • PLI has become an important enabler to create a huge component ecosystem. To earn the PLI, the industry has to improve its revenue which means the competition will be intense and prices will come down while the scale builds up. It is a question of maintaining profitability by building scale.
  • IT, ITES workforce are returning to offices and therefore air conditioning demand is coming. The biggest demand is from the manufacturing sector. Huge expansions are taking place thanks to the PLI in various sectors the government has offered. Capacity expansion is leading to new factories coming up, thus the company expects a huge demand for industrial cooling.
  • There are many social infrastructure projects like the metro railways or water-related projects and the resulting order book is at a record high at this point. It is very encouraging as far as the B2B segment is concerned and the cash flow is also good indicating encouraging signs for the segment.
  • Once in two years, energy labels are getting changed and therefore people will have to buy higher energy efficiency products. But the demand for five-star ACs is not going up significantly because the consumers are predominately first-time, middle-class buyers, who are more price-driven.
  • However in the B2B segment, the real hot selling products are highly energy-efficient like VRB (Vanadium redox battery) or the VFD (Variable Frequency Drive) driven, as manufacturers are more focused on setting up green buildings, platinum rated, and gold rated factories.

Asset Multiplier comments:

  • We think the healthy order book, expansion of business in the B2C segment, and PLI Investments will be the key positives for Bluestar but the supply chain and increased commodity prices may impact profitability.
  • Healthy growth opportunities in Industrial Manufacturing induced Capex and the government’s boost for social infrastructure will drive growth for Bluestar.

Consensus Estimate: (Source: Market screener website)

  • The closing price of Bluestar was ₹ 1,006/- as of 12-January-2022.  It traded at 60x/37x/30x the consensus Earnings per share estimate of ₹ 17/27/33/- for FY22E/FY23E/FY24E respectively.
  • The consensus average target price is ₹ 1,025/- which implies a PE multiple of 31x on FY24E EPS of ₹ 33/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

 

Demand growth visible despite price hikes – Blue Star

Update on the Indian Equity Market:

On Wednesday, NIFTY ended lower at 17,629 (-1.1%). All the sectors were losers today led by METAL (-3.0%), PSUBANK (-1.9%), and PHARMA (-1.9%). Among the stocks, TATACONSUM (+2.5%), ONGC (+2.2%), and UPL (+1.7%) led the gainers while HINDALCO (-4%), SBILIFE (-3.6%), and INDUSINDBK (-3.4%) led the losers.

Excerpts of an interview with Mr. B Thiagarajan, MD, Blue Star with CNBC TV18 on 5th October 2021:

  • The sales of room air conditioners in the month of Sep-21 were better than last year (Sep-20) and have reached the pre-pandemic levels.
  • The summer season, which is the strongest quarter for the company, was impacted by the second COVID-19 wave. It will be extremely tough for the company to make up for it in 2QFY22E and 3QFY22E.
  • However, demand from the month of Jul-21 has been considerably higher than industry expectations. As people are working from home and spending more time in their homes, they are renovating and upgrading their houses which could be the reason for robust demand. The company anticipates strong demand throughout the next festival season.
  • In 1QFY22, Bluestar was at 35% of pre-pandemic levels and in Sep-21 have reached the pre-pandemic levels.
  • The company is getting growth from first-time buyers, as the number of first-time purchasers has considerably grown. Despite the price seen in the months of Jan-21, Apr-21and Sep-21 the demand is not impacted. 50 percent of buyers used consumer finance schemes.
  • In terms of price hikes, there was an average rise of roughly 4% in the month of Sep-21.
  • On a YoY basis, the company anticipates a 1% decrease in margins due to raw material inflation, which would be compensated by operating costs. Hence the overall EBIT/PBT Margins would not be impacted.
  • The firm does not anticipate any significant increases in freight and commodities in the near term.
  • The B2B segment is performing well in the manufacturing sector. There are also various infrastructure projects like metro railway project and data center which are important segments for Bluestar. It includes air conditioning and electro-mechanical work. The company is closely tracking this segment and participating actively in the enquiries.
  • In the B2B segment, the important sector is building which includes offices and light commercial or retail (shops, showrooms, boutiques, and restaurants). Such kind of infrastructure is built upon in many Tier-3/4/5 cities. The manufacturing, commercial segment, and buildings account for 30%, 40%, and 30% of the B2B segment revenues respectively.

Asset Multiplier Comments

  • There has been a bounce-back in demand starting from July-21 which will likely be reflected in 2QFY22 sales numbers. However, a complete recovery will likely be visible in 1QFY23E.
  • Upcoming investments in infrastructure and a recovery in real estate bode well for the company that predominantly services large infra-projects. The Company will have the added benefits of PLI Schemes, New Greenfield Project in FY23 adding to top-line growth and margin improvement.

Consensus Estimate: (Source: market screener website)

  • The closing price of BLUESTAR was ₹ 871/- as of 06-Oct-2021. It traded at 52x/33x/27x the consensus earnings per share estimate of ₹ 17/26/32 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 845/- implies a PE multiple of 26x on FY24E EPS of ₹ 32/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

 

Aspirational middle class buying from Tier 3,4,5 cities will drive growth- Blue Star

Update on the Indian Equity Market:

On Tuesday, NIFTY closed 0.4% down at 15,748. Top gainers in NIFTY50 were POWERGRID (+2.3%), CIPLA (+1.5%), and NESTLEIND (+1.3%). The top losers were IOC (-2.4%), ONGC (-2.2%), and HINDALCO (-2.1%). The only sectoral gainers were PHARMA (+0.6%) and FMCG (+0.5%) while the top sectoral losers were PSU BANK (-1.5%), METAL (-1.2%), and PRIVATE BANK (-1.0%).

Aspirational middle class buying from Tier 3,4,5 cities will drive growth- Blue Star

Excerpts of an interview with Mr. B Thiagarajan, MD, Blue Star (BLUESTARCO), aired on CNBC TV18 dated 29thJune 2021:

  • Markets started reopening in first week of June 2021. Since then, demand has been much better than anticipated. The loss of summer sales will still keep the numbers lower than 1QFY20 by almost 25-30%. However, sales in 1QFY22 will be much better than 1QFY21.
  • In January 2021, BLUESTARCO took a price hike of 5-8% due to cost inflation. Despite that, BLUESTARCO had record sales in 4QFY21with 37% YoY growth.
  • BLUESTARCO took a second price hike in April 2021 to the tune of 3-5%. As the company cannot absorb the exorbitant input cost inflation, it plans to take a third price hike in mid-August 2021.
  • Naturally, consumers have migrated to lower end products and may continue to do that due to the several price hikes.
  • Mr.Thiagarajan maintains the guidance of 8-8.5% margins in the cooling products. BLUESTARCO does not want to sacrifice margins to gain volume.
  • Government’s Production linked incentive (PLI)scheme will have a positive impact in coming months.
  • Embracing the technology of aluminium heat exchangers will reduce the costs and increase energy efficiency for AC industry. Auto industry has shifted to this technology while the AC industry has not done so yet.
  • The next energy level change is scheduled for 1st January 2022 which will push up prices by another 7%. For demand to continue to grow at least at 10% CAGR, these cost rationalizationmeasures will have to be taken.
  • For room ACs, delivering 8% EBITDA margin is possible in 1HFY22. 8.5% is the upper target band which may not be possible in the short term.
  • Demand in Tier 1 cities has been worst affected. For BLUESTARCO, Tier 3,4,5 cities form 65% of revenue. This aspirational middleclass segment in Tiers 3,4,5 cities is what will drive the growth going ahead so BLUESTARCO has repositioned itself in line with this expectation.

 

Asset Multiplier comments:

  • Industries across the board have been facing input cost pressures and are trying to pass on the costs through price hikes.
  • However, passing on the entire cost inflation is proving to be difficult in an already sensitive demand scenario.
  • Consumer discretionary items are sensitive to pricing, so companies will have to calibrate pricing based on competitive scenario. Consumers will shift to a lower priced product if the price difference is large.

 

Consensus Estimate: (Source: market screener website)

 

  • The closing price of BLUESTARCO was ₹ 815/- as of 29-June-2021.  It traded at 44x/ 31x the consensus earnings estimate of ₹ 18.5/ 26.7 for FY22E/23E respectively.
  • The consensus price target is ₹ 819/- which trades at 31x the earnings estimate for FY23E of ₹ 26.7/-

 

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

 

Domestic demand to recover post lockdown- KEI Industries

Update on Indian Equity Market:

On Tuesday, Nifty closing down 8 points at 15,575.  Adani Ports (3.7%), ONGC (3.5%), and Bajaj Finance (2.8%) were the top gainers on the index while JSW Steel (-2.3%), TATA STEEL(-2.2%), ICICI BANK (-1.9%) were the top losers for the day. Among the sectoral indices,  Private Bank (-0.9%) and Metal (-0.8%), and Realty (-0.52%) lead the losers, while Media (0.32%) and IT (0.11%) lead the gainers.

Excerpts of an interview with Anil Gupta, CMD of KEI Industries aired on CNBC TV 18 on 31st May 2021:

  • Pent-up demand is strong and the management is confident that the sales will pick up post lockdown restrictions end.
  • The Company posted a 17% YoY growth in EBITDA margin and  47% YoY growth in the bottom line. The results are indicative of the long-term growth prospects of the company.
  • The company is currently working at full capacity and is expected to stock up inventory in order to be ready when the demand picks up.  
  • Retail sales are currently under pressure due to lockdown but the company is showing good order book growth.
  • KEI Industries currently has an order book of Rs 26000 mn with steady growth however labor shortage and site closures have impacted the execution rate.

Asset Multiplier Comments:

  • Like many consumer durable companies, KEI industries has suffered the adverse effects of lockdown but there are better days ahead.
  • The company has is well poised to reap the benefits of cost rationalisation and volume expansion growing ahead.

Consensus Estimates (Source: market screener website): 

  • The closing price of KEI Industries was ₹622/- as of 31-May-2021.  It traded at 17x/ 14x the consensus EPS estimate of ₹ 36/ ₹ 43  for FY22E/23E respectively.
  • The consensus price target is ₹ 664/- which trades at 15x the EPS estimate for FY23E of ₹ 43/-

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Gaining market share due to shift from unorganized to organized sector- HAVELLS

Update on the Indian Equity Market:

 

On Monday, Nifty closed 0.2% higher at 15,198. Within NIFTY50, IOC (+4.9%), BPCL(+2.8%), and SBIN(+2.4%) were top gainers, while SHREECEM (-2.5%),JSWSTEEL(-2.3%), and TATASTEEL (-1.9%) were the top losing stocks. Among the sectoral indices, PSU BANK (+2.1%), REALTY (+1.4%), and MEDIA (+1.2%) were the highest gainers, while METAL (-0.6%) and FMCG (-0.3%) were the only losing sectors.

 

Gaining market share due to shift from unorganized to organized sector- HAVELLS

 

Excerpts of an interview with Mr. Anil Rai Gupta, CMD, Havells India (HAVELLS), aired on CNBC-TV18 on 21stMay 2021:

  • HAVELLS reported a strong performance in 4QFY21. Even 1QFY22E started off well with continued growth momentum but has been hampered as the covid-19 second wave progressed. Mr. Gupta believes that things should start looking up fromJune 2021.
  • HAVELLS margins contracted 80 bps in 4QFY21. Any movement in raw material costs is passed on with a bit of lag. Due to the sharp increase in raw material costs in 2HFY21, the lag has been longer which led to margin contraction in some categories. As raw material prices start stabilizing, Mr. Gupta expects the margins to normalize by 2QFY22E.
  • HAVELLS made foray into rural India only a couple years back. They have expanded distribution that resulted in 100% growth for the segment in FY21. Rural sales now form 4-5% of overall sales. Rural India is in stress right now but Mr. Gupta still expects it to be an area of big growth potential for HAVELLS.
  • Post the 1QFY21 lockdown, consumer products (contributes to 75% of total revenues)saw good growth in 2QFY21 and 3QFY21. Industrial products segment reported revenue decline in the same period and only started growing in 4QFY21. Mr. Gupta believes that the industrial and infra segment should come back to normalized levels post the current lockdown.
  • Within the consumer products segment, the growth in FY21 largely came from electrical products such as fans, domestic appliances, and personal grooming appliances. As housing sales started improving from 3QFY21, installation products like switches and sockets also started growing.
  • Covid-19 led disruption has been an opportunity for HAVELLS to gain market share from unorganized sector. Mr. Gupta expects to see more benefits on market share post the 2nd
  • HAVELLS sawa lot of restructuring on operating costs and improvement on the technology side in FY21. As some cost savings are sustainable, going ahead Mr. Gupta expects there will be margin expansion compared to FY20.

Asset Multiplier Comments

  • Raw material cost inflation has affected the entire spectrum of sectors and thus companies have taken a hit on their margins. Many companies have taken a cautious approach in taking price hikes as the demand scenario is a little sensitive currently.
  • As companies start taking the required price hikes gradually, margin profiles are expected to improve.
  • Post the lockdowns in FY21, there was a big spike in consumer spending as there was pent up demand in the market. Whether that phenomenon repeats and if it does, will it be to the same extent remains to be seen.

Consensus Estimate (Source: investing. com and market screener websites)

  • The closing price of HAVELLSwas ₹ 1,016as of 24-May-2021. It traded at 55x/ 46x the consensus EPS estimate of ₹ 18.5/22.1 for FY22E/ FY23E respectively.
  • The consensus target price of ₹ 1,071/- implies a PE multiple of 49x on FY23E EPS of ₹22.1/-.

 

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

 

Expect a demand recovery once restrictions are lifted – Blue Star

 

Update on Indian Equity Market:

On Monday, markets were on the rise, with Nifty increasing 128 points to close at 14,950. COAL INDIA (8.2%), UPL (8.0%), and HINDALCO (6.2%) were the top gainers on the index while SHREECEM (-1.9%), BRITANNIA (-1.28%), and ULTRACEMCO (-1.28%) were the top losers for the day. Among the sectoral indices, Metal (4.7%), PHARMA (2.8%), and MEDIA (+2.5%) led the gainers. There were no sectoral losers for the day.

 

Excerpts of an interview with Mr. B Thyagarajan MD of Blue Star with CNBC- TV 18 dated 7th May 2021:

 

  • Till 15-April-21, secondary sales were growing at a healthy pace. The increased restrictions have resulted in the slow down of Air- Conditioning and Commercial Refrigeration verticals.
  • The company feared a washout as evidenced in Q1FY21 but it actually posted a 20% lower compared to its earnings in Q1FY20. The Company hopes sales could normalize by the end of May and sees recovery in the months of June-July owing to a hot extended summer.
  • Blue Star had already hiked prices as of 1st April. As the Company has significant inventories owing to slow down, it doesn’t expect any more margin pressure and expects it to stabilize around 8%.
  • The company witnessed a stellar growth in the pharma-health care sectors across air-conditioning and commercial refrigeration verticals due to covid-19 developments and vaccine transports.
  • The manufacturing sector in both Electro-Mechanical and Air-Conditioning segments showed good growth in Q4FY21. The 1st financial quarter is seasonally focused on residential air-conditioning sees its growth prospects dampened due to lockdowns. 
  • Capacity expansion will be operational in the Wada plant for Deep Freezers by Q2FY22 and another plant is expected to be operational in H1FY23 for Air conditioning in Sri City.
  • It expects pent-up demand to drive residential air conditioning growth by around 10% for FY22 owing to prolonged work from home exposure and reduced spending on other luxuries.

 

Asset Multiplier Comments:

  • The seasonal nature of the company’s demand may impact the performance in the short term. The improved macro factors, longer summers due to climate change present good growth prospects over the long term.
  • The margins have been beaten down due to various factors, we expect pressure to ease off in the medium term.

 

Consensus Estimates (Source: market screener website): 

  • The closing price of Blue Star was ₹ 833/- as of 10-May-2021.  It traded at 44x/ 32x the consensus EPS estimate of ₹ 19/ ₹ 26 for FY22E/23E respectively.
  • The consensus price target is ₹ 790/- which trades at 30x the EPS estimate for FY23E of ₹ 26/-

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

 

Lighting category is 2x that of fans category, see significant growth potential – Orient Electric

Update on the Indian Equity Market:

Nifty continued its losing streak, ending in the red for the fourth straight day ahead of the US Fed reserve policy statement on Wednesday. Nifty closed at 14721 (-1.3%), dragged by the PSU BANK (-3.8%), MEDIA (-3.0%), and REALTY (-3.0%) indices. None of the sectoral indices ended with gains. Among the stocks, only ITC (+1.5%), and INFY (+0.2%) closed in the green while BPCL (-5.0%), ONGC (-4.7%), TATAMOTORS (-4.5%) led the laggards.

Excerpts of an interview with Mr. Rakesh Khanna, MD, and CEO, Orient Electric with CNBC TV-18 on 16th March 2021:

  • The sales in 3QFY21 were good for the entire industry, due to pent-up demand, and staying at home has increased interest in home appliances.
  • The strong demand is continuing in 4QFY21, it is partly pent-up demand and partly due to change in behavior.
  • The management expects the EBITDA margin in 4QFY21 to be better than 3QFY21. This is due to operational leverage which comes with increased revenues with costs remaining stable, some good opportunities to help improve efficiencies. This efficiency improvement has largely been due to cost-cutting.
  • With raw material costs increasing, there could be some pressure on the margins in the time to come.
  • Recently, the company has diversified into lighting, switchgear, air coolers, and water heaters.
  • Lighting as a category is nearly twice in terms of size compared to the fans category, and the management expects significant growth in that segment.
  • Coolers are gaining traction as people are worried about getting fresh air. Water heaters adoption is going up due to change in consumer behavior.
  • The kitchen appliances are doing very well. Mr. Khanna is of the opinion the new categories the company has diversified into have a lot of potential.
  • To get a better brand recall in these new categories, the Ad spend could increase for the new categories.
  • They are operating at full capacity and the surge in demand has enabled the company to improve efficiencies at existing production facilities.
  • The company has been improving its EBITDA margin on a YoY basis for the last couple of years. As the company continues scaling up, they are confident of achieving operational efficiency to achieve better EBITDA margins.

Asset Multiplier Comments

  • During the lockdown period, consumer appliances and electrical sales were impacted. The pent-up demand and banning of certain items from China have helped the domestic electrical appliances companies. As a result, these companies are diversifying from their legacy categories to other categories.
  • Orient Electric already enjoys strong recall in the minds of consumers, being present in India for over six decades. Such a company will enjoy customer loyalty when it enters into new product categories.

Consensus Estimate: (Source: market screener website)

  • The closing price of Orient Electric was ₹ 313/- as of 17-March-2021. It traded at 61x/ 48x/ 39x the consensus earnings estimate of ₹ 5.1/ 6.5/ 8.0 per share for FY21E/FY22E/FY23E respectively.
  • The consensus target price of ₹ 310 implies a PE multiple of 39x on FY23E EPS of ₹ 8.0/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Expect to take another price hike from April – Bluestar

 Update on the Indian Equity Market:

On Wednesday, Nifty closed in the green at 15,175. Among the sectoral indices, Metal (+1.9%), IT (+1.7%), and Pharma (+1.8%) closed higher. PSU Bank (-0.2%) was the only sector that closed in the red. Eicher Motors (+3.1%), JSW Steel (+3.0%), and Hindalco (+2.3%) closed on a positive note. SBI Life (-3.5%), ONGC (-1.8%), and HDFC Life (-1.5%) were among the top losers.

Excerpts from an interview of Mr. B Thiagarajan, MD, Bluestar with CNBC-TV18 dated 09th March 2021:

  • The demand for cooling products has picked up since the festival season. 20% sales growth is expected in Q4FY21E.
  • The Indian Meteorological Department (IMD) has indicated for hotter than usual summer season in 2021.
  • Thiagarajan expects 25% sales growth in the summer season for Bluestar.
  • The demand recovery is primarily due to people spending more time at home.
  • The disposable income is expected to be higher in the hands of people as there is saving due to no summer vacations and less travel.
  • The company has taken a price increase by 3-5% since Jan-21 on its products. The second price hike has not yet been taken by the company.
  • The second price hike might come from April 1. The rise in raw materials, transportation charges, and ABS plastic costs are not coming down.
  • The dealers are stocking up ahead of the season.
  • Room AC market share for the Bluestar was ~12.8% last year and currently it is 13%. The company targets to maintain a 15% market share by FY23E.
  • Food delivery and the pharma sector are driving the growth of commercial refrigeration.
  • In the Electromechanical projects segment, growth is coming from the manufacturing sector.
  • Thiagarajan says Room air conditioners are poised for growth in coming years led by positive announcements under the PLI scheme.

 

Asset Multiplier comments:

  • The coming summer season will be crucial for Air cooling products as last summer season was a washout led by lockdowns.
  • Industry players are bullish on the upcoming summer season as early sales indicate an uptrend.
  • On the commodity cost front, inflationary pressure is witnessed by the industry. Most AC players have resorted to taking price hikes.
  • Increased demand due to rise in temperature bodes well for the industry but an increase in commodity cost might hurt operating margins in the coming next 2 quarters.

 

Consensus Estimate: (Source: Market screener website)

  • The closing price of Bluestar was ₹ 932 as of 10-March-2021.  It traded at 94x/47x/36x the consensus Earnings per share estimate of ₹ 9.87/19.9/26.1 for FY21E/FY22E/FY23E respectively.
  • The consensus average target price is ₹ 761/- which implies a PE multiple of 29x on FY23E EPS of 26.1/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Rising commodity costs, a headwind in managing cost reduction: Crompton Greaves

Update on the Indian Equity Market:

After a big sell-off on Friday, markets witnessed some relief as Nifty started the week on a positive note with 252 point gains to close at 14,782. Within the sectoral indices, all but one, PSU BANK (-0.3%), closed in green led by MEDIA (4.3%), AUTO (2.4%), and METAL (2.0%). The Nifty index followed similar path as only one stock, BHARTIARTL (-4.3%) closed in the red. POWERGRID (6.7%), ONGC (5.5%), and GRASIM (5.4%) led the gainers within the index.

Excerpts of an interview with Mr. Shantanu Khosla, Managing Director, Crompton Greaves Consumer Electricals (CROMPTON) with CNBC -TV18 dated 25th February 2021:

  • The overall demand scenario is promising through January and February. The company reported double-digit growth in the December quarter largely driven by volumes.
  • The trend in the overall demand scenario is positive and expected to continue well into 2021. The company is expected to reach to pre-COVID levels in CY21E.
  • The B2C (Business to Consumer) delivered double-digit growth while B2G (Business to Government) and institutional segment was subdued during the December quarter.
  • Commenting on a possible GST rate reduction, he mentioned that the company has always passed on the benefit of lower tax rates to its customers and it will continue to do so in future as well. The benefit is passed on to the customers through price reductions.
  • Commodity costs have moved up significantly in the last few months. The rising prices are acting as headwinds in the cost optimization initiative taken by company. The company is managing this price rise by further deepening of cost reductions and better management.

Asset Multiplier Comments:

  • With the Make-in-India program and Work from Home restrictions, there was a shortage of appliances in India. As a result, domestic electrical goods companies have witnessed a surge in demand for appliances such as washing machines, dishwashers, air-conditioners, and laptops.
  • CROMPTON has also been a beneficiary and reported YoY revenue growth in the appliances category in the December quarter. CROMPTON intends to increase its presence in electrical appliances category as well to meet the increasing demand.
  • As the company is focusing more on premium category products, the increasing pressure of raw material prices is expected to have lesser impact on the fundamentals of the company.

Consensus Estimates (Source: market screener and investing.com websites):

  • The closing price of CROMPTON was ₹ 383/- as of 1-March-2021.  It traded at 49x/ 40x/ 34x the consensus EPS estimate of ₹ 8.0/ 9.8/ 11.4 for FY21E/22E/23E respectively.
  • The consensus price target is ₹ 451/- which trades at 40x the EPS estimate for FY23E of ₹ 11.4/-

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Increasing commodity prices a concern – Havells India

Update on the Indian Equity Market:
On Wednesday, NIFTY closed at 13,981 (-0.3%). The top gainers in NIFTY50 were Ultratech Cement (+4.4%), Grasim (+3.0%), and Shree Cement (+3.0%). The top losers were IndusInd Bank (-1.5%), Sun Pharma (-1.1%), and Axis Bank (-1.0%). The top sectoral gainers were AUTO (+1.3%), METAL (+1.3%), and REALTY (+1.3%) and the sectoral losers were PSU BANK (-0.2%), PAHRMA (-0.1%), and PVT BANK (-0.1%).

Excerpts of an interview with Mr. Anil Rai Gupta, CMD – Havells India with CNBC TV18 dated 29th December 2020:
• Havells has recovered from the lows and is up almost 80 per cent from the March lows. The demand is holding up from B and C grade towns. There is also a shift from unorganized to organized players.
• There is an improvement in the residential sector and there is some revival in the industrial and infra portfolio. He expects the rising commodity prices to be a dampener.
• Commodity price increase has to be passed on because the increase has been sharp. But it does dampen two things. One, there will be pressure on margins and secondly, if this sustains, people will have the option to postpone their purchases even in the construction sector.
• So there will be a little bit of stress if this continues.
• He believes that the government move to boost manufacturing is a step in the right direction. The government has realized that the next big source of job creation will be manufacturing and the government is taking the right steps.
• They have chosen many industries for a production-linked incentive (PLI) and they are looking at increasing investments in both lighting and air conditioning with the new PLI.
• They have invested constantly, at least Rs 300-500 crore in CAPEX every year. Going forward they anticipate a similar CAPEX would continue; maybe a bit more so – maintenance CAPEX and the other divisions and high CAPEX in the air conditioning and the lightings space.
• But they definitely see that going forward they will be looking at continued CAPEX even in the coming times.
• They have seen a gain in market share post lockdown.

Consensus Estimate: (Source: market screener and investing.com websites)
The closing price of HAVELLS was ₹ 902/- as of 30-December 2020. It traded at 68x/ 59x/ 50x the consensus earnings estimate of ₹ 13.2/ 15.4/ 18.2 for FY21E/FY22E/23E respectively.
The Consensus price target of HAVELLS was ₹ 743/- as of 30-December-2020. It trades at 41x of FY23E EPS estimate of ₹18.2/-.
Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”