According to ICICI Securities, the recent correction in industrial metals (copper, aluminium, steel) will provide some margin relief for consumer durable companies. Since the start of the year, consumer durable firms have faced several challenges, starting from the war to high commodity prices. Due to high RM cost pressure, companies have taken multiple price hikes.
YTD, shares of consumer durable firms have lost their value by around 20–30%. Moreover, half of the stocks in the sector are creating new 52-week lows. However, after metal prices began to fall, shares have been rebounding from their lows over the last week.
Among individual stocks, Havells India (up 10.1%), Bajaj Electricals (up 6.19%), Whirlpool (up 5.93%), Crompton Greaves (up 5.07%), Vaibhav Global (up 4.13%), TTK Prestige (up 2.97%), Amber Enterprises India Ltd. (up 2.98%), Voltas Ltd. (up 1.63%), and Dixon Technologies (up 0.87%) were among the top gainers in the last one week.
ICICI securities note that the prices of key raw materials such as copper, steel, and aluminium have corrected 21%, 19%, and 36%, respectively, in the past three months. Only the price of crude oil, the key raw material, has remained higher compared to six months ago. It believes the reduction in input prices augurs well for the sector.
The domestic brokerage firm expects the profitability margins of organised peers to be better than consensus estimates in H2FY23 and it did not expect the margins to improve in Q2FY23 due to inventory with durable companies.
"With the correction in input prices, the need to raise prices has declined." We believe a breather was essential considering durable companies have raised prices incessantly in the past two years. "The cumulative price hike was higher than 20% in the past two years," said ICICI Securities.
"We remain structurally positive on the white goods and durables sector, given the strong return ratios, healthy growth potential, and low penetration levels."We also expect the migration from the unorganised to the organised sector to steadily generate value, "it said.
ICICI Securities picked Havells and Crompton Greaves as their top picks and noted that the higher-than-expected rise in crude oil prices was a key risk for the industry.
In Q4FY22, the consumer durables sector reported better-than-expected growth in revenues at 15% YoY, despite being on a higher base (+41% YoY in Q4FY21) and pandemic-led supply disruptions.
On the margin front, companies reported a 323 bps YoY EBITDA margin contraction in Q4FY22, dragged by higher raw material prices and delays in price hikes, according to the brokerage.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.