Brokerage firm ICICI Securities expects the white goods and durables sector to report weak revenues in the third quarter of the financial year due to: (a) post Diwali slowdown in consumer offtake due to steep price hikes, inflationary pressures and higher interest rates; (b) a reduction in trade inventory of fans due to shifting to BEE norms.
Here's what the brokerage firm says:
Slowdown post Diwali: The brokerage firm observed a steep slowdown in demand post October 2022, i.e. post Diwali.
"Steep price hikes and high inflationary pressures have impacted consumer offtake. Higher interest rates have also slowed down demand for white goods. We expect demand revival only in the first half of 2023 (H1FY23)," said ICICI Securities.
Reduction in trade inventory due to shift to BEE norms for fans: "Post channel checks, we note the trade is significantly reducing its inventory of fans. While we believe the inventory levels will likely normalise in H1CY23, we model for inventory correction in a large segment like fans to impact Q3FY23 performance," said ICICI Securities.
Price corrections to continue to hurt cable and wire sales: While the high-priced raw material inventory was largely consumed in Q2FY23, the brokerage firm believes there will be some impact on revenues as well as profitability in Q3FY23 too.
"We factor weak sales and profitability of this segment in our estimates," said the brokerage firm.
Muted margins due to higher input prices and negative operating leverage: Though input prices have corrected from their peak in H1CY22, commodity prices are still trading higher year-on-year (YoY), said ICICI Securities.
The brokerage firm believes negative operating leverage and higher input prices will likely hurt margins by 50-150bps in Q3FY23.
Sector view and top picks: Considering the strong return ratios, healthy growth potential and low penetration, ICICI Securities remains structurally positive on the white goods and durables sector.
It also expects the migration from the unorganised to the organised sector will steadily generate value. Havells India and Crompton Greaves are its top picks.
"We value stocks in the white goods and durables sector by the DCF methodology. Better than expected gross margins due to correction in input prices is the key upside risk while unexpected irrational competition due to deceleration in general consumption demand, and steep inflation in input prices are the key downside risks," said ICICI Securities.
Disclaimer: The views and recommendations given in this article are those of the broking firm. These do not represent the views of MintGenie.