Consumer electrical companies may face another soft quarter, as per a recent estimate by brokerage firm Systematix Institutional Equities, due to unfavourable consumer sentiment brought on by the inflation.
Overall, the brokerage expects consumer electrical firms' revenue/profit after taxes (PAT) to arrive at +8%/-1% on a year-on-year (YoY) basis and 12%/19% on quarter-on-quarter (QoQ) basis.
The brokerage's coverage includes Bajaj Electricals Ltd, Crompton Consumer Ltd, Finolex Cables Ltd, Havells Ltd, KEI Industries Ltd, Orient Electric Ltd, Polycab Ltd, and V-Guard Ltd. A good 4QFY23 earnings report is anticipated from KEI Industries, Polycab, and Bajaj Electricals, according to the brokerage.
The brokerage's channel inspections indicate sluggish demand, driven by fans (high channel inventory in non-star stocks), for all Fast-Moving Electric Goods (FMEG) categories. Unseasonal rains had an impact on the volume of fans and RACs, leading to intense competition. Due to channel restocking and an increase in copper prices of 12% QoQ, demand for cables & wires (C&W) remained strong.
Hence, the brokerage prefers cables & wires companies such as KEI Industries, Polycab, and Finolex Cables.
"Since our sector initiation in April 2022, we have preferred C&W to FMEG names, which so far has played out very well. While we remain upbeat on the C&W space (but expect moderate returns post significant re-rating), the year-long underperformance in FMEG and the comfortable valuations of scrips in the space (led by Bajaj Electricals, Crompton Consumer) merits a revisit to our stance," said the brokerage.
The brokerage has a 'buy' rating on Bajaj Electricals, and Crompton Consumer. Meanwhile, it has 'hold' rating on Finolex Cables, KEI Industries, Polycab, Havells, V-Guard, and Orient Electric.
Let's look at the brokerage's valuations and views for each of these companies.
With timely product launches, a broad geographical reach, and the Range & Reach Expansion Programme (RREP), the company's consumer goods business has been on a constant growth trajectory. After seeing a significant increase in EPC sales in FY19, the company changed its approach to focus primarily on contracts with acceptable margins. This increased cash flow assisted the business in lowering its significant working capital debt, as per the brokerage report.
"We estimate revenue/ EBITDA/ PAT CAGR of 13%/ 39%/ 55% over FY22-25E (FY18-22: 1%/ -4%/ 11%) to factor in 1) management’s focus on growth and profitability of its CP business, 2) tightening working capital cycle, and 3) shrinking debt in EPC, enabling nearly 10% EBITDA margin, 18%/26% RoE/RoCE and healthy cash flows by FY25E. Our 'buy' rating and a revised target price of ₹1,197 (based on 30x/15x FY25E earnings for the CP/EPC businesses, earlier ₹1,373) is underpinned by the company's strong prospects, healthy cash flows and corporate restructuring," said the brokerage in its report.
Crompton Greaves Consumer Electricals
Over the years, the company has maintained a high profit position while increasing market share in important categories thanks to excellent distribution reach and a lean cost structure.
With a 13.3% EBITDA margin and an early 22% RoE, the brokerage estimates a CAGR of 17%/14%/10% in revenue/EBITDA/PAT over FY22-25E (compared to 7%/10%/16% over FY18-22). This growth is mostly attributable to the Butterfly acquisition. Although the brokerage anticipates improved margins in the company's core business, Butterfly's relatively poor operating performance and lower other income, brought on by capital outflows for the acquisition of the business, may have a negative impact on consolidated profits and return ratios.
"We like Crompton for its healthy outlook arising from strong brand equity and ability to expand its portfolio and reach. At ~24x FY25E P/E on CMP, we maintain our 'buy' rating on the stock, with a revised target price of ₹336 (earlier ₹387), based on 28x FY25E P/E. Growth and margin recovery in core segments (ECD and Lighting), and integration of the Butterfly business are key near to medium-term monitorable," said the brokerage.
The company's market dominance in electrical wires, high brand equity, pan-Indian distribution network, solid balance sheet, and free cash flow (FCF) creation are reasons why the brokerage likes it. Performance over the past few years, meanwhile, has been uneven.
"We raise FY23E/FY24E/FY25E earnings by nearly 5% on robust outlook and estimate 15%/19%/ 10% CAGR in revenue/ EBITDA/ PAT over FY22-25 (FY18-22: 8%/-1%/16%). Lower PAT growth was due to a fall in the profit of its associate, Finolex Industries.
Considering the stock has gained about 50% in 3-months on expectation of resolution of on-going family tussle for its ownership, we lower our rating to 'hold' from 'buy' with a revised target price of ₹893 (earlier ₹691)," said the brokerage.
The brokerage claims that despite having a high capital expenditure (in contrast to most competitors, the company has chosen in-house production), the company has the greatest margins among peers in numerous product categories and generates good FCF.
"We witnessed strong growth over FY17-22 (18%/17%/20% CAGR in revenue/ EBITDA/PAT), supported by ECD and Lloyd acquisitions. We have broadly retained our estimates and expect 15%/15%/16% CAGR in revenue/EBITDA/PAT over FY22-25E. We maintain 'hold' on the stock, with target price of ₹1,192 ( ₹1,266 earlier). Strong growth, FCF and RoE are key to sustain such premium valuations," said the brokerage.
The brokerage thinks a shorter working capital cycle could help the company produce solid FCF given the reduced percentage of EPC in its overall sales mix.
"Strong industry-leading growth and cashflows have driven significant re-rating in KEII’s scrip over the last five years. We remain sanguine on KEII’s promising growth prospects. However, at about 23x FY25E P/E, we maintain our 'hold' rating on the stock, with target price of ₹1,833 ( ₹1,696 previously). While scope for further re-rating hereon is limited, strong performance would continue to evince investor interest, and drive upside in KEII’s scrip, in our view," said the brokerage.
Orient Electric Ltd
According to the brokerage, the company has repositioned itself as a serious, young, and energetic operator that is focused on premiumisation and innovation thanks to the current management's increased focus since 2015. It has been able to enter more areas and support overall growth thanks to increased visibility and a sizable channel network.
"We like the company for its leadership in fans, deep distribution network, premiumisation-led margin expansion, tight WC and FCF. However, we maintain 'hold' rating, with target price of ₹250 ( ₹284 earlier). A keen competitive landscape is a key risk to our growth/margin estimates," said the brokerage.
"In line with the company's improving performance over the last few years, the stock price has risen 5 times since its listing in May 2019. While we are sanguine about the long-term prospects, at nearly 26x FY25E P/E on current market price (CMP), we believe there is limited potential for a re-rating hereon. Thus, we maintain our 'hold' rating, with an SoTP-based target price of ₹3,154 ( ₹2,958 earlier), based on 28x FY25E earnings for the C&W business ( ₹3,076) and 30x FY25E earnings for FMEG business ( ₹77)," said the brokerage.
According to the brokerage report, it has kept its projections and anticipates a CAGR of 14%/16%/15% in revenue, EBITDA, and PAT for FY22-25E (11%/16%/14% for FY18-22), driven by strong growth across all categories and improved margins as cost constraints subside.
"Despite higher capex, we expect the company to maintain FCF through tight WC management. While we like company's strength in south India, strategy to expand pan India, and healthy FCF generation; we see limited upside potential in its scrip at about 29 times FY25E proforma EPS. We thus maintain 'hold' rating on the stock, with an unchanged target price of ₹268 (30x FY25E proforma EPS). Growth and margin trajectory in all segments would be key monitorable," said the brokerage.