Ahead of searing summer, analysts bet on consumer appliance stocks

The India Meteorological Department (IMD) expects a hotter-than-usual March-May across most parts of the country this year. Consequently, Dalal Street investors are catching up on stocks of consumer durable companies, especially those in the household appliance space.

Shares of Johnson Control-Hitachi, Voltas, Blue Star, Symphony and PG Electroplast saw gains of 8-28 per cent in February, which was the hottest since 1901, as per the IMD. In comparison, the BSE Sensex and BSE Consumer durables index declined 1 per cent each.

Analysts expect a rise in demand for air conditioners, coolers, fans and refrigerators to help related companies clock firm sales following the post-Diwali slump due to inflationary pressures. The correction in the stocks over the last year thus provides a good buying opportunity for investors, they say.

“Summer season could be the strongest this year for cooling products given its early arrival and the high risks of El Nino. Currently, there is a strong build-up in channel inventory in anticipation of strong summer. This coupled with competitive pricing will help the sector perform well,” said Anil R, Senior Research Analyst at Geojit Financial Services, whose top pick is Symphony, followed by Havells and Voltas.

In a recent note, Jefferies gave a ‘buy’ call on Voltas with a target price of Rs 1,050 saying dealers are highlighting that lower commodity prices have not been passed on, which points to improved volume and margin outlook for the company.

Besides, reports say that companies like Symphony and Blue Star have already begun to see a boost in sales due to strong demand traction.

Compton Greaves is seeing a pickup in demand for fans from mid-February with inventory liquidation expected to gather pace as temperatures rise. The demand situation, it said, will gradually normalise in the upcoming summer season. This comes after the fan market saw lower offtake in the last quarter amid the transition to new star labelling norms.

Turnaround in margins

The historically firm January-March quarter (Q4FY23) will see strong sequential improvement in margins for white goods companies due to a reduction in high-cost inventory and price hikes, analysts say.  

“Consumer durable companies could see 8-10 per cent growth in Q4 revenue and net profit. Margins could be 100-120 bps lower year-on-year (YoY) but some relief from high-cost inventory in the last few quarters will lead to 200-250 bps quarterly expansion and an improved outlook for FY24,” said Anil R of Geojit Financial.

Those at ICICI Securities foresee the margins to rise on a yearly basis too by 100-300 bps given the correction in prices of raw materials such as aluminium, steel and high-density polyethylene (HDPE) even as copper prices have bounced back recently. They also expect the companies to use the margin gains to raise advertisement and research spending and increase discounts to improve market share.

“Considering the strong return ratios, healthy growth potential and low penetration levels, we remain structurally positive on white goods and durables sector. We also expect the migration from unorganised to organised sector to steadily generate value. Havells and Crompton Greaves remain our top picks,” the brokerage said.