Seasonal demand uptick critical for consumer electrical firms

Players with a diversified portfolio such as Havells are better placed compared to pure AC players given near term uncertainties

With the start of the summer season, stocks of consumer electrical companies are in focus and the S&P BSE Consumer Durables index is trading near its 52-week highs. Companies such as Havells, Voltas, Crompton Consumer Electrical, Symphony and Johnson Controls-Hitachi are trading close to their six months highs. Expectations are that a strong summer season will lead to significant pickup in their sales after the disappointment in FY19 that saw volumes impacted by unfavourable weather conditions and festive season sales too were muted.

The onset of summers in South India has been a trigger with various channel checks by brokerage houses indicating significant reduction in inventories. However there are some concerns on delayed onset of summers in the North. The rebounding demand in North India remains crucial for companies as it will give them the flexibility of raising prices and take care of cost pressures.

Analysts at a foreign brokerage said that there is some pick-up in South, but North remains challenging and overall market conditions have remained challenging so far In Q4. The analysts are positive on longer term prospects of companies though remain watchful in the near-term. An analyst at a domestic brokerage feels that companies with a diversified portfolio will be a better bet compared to air conditioning players given near-term uncertainty and rich valuations they are trading now.

Amongst the consistent performers during first nine months despite adverse conditions have been companies such as Havells. The company has clocked in 30 per cent and 25 per cent growth in sales and adjusted net profits during first nine months respectively despite challenges. The diversified portfolio remains key driver for the growth. The company did not see significant traction in air-conditioner sales but reported strong sales driven by water heaters and personal grooming products amongst others. Its other segments such as switches, cables and lighting fixtures have reported good  growth. Analysts thereby expect the company to sustain the earnings momentum.  While the company's major penetration is in metros, tier 1 & 2 towns, however analysts also see the next leg of growth to come from Tier 3 towns and rural India. Over FY18-21 analysts at Jefferies estimate Havells sales and earnings growth 17 per cent and 22 per cent respectively, with significant margin expansion by FY21.

Voltas, the leader in room air-conditioners and having diversified to other white goods through a joint venture too remains well placed. The company’s projects segment is also growing well with improving profitability. Nevertheless after significant gains in stock prices since February lows, valuations are rich and analysts feel price hikes post demand revival remains crucial for earnings improvement and further upgrades.

Crompton Consumer Electrical apart from cost and weather condition headwinds had also seen elevated concerns on its lighting segment due to higher competitive intensity during FY19. However, these concerns are reducing and during December quarter the company had posted 14 per cent revenue growth led by 16 per cent growth in electrical consumer durables while lighting fell 2 per cent. Its launch of decorative fans is driving strong volume growth in fans while pumps segment led by the launch of Crest Mini has helped to improve sales momentum. Given strong brand recall, product innovation and go-to-market strategy, analysts at Elara Capital expect the company to post an earnings growth of 14 per cent over FY18-21, with an average ROE of 38 per cent and ROCE of 28 per cent.

Johnson Controls- Hitachi too had seen weaker than expected first nine months performance. Nevertheless analysts say that as company is targeting 10-15 per cent revenue growth annually over next three years and will be bidding for metro projects they expect strong medium to long term prospects. Analysts at Antique Stock Broking expect earnings to grow 20 per cent annually over FY18-21.

Symphony is another player which could benefit if demand perks up given its strong brand recall in coolers, low penetration and market acceptance. Symphony will also gain from shift in demand to the branded category after GST implementation. The weak summers of last year are weighing on FY19 numbers and analysts remain watchful in the current season. Over FY19-21, however earnings growth is expected to be over 25 per cent.