Q4 Results Preview: Margins of consumer durable firms will remain under pressure in the March quarter

After witnessing disruption in the last two seasons, the early and harsh onset of summer is driving demand for cooling products (RAC, fans, air coolers, etc.). According to an HDFC Securities report, channel filling was slow at the beginning of the quarter due to the third wave, weak trade sentiment), but March saw a sharp recovery.

The brokerage expects the consumer durables sector to deliver revenue growth and a three-year CAGR of 13/11% YoY in Q4FY22 (vs. 42/9% in Q4FY21 and 7/11% in Q3FY22).

In addition, demand for non-seasonal products is also sustaining a healthy trend, despite inflationary pressure. Most companies are at a high revenue base; hence, reported growth will be slow, but three-year revenue CAGR is expected to be 11% for our coverage, the report added.

Further, it expects margin pressure will continue; aggregate EBITDA YoY/three-year CAGR may stand at 2/19%. Companies will continue to witness margin pressures due to the restoration of overhead costs along with elevated commodity costs.

Companies have taken price hikes with the continued commodity pressure (steel/aluminium/copper up 18/18/10% in the past three months). However, due to demand disruptions, not all costs were covered, which will impact the margin. HDFC Securities forecasts consumer durables companies to deliver a 2/19% YoY/three-year EBITDA CAGR in Q4FY22.

Additionally, the report expects to outperform on three-year revenue CAGR will be for Havells, Orient Electric, and Crompton with 14/12/11% CAGRs. On three-year EBITDA CAGR, Voltas, Symphony, and Havells are expected to outperform, clocking 33/31/18% CAGRs, it added.

It also estimates that the performance of these products (RAC, fans, air coolers, etc.) will help the companies reinvest in other new launches. Furthermore, liquidating channel inventory (a source of concern in the previous two years) will assist trade partners in retaining other non-seasonal products post-season.

The new housing/home improvement theme is sustaining and it expects non-seasonal products to sustain the growth momentum, despite the macro slowdown in many consumption categories.

They have also added that the medium-to-long-term macro continues to be strong, with industrial Capex recovering and B-B/B-G demand recovering.

According to the report, RM inflation will have an impact on operating margins, but it also provides an opportunity for small/regional players to gain market share.

HDFC Securities has given a buy rating on Crompton Consumer and Orient Electric and ADD ratings on Havells, Voltas, TTK Prestige, V-Guard, and Symphony.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.