C&W cos to lead durables sector

Prabhudas Lilladher expects Polycab and KEI to clock year-on-year revenue growth of 14% each in Q2 led by the C&W business. In FY23, C&W segment accounted for 86-87% of the consolidated revenues of these companies.

Beyond Q2, copper prices are key to monitor. So far in October, copper price is down by 6% versus Q2. Nonetheless, the robust volume performance on the back of solid demand would continue to aid earnings in the second half of FY24.

Havells India Ltd also has the C&W portfolio but it forms a relatively smaller share of FY23 consolidated revenue at 33%. However, the expected weakness in some of Havells’ other verticals may curtail the gains. For example, muted business-to-consumer demand would hurt Havells’ lighting segment. Nomura Financial Advisory and Securities (India) estimates revenue to grow by 18% in Havells’ C&W while the lighting segment is expected to be up by a mere 2%. Havells’ shares are up by nearly 27% in 2023 so far. In general, “Our industry/dealer surveys indicate that demand remained subdued across small and large appliances in Q2FY24. Delayed festive season (October in 2023 versus September in 2022) has led to lower inventory build-up, impacting primary sales compared to that in last year,” said analysts at Nomura in a report on 9 October.

Moreover, in the case of electrical consumer durables such as fans, an off-season in Q2 is another headwind impacting sequential sales growth. Besides Havells, other companies such as Crompton Greaves Consumer Electricals Ltd and Bajaj Electricals Ltd would also bear the brunt of a weak fans segment in Q2. The seasonality factor is also true for room air conditioners.

But there is a silver lining this time around. “There has been recent improvement in secondary sales of seasonal products, driven by dry monsoon season, resulting in channel inventory levels returning to normal,” said Prabhudas Lilladher in a report on 7 October. A secondary sale is the one done by a wholesale dealer to a retailer. Voltas Ltd’s unitary cooling products segment and Havells’ Lloyd, which primarily cater to air conditioners, are expected to see strong growth. However, given the concerns on market share amid intensifying competition, shares of Voltas are up by only 7% in 2023 so far.

Overall, Q2 performance would be volume driven as no major pricing action has been taken by companies. Hence, the quantum of margin expansion needs to be seen. The ongoing premiumization trend could aid the margin to a certain degree. Now with the festive season falling in Q3, there are demand tailwinds. Nuvama Research notes that for consumer electricals other than C&W, there are signs of demand revival over the last few days of September as the festive season approaches. “Our checks, for now, are indicating moderate-to-good demand in Q3FY24 heading into the festive season,” said the Nuvama report. The sharp rally in shares of Polycab, KEI and Havells suggests investors are capturing the brighter picture adequately.

Overall, Q2 performance would be volume driven as no major pricing action has been taken by companies. Hence, the quantum of margin expansion needs to be seen. The ongoing premiumization trend could aid the margin to a certain degree. Now with the festive season falling in Q3, there are demand tailwinds. Nuvama Research notes that for consumer electricals other than C&W, there are signs of demand revival over the last few days of September as the festive season approaches. “Our checks, for now, are indicating moderate-to-good demand in Q3FY24 heading into the festive season,” said the Nuvama report. The sharp rally in shares of Polycab, KEI and Havells suggests investors are capturing the brighter picture adequately.

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Updated: 10 Oct 2023, 10:04 PM IST