Electronics Retail: Expanding Footprint to drive growth

16 Apr 2024 , 11:14 AM

Organised consumer electronics retail in India is set to grow in the mid-high teens on the back of increased penetration for products and market share gain from unorganised stores. Moreover, brick-and-mortar players would thrive despite competition from e-commerce, especially in large appliances, due to financing, service, and a need to check out products side by side. Aditya Vision (AVL) and Electronics Mart (EMIL) are the listed players in this space. AVL has higher growth (FY24- 27 EPS Cagr 24% vs 20.2% for EMIL) and return ratios (~20% ROIC vs ~13% for EMIL) and therefore analysts of IIFL Capital Services prefer AVL over EMIL. They initiate with BUY on both companies with TP of Rs4200 on AVL (24% upside) and Rs250 on EMIL (26% upside).

An underpenetrated segment:

Consumer Electronics industry is likely to grow in double digits for several years driven by increase in penetration for consumer electronics. For instance, RAC (room air conditioners) penetration in India is quite low at 17% and that of refrigerators is 40%. Increasing incomes, improving electricity supply, rising aspirations and improved availability of credit would result in a double digit growth in these segments. Moreover, premiumisation (shift from window ACs to split ACs, from semi-automatic WMs to fully automatic WMs) is resulting in growth even beyond simply penetration.

Organised segment to grow faster:

On the back of improved shopping experience, wider product assortment, easy access to finance, better after sales support and so on, organised share of retailing which stands at 54% in FY22 is expected to go up to 70-75% by FY27. Organised retail have direct connect with OEMs which result in better gross margins, which in turn enables them to compete better vs small players. As a result, organised retail is likely to grow at ~16- 17% Cagr over FY22-27.

E-commerce not a big threat:

Consumers have adopted Ecommerce differently across different categories; E-commerce share for Mobiles stands at 58% but for large household appliances, it is only 17%. In the latter, consumers prefer to go to a physical store to check out the look and feel of the product, discuss warranty and exchange, get priority on installation and so on. In recent times, there is a bit of reverse migration from e-commerce to brick-and-mortar stores in mobiles as well. Analysts of IIFL Capital Services believe that brick-and-mortar organised retail would still grow at ~14% even allowing for some share loss to online platforms.

Aditya Vision (AV) and EMIL listed plays in this space:

Both companies are over-indexed in relatively higher gross margin large appliances (vs the industry), but AV more so at 69% than EMIL at 48%. ROIC is higher for AV at 20% (FY23) vs 13% for EMIL largely on account of higher gross margins. Currently, AV faces lower competition as large retailers such as Reliance Digital and Croma are probably focused on plucking low-hanging fruit in other, larger markets. While they could turn their attention towards AV markets, analysts of IIFL Capital Services believe that this risk is a few years down the line. EMIL on the other hand, needs to demonstrate ramp-up of its NCR store sales from the current ~Rs.200-250m in order to get confidence in its north India expansion.

Initiate with BUY on both stocks, prefer AV:

Analysts of IIFL Capital Services initiate with BUY on AV with TP of Rs4200 and on EMIL with TP of 250. Given higher growth (FY24-27 sales/EPS growth of 23%/24% for AV vs 16%/20% EMIL) and higher return ratio, analysts of IIFL Capital Services believe that AV could have a higher target multiple of 40 vs 37 for EMIL. While competitive intensity could increase in AV’s territories, analysts of IIFL Capital Services believe that this is a few years away.