Consumer Electricals: Awaiting for demand to show up

23 Feb 2024 , 10:51 AM

FMEG players continue to face headwinds from muted demand offtake across B2C categories like Kitchen appliances, Fans, Water heaters, etc. However, institutional demand from infra and real estate capex witnessed sustained growth in C&W, Pumps and Switchgear. During Q3FY24, IIFL’s FMEG coverage reported weak revenue/Ebitda/PAT growth of 5%/-3%/-3%. With a modest performance, VRGD leads growth charts on a depressed base in the PY, while POLYCAB sustained double-digit-volume led growth despite headwinds. While Crompton’s core performance was strong, losses in BGAL led to flat PAT. EPS downgrade was seen across most FMEG companies, but raise for EUREKAFO. Riskreward seems favourable with opportunities to add. Timely onset on heat in the South and expectations of a strong summer are the next catalysts to be watched out for uptick in seasonal products during H1CY24. 

Preferred picks: Havells, Eureka Forbes, Polycab. 

Weak performance continues for ECD/Lighting: 

While weak festive demand and delay in onset of winters impacted volumes, cost initiatives, premiumisation, and favourable product mix helped cap OPM pressures despite aggressive AS&P spends (4.1% of sales for FMEG) alongside Cricket World Cup. ECD growth was healthy for Crompton/VGRD/EFL (19/11%/14%), while being muted for BJE/HAVL (-8%/3%). Polycab is undertaking strategic changes in the FMREG portfolio, delaying the turnaround by a year. Lighting category continues to witness price erosion. No material price hikes (ex- C&W) were taken amidst soft input costs. 

C&W continues growth momentum: 

Cables sustained double-digit growth momentum; however, housing wires faced challenges given the lag in demand from new project launches. Polycab leads the pack clocking 17% growth, followed by KEI (14% YoY). Capacity constraints in Cables restricted growth in the Industrial products segment for HAVL. 

Earnings downgrade continue: 

Since Jan’24, analysts of IIFL Capital Services have cut FY24/25 EPS for HAVL by 9/11%, BJE by 18/2%, VGRD by 14/4% and Crompton by 4/4% respectively, given the weakness in demand. After consistent earnings downgrade over the past 18 months, earnings expectations are now moderate and soft. Risk-reward looks relatively better-off. As a proxy to the last-mile capex connectivity, C&W remain the sweetest spot with regard to demand, pricing and capacity availability. Analysts of IIFL Capital Services also like Eureka Forbes, given its value creation story with 15/9% upgrade in FY24/25 EPS.