Our Consumer Durables coverage universe posted a top-line beat versus our estimates, which on a 3Y-CAGR-basis stood at 7.9% (ex-Dixon/Amber). Profitability remained challenging – Ebitda margins dipped 180bp below our estimate, albeit flat y-o-y, owing to high-cost inventory, limited pricing action and higher ad-spends during the quarter.
In our view, with commodity costs easing, margins shall start inching up sequentially. Demand would also follow suit, a muted June/July notwithstanding, due to the early onset of the festive season and the need for further pricing action staying out of the picture. Maintain Whirlpool, Havells, KEI and Dixon as our preferred sector picks.
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Top-line growth of 55.7% y-o-y (7.9%
3Y-CAGR) ex-Dixon/Amber fared better versus estimates owing to strong demand in April/May. Inventory levels for cooling products (RAC’s/air coolers) were at normalised levels after the loss of last two peak-summer seasons. Commodity cost normalisation will have a positive impact on demand especially for entry level products with margins also expected to improve in the second half of the fiscal.
High cost inventory, limited pricing action and higher ad-spends during the quarter led to 180bp margin miss versus our estimates. Brands highlighted softening of demand in Jun-22, spilling over to Jul-22 and this remains a key concern area going ahead. Slight deferment in demand was seen in industrial and infra segment as per management commentary.
Outlook: Stick to robust leaders
Inflation trajectory, in our view, remains the most important variable for pure consumer segments, which could help both valuations and growth. Past 12M has seen valuation correction across CD space (22% drop in sector multiples to 31x) with heightened risks to growth/profitability. C&W players though, have led consensus earnings upgrades for FY24E in the last 12M while also leading in terms of stock returns.
Given the challenges, we prefer sticking to robust sector leaders that carry more resilient features, have concentrated and sustainable market shares, with significant room for deeper penetration, and robust business models.