Consumer Durables: Sector Update
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Consumer Durables: Sector Update
Global trends = possible sector risks?
Consumer Durables have continued to rise in valuations, moving from the
30-50x range to 40-60x range depending on the company, product and
brand, given the strong growth embedded in this sector due to under
penetration across products, at varying levels. Companies continue to see
strong growth, improve margins, gain market share, increase prices,
incentives like PLI and have a sanguine outlook for the future.
However, we take a closer look at three global trends which could be a
potential risk to the sector- rising copper prices, chip shortages and to a
lesser extent container shortage. While there is no quantification on the
impact of these, we would like to flag off the same.
The consumer durable companies have always used brand heft to offset
input price hikes through continual price hikes and we are not unduly
worried at this stage. Our picks continue to remain Voltas, CG Consumer
and KEI.
In a new valuation range
Consumer Durable stocks have had a good run since post covid recovery
started in Q2, giving a return of 31% since October (BSE Consumer Durables
Index). There are solid fundamental reasons for this outperformance. 1) Q3
saw strong growth aided by pent-up demand with margin expansion,
despite rising input costs, 2) Large players continue expand market share at
the cost of smaller ones with better control on supply chain, 3) Proactive
price hikes taken in Q4 to tackle rising commodity prices and 4) tail winds
from schemes like PLI which is giving incentive to segments like electronics,
ACs and LEDs to boost production.
The valuations for these companies have also entered a new zone, moving
from the 30-50x to 40-60x, depending on the company, product and brand.
While we are not debating the valuations, given the strong growth
embedded in this sector, given the continued under penetration across
products, at varying levels, we would like to highlight risks that might
remain in the near to medium term for these companies. The risks that we
are talking about are copper prices, semiconductor shortages and container
shortages.
Vinod Chari
VP - Research
+91 22 40969776
vinodc@dolatcapital.com
Pranav Lala
Associate
+91 22 40969722
pranavl@dolatcapital.com
February 25, 2021Copper prices: Why it could remain high?
Copper prices have gone up by 32%yoy as global economies recover. Copper,
due to its varied application, has long been considered one of the best
economy proxies. Some reasons for higher copper prices as per our
understanding are:
Most global economies are focusing on infra spending as they recover
from the covid impact, which means higher demand for copper
Many of these spending schemes in many countries lay emphasis on
green energy which will also push for higher demand of copper. For
example, wind and solar plants use 5x the amount of copper per MW
compared to a regular thermal plant1. An EV uses 2.5 as much copper
as compared to a vehicle using internal combustion engine2.
While demand is getting created, supply has been also an issue with
mining one of the activities impacted by covid and the reason why
prices are likely to remain high
Copper mining has reduced significantly in last few decades, with only
8% of copper coming from mines which have been discovered since
1990 as per S&P3. What this means is existing mines have to be mined
deeper to extract copper pushing up extraction costs
This high copper prices are going to impact consumer durables
products like ACs, wires, cables, fans with varying degrees. While
industry does not usually bear the brunt of commodity prices as it is
passed on to the consumer, there could be an impact on volumes.
Semiconductor shortages: here to stay!
There is also a global shortage in semiconductor which in turn affects
electronics components like PCBs. Today, almost every segment of durables
has ‘smart’ products, which involves use of electronics in some form. Again,
we believe that this shortage will stay on for some time.
On the supply side, the semiconductor industry has not seen any
major capex in the last few years. From 2015 to 2019, the capital
investment cycle remained conservative across the industry4.
The demand side was boosted by stockpiling in China on the fear of
sanctions in its race for making 5G gear and also an unprecedented
global demand for all kind of electronics like TV, laptops, mobiles and
tablets etc., as well as advanced home and kitchen appliances which
use such chips
From 2021 to 2023, leading foundries are likely to undergo a cycle of
massive equipment investment. TSMC, Samsung and Intel lead the
capital spending. For example, TSMC is looking at $28bn capex in
2021. However the catch is that setting up a new foundry is a 5 year
process5.
This can impact volumes for not just the appliance players, but also
OEMs like Dixon in terms of a possible volume impact.
February 25, 2021 2Container shortages: fastest to resolve!
If shortages in copper and chips were not enough, the global container
shortages are also elongating lead times for raw material as well as exports.
This means higher working capital requirements for these companies
impacting return ratios.
The main reason for container shortages are trade imbalance post covid. With
China recovering fastest, exports have surged though other parts of the globe
are yet to recover resulting in lesser exports for them. This has impacted
turnaround time for containers resulting in shortages. Another contributing
factor is longer lead times with stringent unload/load procedures due to
covid.
However, as trade balance reverse, we believe that this shortage will be
resolved fast and hence see this as a much lesser risk.
1
https://copperalliance.org.uk/
2
https://auto.economictimes.indiatimes.com/news/auto-components/freeport-eyes-u-s-
expansions-as-bidens-ev-plan-boosts-copper-demand/81231522
3
https://www.spglobal.com/marketintelligence/en/news-insights/blog/major-copper-
deposit-dismal-discovery-rate-continues
4
https://www.counterpointresearch.com/mega-wave-capex-cycle-logic-semiconductor-
industry/
5
https://hbr.org/2021/02/why-were-in-the-midst-of-a-global-semiconductor-shortage
February 25, 2021 3Our picks
Voltas (CMP: Rs 1049, TP: Rs 1260, Buy)
Voltas has continued its strong performance in RAC with double digit EBIT
margins and continuing leadership with market share at 26%. It is also a
leader the inverter AC market with a 22% market share and the No.2 player
in the cooler market with a 13% market share.
Voltas continued to remain a market leader with a 26% market share, which
though down 80bps QoQ, is still formidable. It continues to expand its
distribution and currently has 19000 touchpoints over the country with 6000
Beko touchpoints. Voltas and Voltas Beko have doubled their EBO to 190 from
95 in the previous year. Inventory in the system fully normal and industry
expects a strong summer season ahead. They have taken a price increase of
5-6% across products for higher inout costs. Voltas is in a good position to
take advantage of this and we expect it to continue to remain the leader in
the industry.
The board has approved restructuring of its business into B2C and B2B. We
view this as a long term positive when it happens as it gets a sharper focus on
the durables business.
Voltas remains the pick for playing the AC penetration theme. Apart from its
leadership and brand, it also has a strong debt free balance sheet with cash
of Rs19bn (FY20). We maintain Buy with a TP of Rs1260, valuing it at
50xSep22E.
CG Consumer Electricals (CMP: Rs 385, TP: Rs 500, Buy)
CG Consumer’s strong recovery post covid has also been aided by market
share growth while its focus on costs aided margins. Growth momentum
continued with increased focus on rural and modern channel expansion by
+50% YoY, with an 1% increase in market share in its main product-fans.
It has maintained double digit margins across its product segments as strong
growth recovery in consumer durables, end of price erosion in LEDs and all
round cost savings marked the margin improvement for CG. Company has a
comfortable WC position with strong cash generated from operations. It has
a net cash of despite an interim dividend of Rs1.9bn. TTM ROE and ROCE was
29.4% and 74.8%.
A CG continues to focus on expansion in network through alternate channels.
It has seen E-commerce and modern retail growing by 53% YoY; Company
continues to invest in rural channels, with its initial target to expand to 400
small towns of which it is already present in 75% towns, before expanding g
further in the next phase.
The stock continues to have sector leading return ratios. It trades at
44xFY22E. We have a buy rating with a TP of Rs500, valuing the stock at
50xSep22E. It continues to be our preferred durable stock.
February 25, 2021 4KEI Industries (CMP: Rs 510, TP: Rs580, Buy)
KEI is a proven player in the wire and cable business. This business is going to
be a beneficiary of the increasing thrust on infrastructure building and capex.
Focus on real estate through affordable housing is also expected to drive
demand for cables and wires.
KEI is focusing on becoming a pure wire and cable player and is trying to move
away from EPC. Even the most recent quarter saw EPC revenues falling to
Rs1.2bn in Q321 down 33%. This decline is strategic as it focuses on growing
the consumer business while limiting its EPC business to Rs5bn. The company
continues to focus on reach and has reached 1645 dealers by end of Q321. It
also continues to focus on the EHV cable business, where there is limited
competition and KEI has 35% market share in this segment.
KEI expects to end FY21 at ~87% levels of FY20, given the impact of covid on
the current financial year. Working capital cycle is also expected to normalize
in Q4FY21.Further, it also expects to grow at ~20% in FY22. Stock trades at
16xFY22E. We value the stock at 18x Sep22E and maintain a Buy rating with a
TP of Rs580.
February 25, 2021 5Valuation Matrix
(Rs mn) Net Sales EBITDA PAT EPS (Rs)
FY20 FY21E FY22E FY23E FY20 FY21E FY22E FY23E FY20 FY21E FY22E FY23E FY18 FY19 FY20 FY21E
Amber Enter 39,628 31,993 43,820 60,038 3,093 2,329 3,956 5,156 1,641 808 1,880 2,630 52.2 24.0 55.8 78.1
Bluestar 53,602 40,101 49,151 57,014 2,828 2,286 3,490 4,048 1,432 836 2,050 2,318 14.9 8.7 21.3 24.1
CG Consumer 45,203 46,332 53,281 61,273 5,991 6,857 7,726 9,191 4,964 5,142 5,744 6,856 7.9 8.2 9.2 10.9
Dixon Tech 44,001 64,168 110,873 144,639 2,231 3,080 5,100 6,364 1,205 1,777 3,128 3,900 104.1 153.6 270.4 337.1
Havells 94,403 97,865 117,438 136,315 10,287 14,093 16,911 20,038 7,356 9,800 11,981 14,399 11.8 15.7 19.1 23.0
KEI Industries 48,843 41,992 50,669 58,163 4,960 4,499 5,095 5,812 2,551 2,419 2,737 3,033 14.3 13.5 15.3 16.9
Orient Electric 20,618 19,302 23,163 26,329 1,764 1,850 2,211 2,770 786 966 1,156 1,522 3.7 4.6 5.4 7.2
Polycab 88,300 93,635 107,699 123,464 11,350 12,284 14,343 16,708 7,656 8,514 10,140 11,982 51.4 57.2 68.1 80.4
V-Guard 24,820 25,904 30,855 35,462 2,533 2,720 3,209 3,688 1,852 1,969 2,364 2,765 4.3 4.6 5.5 6.4
Voltas 76,581 70,540 85,444 104,671 6,867 5,361 7,946 9,839 5,211 5,113 7,411 9,220 15.8 15.5 22.4 27.9
Mcap CMP TP Upside PE (x) ROE (%) ROCE (%) EV/EBITDA (x)
(Rs bn) (Rs) (Rs) (%) FY20 FY21E FY22E FY23E FY20 FY21E FY22E FY23E FY20 FY21E FY22E FY23E FY18 FY19 FY20 FY21E
Amber Enter 109 3,232 2,500 (23) 61.9 134.8 57.9 41.4 15.5 5.9 11.2 13.9 14.5 6.9 11.1 13.4 33.5 46.2 27.2 20.8
Bluestar 84 869 730 (16) 58.4 100.1 40.8 36.1 17.3 10.2 21.3 19.6 15.4 11.6 17.5 18.3 29.9 37.6 24.6 20.8
CG Consumer 242 385 500 30 48.7 47.0 42.1 35.3 38.7 32.7 30.5 29.0 36.0 30.3 27.6 28.0 40.6 35.0 30.7 25.2
Dixon Tech 230 19,852 17,500 (12) 190.6 129.3 73.4 58.9 26.2 28.3 36.5 33.2 26.6 27.8 35.5 32.7 102.9 74.6 45.0 36.0
Havells 693 1,107 1,300 17 94.2 70.7 57.8 48.1 17.3 21.6 23.2 23.6 16.5 21.6 22.4 23.0 66.3 48.6 40.3 33.6
KEI Industries 45 501 580 16 35.1 37.0 32.7 29.5 22.3 14.9 14.7 14.2 27.8 21.1 21.7 21.6 9.2 9.7 8.6 7.5
Orient Electric 57 270 290 7 73.0 59.4 49.6 37.7 23.6 25.2 26.3 29.5 23.5 23.6 22.4 24.7 33.0 31.2 26.5 20.9
Polycab 199 1,337 1,350 1 26.0 23.4 19.6 16.6 22.9 20.4 20.6 20.7 23.3 21.1 21.1 21.0 17.4 15.6 12.9 10.8
V-Guard 96 225 270 20 52.0 49.0 40.8 34.9 19.6 18.3 18.9 19.1 19.7 18.6 19.2 19.4 37.6 34.6 29.3 25.4
February 25, 2021 5DART RATING MATRIX
Total Return Expectation (12 Months)
Buy > 20%
Accumulate 10 to 20%
Reduce 0 to 10%
Sell < 0%
DART Team
Purvag Shah Managing Director purvag@dolatcapital.com +9122 4096 9747
Amit Khurana, CFA Head of Equities amit@dolatcapital.com +9122 4096 9745
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