Another round of pre-buying on offer?
The uptrend in commodity prices continued into 4QFY21, pointing towards another round of likely price increases across key product categories. We assess the impact from a higher commodity pricing environment along with other key points below:
* Key commodities witness a sequential uptrend: The uptrend in commodity prices continued, with various commodities witnessing a 30-60% YoY/5-15% QoQ surge in 4QFY21 till date. For instance, copper/steel/aluminum is up 15%/9/5% QoQ. Even plastic prices are seeing a strong upsurge, with prices of Polypropylene up 8% QoQ (~35% YoY). As indicated in our previous note on commodity price inflation (link), the latter is not necessarily a negative catalyst as many companies have the ability to undertake price hikes. Most companies undertook prices hikes (4-8%) across various products during the first week of Jan’21. There is a likelihood of another round of price hikes in Apr’21.
* Consumer Electricals tend to defend margins; White Goods could witness margin headwinds: Electrical Goods like Fans and Lighting are able to pass on input cost pressures. These categories consist of small ticket size items and have higher replacement demand. At times, there may be a delay in price hikes by a month or so, but overall they tend to tide over commodity price inflation risks. The risks to margins are relatively high in the White Goods category owing to higher competitive intensity. Prior to COVID-19, brands resisted price increases, despite import duty hikes as well as depreciation in the rupee v/s the dollar. This is rightly reflected in the decline in margins from peak levels for various companies in the past. Also, White Goods have an element of discretion, which allows for postponement of purchases, although not as discretionary as say high ticket size items like 4Ws. We do see risks to FY22E margins for White Goods players, especially ACs (VOLT and BLSTR). In the very near term, a strong summer season (led by pent-up demand) can offset these risks.
* Possibility of another round of strong pre-buying: With a strong uptick in commodity prices on a sequential basis, there exists a possibility of price hikes towards the end of Mar’21 or beginning of Apr’21. Our channel checks suggest that underlying retail sales are yet to pick up meaningfully (or match primary sales), but the confidence level is good among dealers, especially for Cooling products. The possibility of a price hike in Apr’21 could lead to strong primary sales for brands by the end of Mar’21, a similar phenomenon which happened towards the end of Dec’20. This could lead to an upward revision in our 4QFY21E revenue estimates across our coverage universe. Do note that the supply chain network of the unorganized sector is yet to fully return to normal. Any pre-buying is likely to benefit the organized (or listed space) disproportionately.
* Inventory levels slightly higher than normal, but not a major concern: Strong pre-buying towards the end of 3QFY21 led to inventory levels inching to ~50 days in Jan’21. While secondary sales were uniform across Consumer Electricals categories like Fans and other appliances during Jan-Feb’21, it was subdued for the Consumer Durables category (barring Refrigerators). However, sales for Air Conditioners have started to pick up in the initial few days of Mar’21. Inventory levels have moderated to 40-45 days now and is not a major concern.
* Valuation and view: a) WHIRL (TP: INR3,020, Buy) – WHIRL is our top pick in the underpenetrated White Goods space as it offers the best risk-reward matrix at present. b) OEL (TP: INR350, Buy) – OEL is our top pick in Consumer Electricals, with a strong case for EBITDA margin to converge within the 13-15% range enjoyed by peers. It has a superior RoE compared to peers, despite higher investments in people and branding-related spends. c) CROMPTON (TP: INR485, Buy) – Product categories are resilient to input cost pressures. The ongoing revival/pent-up demand in Real Estate can aid revenue growth. d) HAVL (TP: INR1,100, Neutral) – Given the diversified nature of its portfolio and various degrees of impact from cost inflation, the latter tends to nullify. We remain Neutral on expensive valuations. e) VOLT (TP: INR1,170, Prior: INR1,125, Neutral) – As low-cost inventory gradually gets liquidated, we do see margin risks for VOLT in FY22E. Expectations of pent-up demand for ACs during the summer season can keep valuations expensive in the near term. We remain Neutral as we await a better entry point in the stock. f) BLSTR (TP: INR740, Prior: INR680, Sell) – Adjusted for the Projects business, the stock is now more expensive than VOLT. Also, BLSTR remains a single product company, while VOLT is expanding into the wider White Goods space of Refrigerators and Washing Machines. Restructuring of VOLT’s Projects business may be a precursor to a demerger and can help sustain higher multiples. On a relative basis, VOLT scores over BLSTR as an investment thesis.
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