Strong recovery led by pent up demand…
We expect the I-direct consumer discretionary universe to have posted a strong bounce back in demand for discretionary products (paints, pipes and electrical goods) post easing of lockdown restrictions. The growth was largely driven by semi-urban and rural India that were less impacted by the pandemic and also helped negate the impact of intermediary lockdowns in metro regions. We believe organised players have also gained market share from unorganised/regional players that were adversely impacted by supply chain disruptions amid lockdowns. Major FMEG players like Havells, Bajaj Electricals and Voltas have confirmed market share gains due to their strong supply chain management and pan-India distribution reach. Further, changing consumer habits as more people stay home due to lockdown and rise in work from home culture led the revival in demand for home appliances in urban India in July-August 2020. On the paint front, top three paint majors are likely to post ~8-9% YoY volume growth in Q2FY21, supported by strong pent up demand in both decorative, industrial paints category. The recent surge in auto OEMs sales volume and a low base of decorative paints would benefit Kansai Nerolac in terms of strong volume growth of 7% in Q2FY21E. On the piping business, we believe Supreme Industries would record a strong performance in piping (strong demand for agri, residential pipes from rural regions) and packaging segments. The Idirect coverage universe may see ~4% YoY revenue growth in Q2FY21.
Benign raw material prices, better utilisation to drive margin
Our coverage universe is likely to see ~110 bps YoY expansion in EBITDA margin led by paint companies. We believe benign raw material prices (crude, VAM prices were down ~37%, 17% YoY, respectively) are likely to benefit paint and adhesive companies most in our coverage universe. Also, withdrawal of discounts provided in Q1FY21, would also help increase gross margins of paint companies. We believe gross margins of paint and adhesive companies are likely to grow up to 200 bps YoY, helping drive EBITDA margin up ~120-180 bps YoY in Q2FY21. From the piping segment, Supreme is likely to witness an increase in EBITDA margin by ~90 bps YoY due to successful pass on of higher input prices (HDPE, LDPE prices up 24%, 16% YoY) to customers along with a better product mix. On the electrical good fronts, despite pressure from industrial product and project business, Voltas and Havells India are likely to see a substantial recovery in EBITDA margin by 170 and 120 bps QoQ, respectively.
Unfavourable base due to change in corporate tax rate
The I-direct CD universe is likely to see ~8% YoY growth at the PBT level due to better margins. However, the Q2FY21 bottomline would be impacted by unfavourable base on account corporate tax rate cut in Q2FY20.
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