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Q4FY21 Preview: The ‘cost management’ quarter

* Even after the festive season quarter, durable and electrical product demand has sustained in Q4 despite price hikes. Channel filling for cooling products (RACs and Fans) at the fag end of Q3 did not impact Q4 growth as demand momentum remained strong. After a strong Jan, demand for Washing Machines and Refrigerators moderated a bit from Feb. In the case of Cables & Wires, though cable volumes are recovering, they are still below pre-Covid-19 levels, while wires demand is tracking well despite multiple price increases. Channel checks point to: 1) unorganized players continuing to struggle due to commodity price inflation and supply-chain challenges; 2) recovery rate in Cables & Wires surprising distributors; 3) sustained growth in Tier-II and Tier-III towns; and 4) price increases being implemented across white goods categories, while a few players are focusing on gaining market share with lower/no hikes.

* With the majority of Covid-induced cost savings normalized, cost management and product mix will define margin delivery in Q4. Commodity inflation will dent gross margins. Havells, Crompton, V-Guard and Blue Star should lead EBITDA growth. Covid resurgence and stringent lockdowns will be the spoilsport for Q1FY22E growth and shall restrict price hikes.

* We expect consumer electrical companies under coverage to post 38% revenue growth yoy and 19% growth over Q4FY19. Sub-segments such as ECD to see strong 60% growth. Domestic C&W segment should see double-digit growth (except for KEI) on higher copper prices. Lighting (B2B) volumes remain impacted on account of slower recovery. In RACs, Voltas will continue its outperformance over peers. With the normalization in channel inventory, Amber should see 40% growth in RAC volumes. Dixon’s topline should expand 140% yoy, driven by TV, Washing Machine and Mobile segments. Whirlpool’s revenue is expected to grow by 25%. Average gross margins will likely see contraction of 214bps yoy, whereas EBITDA margin to see 110bps expansion.

* Rising commodity price inflation: Commodity inflation continued in Q4 (see Exhibits 4- 8). On average, copper prices have increased 51% yoy and 12% qoq, with prices currently standing slightly lower than their multi-year highs. Aluminum prices have risen 23% yoy and 4% qoq. Polypropylene prices have also started to rebound from Q2FY21 (after seven quarters consecutive declines) and have seen 42% increase yoy and 24% qoq. The only silver lining was a stable INR.

Segment-wise details (yoy denotes two year growth i.e. over Q4FY19)

* Electricals: Havells should see strong momentum sustaining in ECD+others, with Lloyd and C&W seeing revenue growth in the range of 12-68% yoy. Market share gains in Fans and better mix should aid ECD growth of 36% for Crompton. B2B lighting is expected remain a drag. V-Guard should deliver strong numbers for Stabilisers, Fans and Pumps categories leading growth. We expect Polycab’s FMEG revenue to grow 52%.

* C&W: Copper and aluminum prices have appreciated 51% and 23% yoy, respectively. This will offset the weakness in volumes. Demand for wires has been on the positive trajectory despite multiple rounds of price hikes. The B2B/institutional business is recovering as well. Havells, V-Guard and Polycab (domestic business) should post healthy double-digit C&W revenue growth. Higher dependence on the institutional business and reduced focus on EPC segment to keep KEI’s topline under pressure for one more quarter.

* Durables: Voltas’s (UCP) revenues is expected to grow 59%, driven by market share gains. Lloyd’s revenues should grow 30%. Blue Star’s (UP) revenues should grow 8%, while Whirlpool should see 25% growth.

* Contract manufacturers: Dixon’s revenues should rise 1.4x, with strong performance in TVs (2.5x) and Washing Machines (+47%). Amber's AC volumes should grow 40% yoy with channel inventory normalization and seasonality.

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