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Realization to drive revenue growth; C&W to lead the pack

* After getting hit in Q1FY22, the consumer durables and electrical industry saw demand recovery in Q2. However, in our view, the high base from last year should restrict volume growth on a yoy basis. The companies should witness double-digit value growth, backed by price hikes initiated in the last three quarters to offset commodity inflation. C&W segment will be an outlier, with strong growth led by ~35% price increase.

Channel feedback indicates: 1) a moderation in demand recovery in Aug and Sept after seeing strong comeback in July; 2) Channel inventory across the product categories is at normalized levels, 3) relatively better performance of Electricals compared with white goods; 4) a rebound in private capex/small-ticket projects but only gradual pick-up in large government orders benefitting C&W; 5) use of alternative materials, price hikes and product mix change (in a few companies), which should support stability/improvement in GM qoq; and 6) competitive intensity remains high durables along with premiumization story.

* The prices of some constituents in the commodity basket have cooled off (except for aluminum) vs. Q1, along with a stable USD/INR. Within our coverage universe, Havells and Whirlpool should see a healthy improvement in GM sequentially, while others should post stable numbers. Contract manufacturers and C&W companies should see a sharp contraction in GM yoy, while the trend should be stable to better qoq. Despite elevated revenue growth, high margin base in Q2FY21 shall restrict EBITDA growth for few companies, with costs expected to normalize. Our coverage universe should see a 246bps qoq EBITDA margin expansion.

* We expect consumer electrical companies in our coverage to post 25% revenue growth yoy and 12% growth vs. Q2FY20, backed by strong growth in C&W and ECD. The C&W segment should see 34% growth yoy and 12% CAGR over Q2FY20, driven by an improvement in realizations, followed by the ECD segment, which should see 17% growth. The lighting segment has seen a relatively slow recovery in both B2C and B2B categories. Cooling products (RACs) are expected to grow 26% yoy and 17% CAGR over Q2FY20. Dixon and Amber are expected to see strong revenue growth, driven by Mobile PLI, momentum in the TV segment and recovery in RAC volumes, respectively.

* Commodity price inflation moderates: Commodity inflation (Exhibit 4-8) has started to ease off in Q2, with copper and polypropylene average prices down 2% and 6% qoq. On the other hand, aluminum prices rose 11% qoq, implying a 49% increase yoy. USD/INR has been stable qoq and yoy.

* Electricals: We estimate that Havells will see 18% growth yoy in ‘ECD+others’ revenue vs. 16% for Crompton, 20% for VGRD and 17% for Polycab. The C&W segment of Havells and VGRD should aid better topline growth for both firms. Across product categories, lighting should see the slowest growth.

* C&W: Copper and aluminum have appreciated 42-49% yoy, leading to robust realization improvement for companies. In addition, demand for wires has been trending strong with a gradual improvement in project execution. In our coverage universe, we estimate C&W segment to post 30-40% yoy revenue growth.

* Durables: Blue Star is estimated to record 41% growth yoy, followed by Lloyd and Voltas (UCP - revenues adjusted for the services business) at 21% each. Whirlpool should post revenue growth of 12% yoy.

* Contract manufacturers: Dixon’s revenues are expected to rise by 59% yoy, driven by solid performance in TVs and an increase in revenues from Mobile PLI and security cameras. Home appliances is expected to see muted growth while lighting revenues is estimated to decline on yoy basis. Amber's AC volumes are estimated to more than double on the extremely low base from the year-ago quarter.

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