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The Consumer Electricals sector is likely to keep growing at a CAGR of 10-12% over the next decade, led by resilient demand for products that serve basic household needs. The sector is witnessing consolidation in favor of industry leaders, with consumers preferring aspirational and premium products with better brand image and product quality.

Market share is rapidly shifting from unorganized players and regional brands to sector leaders over the past few years and is expected to accentuate even further. Sector leaders have emerged stronger from the pandemic, led by deeper distribution network, direct retail reach, ability to manage supply chain through alternate sourcing, and structural cost savings while the weaker players are likely to exit or taken over.

With new trends in the sector favoring premiumization and IoT-enabled smart products, and upcoming BEE norms, we expect the sector leaders to further strengthen their market share and profitability. We initiate coverage on the sector with an Overweight view. Our top picks are Polycab India, Orient Electric and V-Guard Industries. Key risks are prolonged Covid waves leading to more shutdowns and any further exponential rise in commodity prices from current levels.

Sector macros remain favorable; demand resilient

Consumer Electricals is a compounding growth sector. The products cater to the basic needs of urban as well as rural households and are low ticket-size items, having a resilient demand due to lack of alternatives/substitutes. Therefore, demand for these products is less dependent on discretionary spending trends of the economy. Urbanization and growing middle-income class are driving urban demand, while improving power connectivity is driving rural demand. In addition, growth tailwinds include rising premiumization, shift from unorganized players to organized brands, low penetration levels, and healthy replacement demand.

Leaders emerge stronger from pandemic; create structural moats in distribution reach

The sector leaders have emerged stronger from the pandemic-led disruptions compared to the regional players and unorganized trade due to their superior and deeper distribution reach, direct retail connect, ability to manage supply chain through alternate sourcing, and structural cost saving measures. Attaining deeper distribution network is a critical success factor, as more than 80% of sales happen via general trade. The sector leaders have raced away from smaller peers, with direct retail reach in excess of 150,000 outlets on an average and direct access to more than 1,000 cities with retailers being digitally mapped, an unassailable lead.

Consolidation underway - Unorganized trade shrinking; Weaker hands to wander off

The industry is witnessing consolidation towards the large brands, as consumers are preferring aspirational and premium products with better brand image and product quality. With their superior R&D and product development capabilities, the sector leaders stand to gain from the rising trend of premiumization, IoT-enabled smart products, and upcoming change in BEE norms.

The smaller regional players are facing increased competition amidst rise in commodity prices and supply chain challenges. While some smaller players have been acquired (like Kenstar and Nirlep), more such takeovers are likely (like Syska). The share of unorganized trade has declined from 39% in FY14 to 34% in FY20 and is likely to shrink further to 26% in FY23E.

Testing the core strength of balance sheet and cash flow through historical analysis

The ability of a company to transform itself and achieve greater heights lies in its roots. Hence, we place greater significance on the cash flows and working capital cycle and have done detailed historical analysis of it for our six coverage companies.

Initiate coverage on sector leaders

We initiate coverage on the six leaders in the Consumer Electricals sector. Based on the current valuations and growth outlook over FY21-24E, we have assigned BUY ratings to Polycab (TP: Rs3,065, 29% upside), Orient Electric (TP: Rs415, 23% upside) and V-Guard (TP: Rs315, 20% upside) and ADD ratings to Havells (TP:1,535, 6% upside), Crompton (TP: Rs550, 12% upside) and Bajaj Electricals (TP: Rs1,450, 10% upside).

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