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Mixed bag; hopes pinned on 2HFY24

Electrical Consumer Durable (ECD) companies’ revenue grew by 16% YoY (+13% 4-year CAGR) in 1QFY24, largely on the back of healthy growth in the B2B segment (particularly cables) while demand environment in the B2C segment remained subdued due to soft summer/unseasonal rains and consumption slowdown in general. Although gross margin improved on the back of a benign RM envionrment, that improvement was not reflected in operating margin due to a) high competitive intensity, and b) sustained spend on long-term strategic initiatives (A&P, GTM, etc). We continue to be positive on the space from the medium- to long-term perspective given macro tailwinds (low penetration in some categories) and category expansion opportunities. Our top picks - Bajaj Electricals, and Havells.

* B2B drives revenue while B2C remains subdued in 1QFY24: ECD companies’ aggregate revenue witnessed healthy growth of 16% YoY (+13% 4-year CAGR; -4% QoQ). This was largely on the back of healthy growth in the B2B segment while demand environment in the B2C segment remained subdued due to consumption slowdown and soft summer. ECD segment saw another quarter of modest revenue growth while wires & cables continued to outperform, growing in double digits aided by strong volume growth.

* Unseasonal rains and consumption slowdown impacted demand in ECD segment: ECD segment saw another quarter of modest revenue growth of 3% YoY (+8% 4-year CAGR) impacted by a) weak demand environment, and b) soft summer due to unseasonal rains. Moreover, fans segment continued to witness volatility because of BEE energy rating transition. Revenue grew 8%-16% YoY (excluding Havells/Symphony, which saw 13%/17% decline). Low volume, high competitive intensity, high discounting on nonrated fans inventory and liquidation of high-cost inventory kept margins under pressure.

* Cables & wires revenue outperformance led by volume: Cables & wires segment revenue grew 30% YoY (+18% on 4-year CAGR); copper prices fell 5% YoY, implying strong volume growth in cables and wires. Within this, we believe industrial cables is growing at significantly faster pace compared to consumer wires. Healthy demand from government as well as infrastructure side aided volume growth. With most of the high-cost inventory liquidated, EBIT margin improved across companies

* RM prices soften in 1QFY24: In 1QFY24, prices of key commodities fell by 5-36% over 1QFY23 but remained high compared to pre-Covid levels. However, amidst a weak demand environment, brands in an attempt to stimulate demand offered schemes/ discounts leading to heightened competitive intensity, which put pressure on margins.

* Maintain positive outlook from medium-term perspective: Notwithstanding near-term pain (weak consumer demand; fans energy rating transition) the industry remains optimistic of demand recovery given a) expectation of strong H2, b) recovery in rural markets, and c) stability in the input cost environment. We remain positive from the medium- to long-term perspective given macro tailwinds, low penetration for some of the categories, and category expansion opportunities for companies. We maintain BUY on Bajaj Electricals, V-Guard Industries, Havells and Stove Kraft; HOLD on Crompton Consumer and TTK Prestige stays.

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