IGI Logo

Sedate volumes & cost inflation suppress margins

Consumer demand was healthy in October, but started tapering post the festive season (mid-November onwards) as fear gripped among consumers due to surge in OMICRON variant of COVID-19. Revenue growth across our coverage universe grew 12% YoY to Rs114bn largely driven by value growth (on account of ~14-15% price hike taken over the past year to mitigate cost inflation), thus implying a decline in overall volumes YoY. The challenges of unprecedented rise in commodity costs and higher freight charges (refer Exhibit 9-14) led to a decline in gross and EBITDA margin. Our coverage universe saw 290bps YoY and 50bps QoQ compression in EBITDA margin to 10.9%. Lower margins led to PAT decline of 13% YoY to Rs8.4bn for our coverage universe. Management commentary remains optimistic due to expectation of healthy and uninterrupted summer season after a gap of 2 years, which should aid demand and provide an opportunity to pass on the price hikes to end-consumers.

Revenue growth subdued; fear of OMICON surge impacts demand: Revenue for our coverage universe grew 12% YoY to Rs114bn, largely value driven due to ~14-15% price hike over the past year to mitigate cost inflation. This implies a volume de-growth due to subdued demand post festive season and lower consumer footfalls amidst fear of Omicron surge. Key outperformers include: (1) POLYCAB (23% YoY revenue growth at Rs33.7bn, highest ever) owing to good volume uptick in HDC and LDC cables and FMEG portfolio excluding fans. (2) VGRD (16% YoY growth at Rs9.6bn), led by consumer durables and house wires. (3) HAVL’ssales grew 15% YoY to Rs36.5bn, led by cables (33% growth, led by higher commodity prices but flat volumes) and lighting (16% YoY growth). ORIENTEL’s growth (10% YoY to Rs6.8bn) was value led as implied volume growth was negative. CROMPTON’s growth was relatively lower at 5% YoY, implying higher volume decline, on account of demand moderation. BJE’s sales fell 13% YoY to Rs13bn with consumer products segment also posting 7%/20% value/volume decline in sales.

Commodity cost headwind continues to dent gross margin: Commodity costs inflation continues to impact the industry. The gross margin declined as companies were unable to pass on the entire extent of cost inflation to end-consumers owing to subdued demand and OMICRON surge. Decline in gross margin was highest for HAVL at 580bps YoY and 200bps QoQ to 32.3%, the lowest level in the past decade. ORIENTEL’s gross margin fell 340bps YoY and 90bps QoQ to 27.6% while BJE’s gross margin fell 300bps YoY and 120bps QoQ to 26.7%. The sharp decline in gross margin on YoY basis for HAVL, ORIENTEL and BJE is partly also due to the high base effect. On QoQ basis, the decline in gross margin was lower for CROMPTON and VGRD at 30bps each. POLYCAB’s gross margin improved QoQ by 70bps to 22.6% as it took higher price hike compared to cost inflation in Q3FY22.

EBITDA margin follows gross margin decline: EBITDA margin for our coverage universe fell 290bps YoY (on a high base) and 50bps QoQ to 10.9%, partly due to revival of discretionary spends (such as advertising and travelling) in Q3FY22. However, companies undertook several cost control initiatives to support operating margins. On a QoQ basis, the EBITDA margin expansion was witnessed in POLYCAB (by 100bps to 10.7%) and BJE (by 20bps to 6.3% due to lower EPC loss). EBITDA margin declined on QoQ basis for ORIENTEL (by 60bps), Crompton (by 120bps), VGRD (by 160bps) and HAVL (by 170bps).

Lower margin profile leads to PAT de-growth: PAT for our coverage universe fell 13% YoY to Rs8.4bn due to weaker margins. Key outperformers were POLYCAB (1% rise in PAT) and CROMPTON (PAT decline of 2%). HAVL saw PAT decline of 12% while PAT of ORIENTEL/VGRD fell 27%/32%, respectively. BJE saw sharper decline in PAT by 48% YoY.

Summer season holds the key: Across our coverage universe, two key expectations from the managements are: (1) Growth revival in the summer season as the fear of OMICRON surge is almost behind us and pent-up demand should be healthy considering lock-downs in past two summer seasons. (2) With demand revival, there should be an industry-wide hike in prices to pass on the cost inflation.

To Read Complete Report & Disclaimer Click Here

For More Centrum Broking Disclaimer https://www.centrumbroking.com/disclaimer/

SEBI Registration No.:- INZ000205331

Above views are of the author and not of the website kindly read disclaimer