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In 4QFY23, weakness in demand continued in the rural and economy markets on account of a) sustained high inflationary environment, b) higher-than-usual channel inventory of fans in the beginning of the quarter (companies liquidated non-rated fans’ inventories in 3QFY23), and c) weak Mar’23 month due to unseasonal rains in a few states. Demand for premium segment products was seen holding up though it was offset by weaker demand in the mass segment. Notwithstanding near-term weakness, the industry remains optimistic on recovery in demand as input cost is stabilising. We estimate companies in our coverage to post aggregate revenue growth of 5% YoY (+8% QoQ/+9% 4-year CAGR; +2% YoY/+8% 4-year CAGR excluding Butterfly and Sunflame revenues) and EBITDA decline of 4% YoY as overheads cost (including A&P) is normalising. Notwithstanding near-term pain, we continue to be positive on the space from a medium- to long-term perspective given macro tailwinds (low penetration in some categories) and category expansion opportunities. Our top picks are Bajaj Electricals (BEL) and Havells India.

* Demand softness continues; unseasonal rains weaken consumer sentiment: Demand trend continued to be weak during 4QFY23 on account of a) weak consumer sentiment due to sustained inflation, b) unseasonal rains in a few states further impacting rural and semi-urban demand, and c) lower primary demand for fans due to higher inventories in the channel. For 4QFY23, we expect companies under our coverage universe to report aggregate revenue growth of 5% (+2% YoY excluding Butterfly and Sunflame revenues) while EBITDA is expected to decline 13% YoY.

* Urban demand holding up; El Nino and weak monsoon concerns loom: Weak consumer sentiment on account of high retail inflation continued even in Q4FY23. However, our interaction with channel partners revealed a slight improvement in urban demand over rural, which further deterioriated on account of unseasonal rains in states such as Maharashtra. Improvement in rural sentiment remains uncertain as companies are wary of the El Nino effect. Demand trend for premium products improved sequentially over a weak 3QFY23. Fans’ primary demand was impacted during the quarter due to a) higher inventory built up by the channel during Nov-Dec’22, led by higher discounts to liquidate non-rated fans’ inventory, and b) 5-7% price hike on BEE star-rated products on a like-tolike basis. Demand trend for appliances was mixed as the premium category saw steady demand whereas the mass/aspiration category was impacted on weak consumer sentiment. The industry remains optimistic on demand recovery aided by a) stability in input cost environment, and b) pent-up demand following 3 consecutive weak quarters.

* Prices of key commodities up QoQ, though lower YoY: Sequentially, key commodities saw a 3-12% increase (copper was up +12% QoQ), but YoY there could be a decline of 2-29% (PVC seeing the steepest fall). With most of the high-cost inventory liquidated, operating margins are likely to improve hereon.

* Adjust FY23-25 estimates by 0-5%; Maintain positive outlook from medium-term perspective on the space: Notwithstanding near-term pain (weak consumer demand; fans’ energy rating transition and concerns of a weak monsoon) industry remains optimistic on demand recovery in the coming quarters. We remain positive from the medium- to long-term perspective given macro tailwinds, low penetration in some categories, and category expansion opportunities. Our top picks are Bajaj Electricals (BEL) and Havells India. Key Risks - Delayed recovery and sharp spike in commodity prices.

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