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While we model EBITDA margin expansion for the sector in H2FY23 due to steep correction in input prices, we believe the margin expansion is likely to be lower than consensus expectations due to (1) the ad-spend (as % of net sales) is likely to be higher after remaining low in FY21-22, (2) increase in freight cost will also hurt the margins and (3) we model the companies to invest in R&D and new product launches / relaunches. Also while the input prices corrected in Q1FY23, they have remained largely stable in Q2FY23. The durable companies are required to pass on the benefits in commodity linked categories like cables & wires. Hence, we model the margins in these commodity linked categories to be weaker in Q2FY23 and Q3FY23 due to high priced inventory.

While we remain hopeful about margin expansion in H2FY23, we model the margin expansion to be lower than consensus expectations. We remain positive on the sector, our top picks: Havells (BUY) and Crompton Greaves (BUY).

* Correction in raw material prices: We note the prices of key raw materials such as copper, steel, HDPE and aluminium have corrected by 6-28% in the past six months. We believe this augurs well for improvement in gross margins in H2FY23E.

* Ad-spend likely to increase: We model durable companies to (1) increase adspend, which has remained lower over FY21-22; (2) offer additional trade schemes and discounts; and (3) likely higher consumer offers to gain market shares from smaller / unorganised players.

* Freight cost to remain high: We believe higher fuel costs due to higher crude prices will result in higher freight costs. Also increase in travel expenditure will also hurt the margins.

* EBITDA margin expansion likely to be lower than consensus expectations: While we remain positive about margin expansion in H2FY23, we believe the companies need to reinvest large part of the savings back in business. Hence, we model the margin expansion to be lower than the consensus.

* Sector view and top picks: Considering the strong return ratios, healthy growth potential and low penetration levels, we remain structurally positive on the white goods and durables sector. We also expect migration from unorganised to organised sector to steadily generate value. Havells and Crompton Greaves are our top picks. Key risks: Higher-than-expected rise in crude oil prices, any delay in price hikes to protect margins, and irrational competition.

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