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Reduction in exports duty on steel; negligible impact on durable companies

The Ministry of Finance has rolled back the export duties imposed on steel in May’22 (Link), to likely promote exports from India. Higher demand for steel products from International markets might shoot domestic steel prices upwards. However, historical raw material cost analysis of durable players suggests very low (only 2-4% of net sales) exposure to steel. Thus, majority of durable players may sail smoothly, in case of any adverse movement in the prices of steel. But it is important to note that close to ~10% of TTK Prestige’s sales are from stainless steel cooker and cookware. Any adverse movement of steel prices might affect its profitability and premiumisation efforts in the near term. We remain positive on the sector; our top picks are Havells (BUY) and Crompton Greaves (BUY).

* Reduction in exports duty on steel: Government of India has withdrawn the export duty imposed in May’22. This may result in more export opportunities for domestic steel players, which may lead to higher demand for steel, pulling domestic steel prices upwards.

* Steel is just 2-4% of net sales: We note steel constituted 1.6% and 2.3% of total sales and total raw material costs in FY22 for Havells, respectively. Other durable companies also have steel exposure of sub-5% of net sales.

* Impact on durable companies: Key raw materials for white goods and durable companies are copper, aluminum and crude oil derivatives. As steel is just 2-4% of net sales, we believe there will be negligible impact on the profitability of durable companies. We model these companies to pass on the increase in costs, if any.

* Impact on steel cooker portfolio of TTK Prestige: Steel cookers comprise 30% of total cooker portfolio (~10% sales) of TTK, in our view. We believe any steep increase in domestic steel prices may take impact TTK’s profitability in the near term and may also slowdown the pace of portfolio premiumisation.

* Sector view and top picks: Considering strong return ratios, healthy growth potential and low penetration levels, we remain structurally positive on the white goods and durables sector. We also expect the migration from unorganised to organised sector to steadily generate value. Havells India 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.

Valuation and risks

We value stocks in white goods and durables market on DCF methodology (WACC and TG ranging from 10-13% and 3-6%, respectively). Key upside risk: Better than expected gross margins due to correction in input prices. Key downside risks: (1) Unexpected irrational competition due to deceleration in general consumption demand, and (2) steep inflation in input prices.

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