Consumer Electricals: Heatwave lights things up for this space

The consumer electricals sector was sought after pre-Covid for its growth, capital efficiency and lean balance sheets. These stocks also commanded valuations multiples similar to that of FMCG companies.

The pandemic wrought a marked change, with multiple challenges thrown up in succession that took the sheen away from the sector. But some of that sheen now seems to be returning with stocks in the sector rallying in the last six months.

So are these companies on the turnaround path, which markets are building in? Going by the March 2024 and June 2024 quarter numbers, consumer electrical companies are certainly seeing an improvement in their key cooling business along with better demand. But other segments are yet to pick up and sustained expansion in profitability hinges on broader demand pick up and a better pricing environment. Here’s a detailed analysis.

For the purposes of this report, ‘consumer electricals’ covers companies operating in:

• Electrical Consumer Durables (smaller appliances like fans, air coolers and pumps),
• Lighting,
• Cables & Wires
• Kitchen Appliance spaces (but not those in the large appliance / consumer durables space, though there is some overlap).  

The key listed players in this space are as follows.

The challenges so far

For a few years now, challenges have cropped up for the consumer electricals sector one after another.

• In FY 18 it was GST implementation and a slowdown in the real estate sector. Just as things had started to look up in FY20, the pandemic reared its head in Q4 FY20, a very important part of the year for consumer electricals sales.
• The next two years were marked by the subsequent waves of the pandemic, supply chain challenges, unfavorable commodity prices (especially copper, a key input) that stressed margins and a deep slowdown in consumption on account of negative consumer sentiment. The slow pace of rural recovery in the aftermath of Covid also took a toll on the sector.
• During this period, several changes to the market structure also served to make sales more challenging for companies. For one, competition intensified with several new entrants. Two, consumer demand changed, to more discerning buyers and a preference for value-added products. Energy efficiency come more into focus.  The way the product reaches the consumer too has transformed dramatically, shifting from traditional channels to online.

Individual segments within the consumer electricals sector also had unique challenges. In the lighting segment, for instance, it was, the transition to LED which brought margin and pricing pressures. Price erosion in the LED lighting segment has been significant in the last few years, leading to slowdown in revenue and profitability. On the kitchen appliances front, muted demand and single digit growth kept earnings growth in check.

Here is how companies have fared on Net Profit (PAT) growth the last 5 years. Havells alone eked out better growth owing to its wires & cables business, which was more resilient, and adept at handling the overall challenges.

Looking up

The June 2024 quarter numbers, however, give us reason to be more optimistic with encouraging revenue growth and margin expansion over the same quarter in the year-ago period.

Here are the key points that stood out in the Q1 results of this sector.

#1 The bright side of the heatwave

The summer may have been brutal but this problem turned out to be an opportunity for consumer electricals players with portfolios tilted toward fans and air coolers (cooling products). These companies were also able to undertake price hikes to pass on commodity price increases without upsetting the buyers.

This is a key development, since the cooling product segment accounts for the bulk of revenues for these companies. A sustained turnaround in this segment can thus propel overall revenue and profitability growth.

Symphony is a leading player in the air cooler space that caters to household, commercial and international clients. The domestic business clocked a y-o-y growth of 116%, aided by the strong summer season - an indication of how richly summer product makers benefited.

Further, the company saw significant part of this demand stem from the South and the East regions that historically were not ‘air-cooler markets’. Keeping up the tempo, the company is lining up 17 new air cooler launches for the next season and is working on greater dealer penetration in semi-urban and rural areas to drive demand.

In V-Guard too, the consumer durables segment that houses the fans and air coolers businesses saw strong growth as also in its stabilizer business which is a proxy to air conditioner sales. Like the others, V-Guard too undertook a price hike of 2% in fans primarily to offset commodity price increases. Other products like UPS too were on an uptick as sales went up to combat summer power cuts.

For CGCEL, the fans segment clocked a 16% growth. Here too to combat commodity prices, calibrated price hikes were undertaken to preserve margins. On the air coolers front, CGCEL saw its highest ever sales with volumes up by 68%.

In Havell’s, both its own ECD segment benefitted from summer sales and the Lloyd’s consumer business (acquired, and which had been a cause for concern), too benefited with an uptick in air conditioner sales.  

While a bumper season has certainly contributed to sharp growth, companies are putting in plans in place to ensure that this growth is not a one-off event. They are lining up new launches, streamlining distribution channels and being capacity-ready to meet demand. The other theme underscoring plans of all the players is ‘premiumization’ to keep up with consumer preferences. Premium products not only accelerate revenue growth but also enhance margins.

Finally, optimism is also back on rural demand recovery, which has been subdued for a while in the aftermath of Covid. Given that summers are unlikely to get any better in the coming years and the healthy demand environment, this key product segment can continue to stay ahead.

#2 Lighting not so bright

The lighting segment, on the other hand, has been a mixed bag. It is a significant category for players like Orient and Crompton. This quarter, the lighting side of the business was not as buoyant as the cooling products segments as price erosion combined with LED transition continued to keep revenue growth and profitability in check.

The professional lighting (B2B) business, in general, offered better growth. The B2B business helped the likes of CGCEL, Bajaj and Orient all offset pressures in the B2C market. For example, Bajaj saw growth driven by the B2B market and managed to expand the EBIT margins in the overall lighting segment from 8.1% in the June 23 quarter to 10.5% in the June 24 quarter. Orient, similarly, had a prudent product mix in this segment and clocked a double-digit value growth and expanded EBIT margin to 18.6% compared to 16.1% in the June 23 quarter.

The B2C market’s primary challenge is price erosion, impacting both revenue growth and margins despite underlying volumes being healthy. For example, CGCEL’s EBIT margins dropped from 12% in the June 23 quarter to 8.9% in the June 24 quarter.

 A key monitorable for this space, therefore, remains the LED pricing. There is still uncertainty on here on whether the erosion has entirely played out. If erosion has bottomed out, then revenue and margin growth may return in the subsequent quarters.

#3 Kitchen appliances not cooking up a storm

The kitchen appliances segment is another one that has been subdued. This June 2024 quarter was no different with weak demand underscoring everything else. The market is also highly competitive with customers being extremely price sensitive. For example, Bajaj Electricals faced a lot of resistance when it revised prices to negate the deep discounting that had to be undertaken last year. For both CGCEL and V-Guard, acquisitions they made (Butterfly Gandhimathi & Sunflame) are yet to pick up. Both companies saw a drop in revenues.

Historically, Q2 and Q3 tend to be better for the kitchen segment as festival buying spurs demand. Management commentary from these companies indicate that demand could start to return in the second half of FY-25. But with even the festival season remaining lackluster in the past, one needs to wait and see if the green shoots that have been spoken about indeed materialise. The December 2024 quarter could therefore be a key period to watch.

Meanwhile, competition continues to heat up. Atomberg that disrupted the fans space with their sleek BLDC fans are trying to do the same in the kitchen appliances space with products like mixer grinders.  

On the positive side, the kitchen appliances segment is not a large contributor to overall revenue and profitability and a longer recovery period may be compensated by primary segments such as cooling products doing better. What can also help is the premiumisation that companies are banking on.

#4 The ‘cables and wires’ factor in Havell’s

As far as Havell’s goes, what sets it apart, and to a smaller extent V-Guard, is the presence in the cables and wires segment. This segment has seen a growing share of market accounted for by organized players and has also been the bright spot for players that have exposure to this area like Havells.

Apart from a buoyant real estate sector, increasing thrust on both Govt. and private capex in the aftermath of Covid, are also driving healthy domestic demand for wires and cables, also spurring players to expand capacities.

Valuation & way forward

Market seems to be discounting healthy earnings growth ahead for these companies, with stocks rallying sharply out of their slump. Hence, their valuations have also moved up ahead of earnings recovery. 

So, are they still attractive after the recent run-up? This depends on the speed and magnitude at which earnings growth can take place from here on. For that, the following factors need to play out.

1.While companies have been taking measured price hikes to combat commodity price inflation, commodity prices (like copper, a key input) have shown signs of easing up (correcting 7% since June 2024). If prices remain at these lower levels or drop further, it should help support margins.

Companies have also taken cost-cut initiatives which are yielding results. Gross margins are back at or around pre-Covid level for most companies at end-FY24 and are showing a favourable trend in Q1FY25 as well. That indicates that EBIDTA margin expansion and PAT growth would also follow. This coupled with improving consumer sentiment could prove to be very favourable for earnings growth.

2. Meanwhile, increasing urbanization, strong growth in real estate sector, rising disposable income, aspirational buying, and access to credit bode well for the sector. Optimism around rural demand is also favourable, which is important as categories like small electrical appliances and kitchen appliances will stand to benefit.

3. Premiumisation, an item that is high on the agenda of all the players (including Bajaj Electricals that has hitherto focused on the value segment in rural markets) too, is key to ramping up topline and margins.

4. The sector has also seen some consolidation (Crompton acquiring Butterfly, V Guard acquiring Sunflame and Whirlpool acquiring Elica PB India). This along with the strong PE interest in the space, indicates that interest is picking up in the sector which in turn augurs well for investors. (Eureka Forbes was bought out and listed separately by PE Advent and D2C player Atomberg raised money at nearly half a billion dollar valuation.)

5. Q1 and Q4 are traditionally the strong quarters for cooling products. An exceptionally bad summer helped players with strong summer portfolios in the June 2024 quarter. Last year’s low base also helped make the numbers look more impressive. A close watch needs to be kept on whether consumer sentiment has well and truly changed for the better and the next couple of quarters, the festive quarters, would give more clues on this front.

The securities quoted are for illustration purposes only and are not recommendatory.

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