Equity Research INDIA

September 22, 2022

BSE Sensex: 59457
White goods & durables
ICICI Securities Limited
is the author and
distributor of this report
Margin expansion in H2FY23 but likely to be lower than
consensus expectations
Sector update 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
White Goods & 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
Durables 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 ad-
spend, 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.
Valuation summary
Price M.Cap Target RoE RoCE EPS CAGR P/E (x)
Company (Rs) (Rs bn) Price (Rs) Rating (FY23E) (FY23E) FY22-24E FY24E
3M India 23,603 259.8 26,500 BUY 15.5 19.1 39.4 50.3
Amber 2,266 76.4 2,280 ADD 9.4 9.3 54.6 29.3
Research Analysts:
Bajaj Electricals 1,120 128.7 1,230 ADD 12.8 15.2 42.5 40.4
Aniruddha Joshi Blue Star 1,081 104.1 1,028 HOLD 19.2 17.9 15.6 46.5
aniruddha.joshi@icicisecurities.com Crompton Cons. 413 262.8 504 BUY 26.2 21.6 23.5 29.6
+91 22 6807 7249 Dixon 4,490 266.4 3,850 HOLD 26.4 25.1 59.4 55.2
Manoj Menon Havells India 1,314 823.2 1,621 BUY 20.1 22.7 22.9 45.5
manoj.menon@icicisecurities.com Orient Electric 273 58.0 295 ADD 24.4 29.0 19.5 32.0
+91 22 6807 7209
Polycab 2,603 389.6 2,250 HOLD 16.9 20.0 25.4 29.5
Karan Bhuwania TTK Prestige 993 137.6 1,150 BUY 16.9 19.7 10.7 36.8
karan.bhuwania@icicisecurities.com
+91 22 6807 7351 V-Guard 251 108.4 250 ADD 17.7 22.1 21.5 32.2
Pranjal Garg Voltas 904 299.1 1,033 HOLD 11.2 10.7 25.8 37.6
pranjal.garg@icicisecurities.com Whirlpool 1,699 215.5 2,175 BUY 10.4 10.4 42.9 43.7
+91 22 6807 7650 Source: Company data, I-Sec research
Please refer to important disclosures at the end of this report
White Goods & Durables, September 22, 2022 ICICI Securities

Margin expansion likely to be lower than consensus

expectations
Correction in input prices: The major raw materials used in white goods and
durables are aluminum, copper, steel and HDPE. While there has been steep inflation
in these materials in past two years, their prices have corrected 6-28% from in past six
months. We believe, this will likely result in margin recovery for all the companies
under our coverage in durables.

Table 1: Correction in raw material prices

Commodity Aluminium Copper Steel HDPE
(Rs/kg) (Rs/kg) (Rs/10MTs) (Rs/kg)
Sep’22 208 653 51,200 141
Mar’22 292 818 57,830 151
Sep’21 231 719 46,110 117
12M change
(%) -10.0% -9.2% 11.0% 20.1%
6M change (%) -28.7% -20.2% -11.5% -6.3%
Source: Company data, I-Sec research

Chart 1: Aluminium prices are decreasing Chart 2: Copper prices are correcting

(Rs/kg) Aluminum (Rs/kg) Copper

350 900
800
300
700
250
600
200 500
150 400
300
100
200
50 100
0 0
May-21

May-22
Jan-21

Jan-22
Mar-21

Mar-22
Jul-21

Jul-22
Nov-21
Sep-21

Sep-22
May-21

May-22
Jan-21

Jan-22
Mar-21

Mar-22
Jul-21

Jul-22
Nov-21
Sep-21

Sep-22

Source: Bloomberg, I-Sec research Source: Bloomberg, I-Sec research

Chart 3: Steel prices are declining… Chart 4: … so are HDPE prices

(Rs/ 10 MTs) Steel (Rs/kg) HDPE

70,000 160
60,000 140

50,000 120
100
40,000
80
30,000
60
20,000 40
10,000 20
0 0
May-21

May-22

May-21

May-22
Jan-21

Jan-22

Jan-21

Jan-22
Mar-21

Mar-22

Mar-21

Mar-22
Jul-21

Jul-22

Jul-21

Jul-22
Sep-21

Nov-21

Sep-22

Sep-21

Nov-21

Sep-22

Source: Bloomberg, I-Sec research Source: Bloomberg, I-Sec research

2
White Goods & Durables, September 22, 2022 ICICI Securities
Ad-spend likely to inch upwards
Disruption in the operations, lower sales and uncertain environment due to covid in
FY21 led to companies cut their marketing budget in FY21. However, with returning
normalcy in FY22 all durable companies increased their ad-spend as a percentage of
sales (though a tad lower than pre-pandemic levels).

The companies would like to invest further in branding, channel schemes and new
product developments. Hence, we believe marketing and brand spend will likely
further increase to FY19 levels over FY23E-FY24E, hurting profitability.

Chart 5: Adspend as a percentage of net sales

FY20 FY21 FY22

8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
Havells

Bluestar
Crompton

V Guard

Polycab
Whirlpool
Electricals

Orient
Voltas
Dixon
TTK Prestige
Bajaj

Source: Company data, I-Sec research

Freight cost likely to remain high

While freight cost as a percentage of sales in FY21-FY22 was lower for most
companies as compared to FY20 levels, we believe the rise in fuel costs and
fluctuations in crude oil prices will likely result in higher freight costs for most
companies over FY23E-FY24E.

Chart 6: Freight cost as a percentage of net sales

FY20 FY21 FY22

7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
Bluestar
Havells

V Guard
Crompton

Polycab
Orient
Whirlpool
Electricals

Voltas
TTK Prestige
Bajaj

Source: Company data, I-Sec research

3
White Goods & Durables, September 22, 2022 ICICI Securities
No price hikes in Q2FY23, but no additional trade schemes/ discounts
All the covered companies have taken price hikes in the range of 12-18% in FY22.
With correction in input prices, most companies have not raised prices in Q2FY23.
However, there is no pass through of correction in input prices via additional schemes/
discounts except in commodity linked categories like cables and wires.

EBITDA margin expansion: While the correction in input material prices will improve
the gross margins of the companies, higher ad-spend and logistics costs will likely
impact EBITDA margin of the sector. We expect the EBITDA margin to expand over
FY23E-FY24E, but our estimates of EBITDA margin expansion remain conservative
vs consensus.

Chart 7: EBITDA margin expansion over FY22-24E

FY22 FY23E FY24E

18.0%
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%

Bluestar
Havells

V Guard
Crompton

Amber

Polycab
Orient
Dixon

Voltas
Electricals

TTK Prestige

Whirlpool
Bajaj

Source: Company data, I-Sec research

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.

Table 1: White goods sector valuation summary

CMP RoE (%) RoCE (%) CAGR FY22-24E (%) P/E (x)
Company (Rs) Rating FY23E FY23E Revenues EBITDA PAT FY23E FY24E
3M India 23,603 BUY 15.5 19.1 16.6 34.7 39.4 73.8 50.3
Amber 2,266 ADD 9.4 9.3 32.3 36.8 54.6 42.2 29.3
Bajaj Electricals 1,120 ADD 12.8 15.2 16.9 36.6 42.5 52.5 40.4
Blue Star 1,081 HOLD 19.2 17.9 18.1 14.6 15.6 52.0 46.5
Crompton Consumer 413 BUY 26.2 21.6 24.0 27.2 23.5 36.3 29.6
Dixon 4,490 HOLD 26.4 25.1 41.0 45.1 59.4 86.8 55.2
Havells India 1,314 BUY 20.1 22.7 21.9 19.4 22.9 60.8 45.5
Orient Electric 273 ADD 24.4 29.0 17.1 14.9 19.5 41.8 32.0
Polycab 2,603 HOLD 16.9 20.0 16.9 23.1 25.4 38.6 29.5
TTK Prestige 993 BUY 16.9 19.7 14.0 8.6 10.7 43.3 36.8
V-Guard 251 ADD 17.7 22.1 20.8 21.3 21.5 40.9 32.2
Voltas 904 HOLD 11.2 10.7 17.1 15.8 25.8 47.1 37.6
Whirlpool 1,699 BUY 10.4 10.4 22.0 38.9 42.9 59.5 43.7
Source: Company data, I-Sec research

4
White Goods & Durables, September 22, 2022 ICICI Securities
Price charts
3M India Amber Bajaj Electricals Blue Star
35,000 4,100 1,700 1,300
3,700 1,500 1,200
30,000
1,300 1,100
25,000 3,300 1,100 1,000
(Rs)

2,900 900

(Rs)
900
20,000 800

(Rs)
2,500 700 700
15,000 2,100 500 600

(Rs)
300 500
10,000 1,700
100 400
1,300
Mar-20

Mar-21

Mar-22
Sep-19

Sep-20

Sep-21

Sep-22

Mar-20

Mar-21

Mar-22
Mar-20

Mar-21

Mar-22

Sep-19

Sep-20

Sep-21

Sep-22
Sep-19

Sep-20

Sep-21

Sep-22
900
500

Mar-20

Mar-21

Mar-22
Sep-19

Sep-20

Sep-21

Sep-22
Crompton Consumer Dixon Havells India Orient Electric
550 7,000 1,600 450
500 1,400 400
6,000
450 350
5,000 1,200
400 300
350 4,000 1,000
(Rs)

250
(Rs)

(Rs)
300 800 200

(Rs)
3,000
250 150
200 2,000 600
100
150 1,000 400 50
100 0 200 0
Mar-20

Mar-21

Mar-22
Sep-19

Sep-20

Sep-21

Sep-22

Mar-20

Mar-21

Mar-22

Mar-20

Mar-21

Mar-22
Sep-19

Sep-20

Sep-21

Sep-22

Sep-19

Sep-20

Sep-21

Sep-22
Mar-20

Mar-21

Mar-22
Sep-19

Sep-20

Sep-21

Sep-22
Polycab TTK Prestige V-Guard Voltas
1,400 300 1,400
3,000
2,500 1,200 1,200
250
1,000 1,000
2,000
800 800
(Rs)

(Rs)

(Rs)
1,500 200
600
(Rs)

600
1,000
400 150 400
500 200 200
0 0 100

Mar-20

Mar-21

Mar-22
Sep-19

Sep-20

Sep-21

Sep-22
Mar-20

Mar-21

Mar-22

Mar-20

Mar-21

Mar-22
Sep-19

Sep-20

Sep-21

Sep-22

Sep-19

Sep-20

Sep-21

Sep-22
Mar-20

Mar-21

Mar-22
Sep-19

Sep-20

Sep-21

Sep-22

Whirlpool
3,000
2,500
2,000
1,500
(Rs)

1,000
500
0
Mar-20

Mar-21

Mar-22
Sep-19

Sep-20

Sep-21

Sep-22

Source: Bloomberg

5
White Goods & Durables, September 22, 2022 ICICI Securities

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