Consumer Durables: Margins Expected to Start Rising Sequentially


Our consumer durables hedging universe posted better revenue than our estimate, which on a 3-year CAGR basis was 7.9% (ex-Dixon/Amber). Profitability remained challenging – Ebitda margins fell 180 basis points below our estimate, although flat year-over-year, due to high cost inventory, limited pricing action and spending higher advertising costs during the quarter.

In our view, with the decline in raw material costs, margins will begin to gradually increase. Demand would also follow, despite a muted June/July, due to the early start of the holiday season and the need to continue pricing measures by staying away. Keep Whirlpool, Havells, KEI and Dixon as our favorite sector picks.

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Positive Highlights
Revenue growth of 55.7% year-over-year (7.9%
3Y-CAGR) ex-Dixon/Amber fared better against estimates due to strong demand in April/May. Inventory levels for cooling products (RACs/air coolers) were at normalized levels after the loss of the last two peak summer seasons. The normalization of raw material costs will have a positive impact on demand, particularly for entry-level products, with margins also expected to improve in the second half of the year.

Negative Highlights
High cost inventory, limited pricing action and higher advertising spend in the quarter resulted in a margin loss of 180 basis points from our estimate. Brands pointed to the slowdown in demand on June 22, which extended into July 22 and this remains a major area of ​​concern going forward. According to management comments, a slight postponement of demand was observed in the industrial and infra segment.

Insights: Sticking to Strong Leaders
The path of inflation, in our view, remains the most important variable for the pure consumer segments, which could help both valuations and growth. The past 12 months has seen a correction in valuations across the CD space (sector multiples down 22% to 31x) with heightened risks to growth/profitability. However, C&W players have led consensus earnings increases for FY24E over the past 12 months while also leading in terms of stock returns.

Given the challenges, we prefer to stick with robust industry leaders that exhibit more resilient characteristics, have concentrated and sustainable market shares, with significant headroom for deeper penetration and robust business models.


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