Havells India, Voltas Among Credit Suisse’s Top Bets In Consumer Durables

Shares of India’s consumer durables makers gained after Credit Suisse said rapid changes in the sector such as the government’s push to encourage domestic manufacturing, a shift in customer preferences, scale-up in new categories and stronger economic momentum post Covid-19 recovery provide an opportunity for some large companies to strengthen their presence in the market.

“The Indian electrical and consumer durable sector is a Rs 6-lakh crore opportunity, with a 15% CAGR (FY20-25E),” the research firm said in a note. “Several areas of this opportunity basket have traditionally been dominated by companies like LG and Samsung, and have not been contested by many Indian companies.”

But Havells India Ltd. and Voltas Ltd., according to Credit Suisse, have the highest potential based on their foothold already established in this market. This foothold, it said, can build a reasonable market share, potentially surprising investors. “The market has natural space for these as current dominant players control 60-75% of the market and fringe players are ceding market share.”

• The research firm has initiated coverage on Havells India with an ‘outperform’ and a target price of Rs 1,475, implying a potential upside of 16.5% from its current market price.

• It has also initiated coverage on Crompton Greaves Consumer Electricals Ltd. with a ‘neutral’ rating and a target price of Rs 500, implying a potential upside of 5.6%.

• Credit Suisse has upgraded Voltas to ‘outperform’ from ‘neutral’, and raised its target price from Rs 1,125 to Rs 1,150, implying a potential upside of 15.5%.

• The research firm also recommends an ‘outperform’ for Amber Enterprises Ltd., and has set a target price at Rs 3,450 apiece.

Credit Suisse highlighted a few risks facing the consumer durables sector:

• Commodity price spikes affecting margins.

• Strong price increases on rating changes and commodity pass-through affecting demand.

• Strong competition.

• Modern retail and e-commerce dynamics.

Stock Picks

Havells India

• Credit Suisse expects the company to deliver 20% compounded annual growth rate in earnings over FY21-24.

• This will be driven by a revival in switchgear and cables, market share gains in consumer durables, an increasing presence in the electrical consumer goods and appliances and margin gains in Lloyd’s portion of the business.

• Upside Risks: strong success in new launches, margin expansion in Lloyd and success of AC exports.

• Downside Risks: real estate/construction-related pick-up is only transient and reverts to sluggish momentum in India; and sharp input cost inflation.

Amber Enterprises

• One of the leading OEM players in the market with a strong diverse customer base as well as successful bolt-on acquisitions to backward integrate as well as expand into the commercial Heating, ventilation, and air conditioning segment, with optionality from participating in upcoming PLI schemes.

• Risks: large contractual labour, already high market share in AC manufacturing, and most of the leading brands have their own manufacturing as well as preference for outsourcing may shift.

Voltas

• Credit Suisse is upbeat on the company because of the market positioning it enjoys in the room AC business, low penetration levels in India, strong ordering activity seen in the EPC business, and its attempt to build a broader consumer durable business.

• Risks: slower-than-expected recovery in commercial and infrastructure construction activity in both India and the Middle East, a sharp drop in the AC business market share or profitability as well as delays in fruition of broader consumer business.

Crompton Greaves

• Credit Suisse has a ‘neutral rating’ on the stock as while the business has historically been a strong franchise and with the new management at the helm, increased ad spend, a focus on growth and tighter control on costs can yield results, the existing portfolio offers a limited road map to growth versus peers.

• Upside Risks: stronger ramp up in durables spending can help Crompton capitalise on opportunity using its existing strong brand recall.

• Downside Risks: rising competition, sharp increase in commodity prices, and major traction by EESL (energy efficiency) in fans.

Shares of Havells India, Voltas and Crompton Greaves gained as much as 3.6%, 5.1% and 3.9%, respectively, as of 10:30 a.m. on Wednesday compared with a 0.14% decline in the Nifty 50.