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Worst behind; ECD companies to shine again amid easing inflation

ICICIdirect Research 04 Jan 2023 DISCLAIMER

What's Buzzing 

Electrical consumer durable (ECD) companies are expected to see a sharp margin recovery amid easing inflationary pressure and demand recovery in FY24. 


ECD companies were underperformers in the last one year, mainly due to slowing rural demand and pressure on EBITDA margin (H1FY23 EBITDA margin were down in the range of ~200-400 bps YoY) amid high inflation and an unfavourable base. This led to a muted price performance of ECD companies in the last one year. Now, the price of key input such as polymer & copper have fallen in the range of 20-50% (since the start of FY23). This will bring much needed relief to ECD companies, especially in the period of rising competition. Lower inflationary pressure and intact structural growth themes are expected to drive revenue growth for ECD companies. 

Our Perspective 

As raw material prices are falling back to their pre-Covid levels, we see margin expansion kicking in from FY24E onwards. We believe EBITDA margins will expand by ~200 bps YoY to ~13% in FY24E. We also believe ECD companies will post strong revenue CAGR of ~18% over FY22-24E supported by intact structural growth drivers. We believe strong growth in the real estate industry (18% CAGR over FY17-30E), growing urbanisation and recovery in rural demand will be key demand drivers for small and large home appliances. ECD companies are, therefore, likely to report strong earnings CAGR of 16% over FY22-24E. Strong earnings CAGR, coupled with their robust balance sheet conditions, are expected to drive the performance of frontline ECD stocks such as Havells India, V-Guard, Bajaj Electricals and can make them shine again in the near to medium term.

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